China’s new round of IPO reform

China’s Securities Regulatory Commission has begun consultation on a new round of IPO reform, raising hopes that it is preparing to lift its most recent ban on initial public offerings, imposed last year to speed up reform and stabilise a weak domestic market. But many are urging Xiao Gang, the CSRC’s new chairman (pictured), to take the proposed reform further.

A draft paper for public comment was posted on the CSRC’s website on Friday. The consultation period ends on June 21.This is being seen as a strong signal that the IPO market may re-open as soon as the third quarter, according to the official Xinhua news agency.

Two highlights of the proposed reform:

  • Once the public offering review committee approves an offer, the validity of an IPO is extended to 12 months instead of six months and its timing is up to the issuer;
  • Controlling shareholders should promise in the IPO prospectus that after a two-year lock-up, the price at which they will sell their shares should not be lower than the issuing price. And the lock-up period will automatically be extended by another six months if the average trading price in the first six months of listing is lower than the issuing price.

As detailed as it may be, many market participants and observers think the proposal falls short of touching the core issue – a need to decentralise administrative control and let the market set its own parameters.

One senior Chinese securities manager told beyondbrics that China’s capital market was still operating as “a planned economy”.

“When and where you list your company, how many shares and the price per share is all determined by the regulators, ” he said. “So far, any reform the regulators have done is only minor technical amendments.”

This is the fourth round of IPO reform since the introduction of China’s IPO sponsoring system in 2004, under which offerings must be endorsed by a qualified sponsor who vouches for the information provided in prospectuses. The most recent round of reform was under Guo Shuqing, the CSRC’s previous chairman, in April last year.

But the problem of the so-called “three highs” – high issue prices, high price to earning ratios and high levels of subscription funds – has yet to be solved. The same is true of China’s opaque approvals system, the issue of market manipulation and the large number of price busts immediately after listings, which have trapped many investors.

A report in April by the Caixin news service described the issuing process as “an opaque and graft-poisoned game”. A separate report noted the importance of having access to officials on the CSRC’s perhaps appropriately named Public Offering Review Committee, or PORC.

To some industry insiders, however, administrative interference in the market was actually greater during Guo’s tenure.

“Everyone is watching Xiao Gang closely,” said the senior manager of the securities company, adding that it was too early and unfair to label Xiao as a “conservative”, an impression some may taken from the draft of his reforms and from his absence from an annual brokerage industry innovation conference in May.

“I have more hopes for Xiao, who is more low profile but knows where the problems are,” said the manager. Severe punishments handed down on sponsors such as Ping An Securities showed the new chairman understood the need to rebuild integrity in China’s capital markets.

Xiao made an internal speech on May 21, when he talked about changing the role of the CSRC and decentralisation. The manager said this was a good omen for more substantial reform, even though the reform paper issued last week was far from satisfying.

While Xiao remains a mystery to many, belief is growing that a resumption of the IPO market is coming soon. Chinese media reported on Monday that Zhang Yujun, vice chairman of the CSRC, told market participants that completion of IPO reform and stabilisation of the stock market index above 2,500 points were two preconditions for a lifting of the IPO ban. But the report referring to a specific index was quickly denied.

More than 800 companies were preparing public listings when the CSRC imposed its IPO ban last October. Following two rounds of financial verification, 268 companies have withdrawn from the pipeline, according to the CSRC.

A resumption of IPO activity is likely to dampen the performance of the overall market, as investors absorb new liquidity. But that need not be a bad thing for stocks with a good track record.

Related reading:
China boosts regulatory defences before likely end to domestic IPO ban, beyondbrics
China’s new securities regulator: more reformist than you think beyondbrics
China reforms: and the beat goes on, beyondbrics
China’s premier sets reform bar lower, FT