China’s latest IPO reform unlikely to flood markets with new issuance, bankers say
CHINA’S move this week to streamline stock-market listing rules is unlikely to result in a flood of initial public offerings (IPOs), said bankers. They cited the prospect of state intervention on grounds such as national security, that would result in delays.
Beijing on Wednesday (Feb 1) published draft rules to broaden its fledgling registration-based IPO system, and expand the US-style mechanism to all corners of China’s stock market. The aim is to speed up listings and corporate fundraising.
Under the new system, China’s stock exchanges will vet IPOs themselves, with a focus on information disclosure. Currently, IPOs on China’s blue-chip boards need clearance from the China Securities Regulatory Commission (CSRC) through an approval-based system – one that involves long delays and IPO prices capped by the regulator.
State media and analysts hailed the reform as a key milestone that would make China’s IPO market more inclusive, transparent and efficient.
But bankers said that in reality, the IPO process would remain largely at the mercy of the authorities, who view stock markets as tools in a global power struggle, as well as in national rejuvenation. Under the new rules, the CSRC’s role will be to ensure that listings are in line with Beijing’s broad industrial policy.
“Under China’s mechanism, the government dictates the direction of IPOs. Applicants are screened based on national policies,” said Terence Lin, partner at TRSD Capital, a boutique investment bank which helps Chinese companies list in the US.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
More than 30 IPO hopefuls have halted the CSRC registration process, public filings showed, while hundreds have aborted their listing plans during the gruelling vetting process being carried out by exchanges in the pilot scheme.
Although China’s IPO system is registration-based, it still requires government approval in essence, said a banker at a major Chinese brokerage, who declined to be named.
“If a company is neither big enough nor innovative enough, listing domestically is quite impossible,” he said, adding that “paternalism and politics continue to play a big role” in the new IPO system.
SEE ALSO
The registration-based IPO system was first adopted by Shanghai’s Star Market in 2019, when the tech-focused board was launched. Endorsed by President Xi Jinping, the exchange was designed to fund tech independence amid escalating tensions with the US.
The system was later rolled out to the startup board ChiNext, as well as the Beijing Stock Exchange.
On Wednesday, the CSRC said the IPO reform would be expanded to the main boards in Shanghai and Shenzhen, home to multibillion-dollar blue-chip China stocks such as Kweichow Moutai and Bank of China.
The regulator made its role explicit on Thursday. It said it would strengthen the Chinese Communist Party’s leadership in capital markets, and vowed to combine market forces with government roles as it mobilised the reform.
“This means the CSRC still has the final power in deciding whether the listing hopeful is in the appropriate sector,” said Yi Jiansheng, capital markets lawyer at Jia Yuan Law Offices, on Thursday.
The most glaring example of state intervention – even in the registration-based system – is the scuppering of Ant Group’s US$37 billion IPO dual-listing in Shanghai and Hong Kong, said bankers. The plans were halted just days before the group’s scheduled listing in late 2020.
“We thought the registration-based IPO mechanism would allow more types of companies to list, and give the market more power,” said another banker at a Chinese brokerage, who also requested anonymity.
“But as IPO sponsors, we feel on the ground that companies face tighter and tighter regulatory scrutiny, which defies the original purpose of the reform.” REUTERS
Share with us your feedback on BT's products and services
