China plans to launch a long-awaited registration-based system for initial public offerings on the Shanghai and Shenzhen stock exchanges in two years, shifting approval powers from the securities regulator to bourses, the State Council announced on Wednesday.
A regular meeting of China’s cabinet, chaired by premier Li Keqiang, on Wednesday passed a draft document to overhaul the country’s current approval-based IPO system, which heavily relies on stringent review by the securities watchdog.
The cabinet said it is awaiting approval from the National People’s Congress on the proposal as it involves adjustment of the current securities law, according to a statement posted on its website on Wednesday.
“The reform of the registration system will be a gradual process. It won’t be achieved overnight. And it won’t result in a massive expansion in the new share listings,” the China Securities Regulatory Commission said in a separate statement on Wednesday.
It also acknowledged “the flaws and disadvantages” of the current mechanism, adding that a registration-based system would help build the market’s self-regulation and allow the market to play “the decisive” role in resource allocation.
The new mechanism, which will lower the listing threshold, simplify the process and emphasise financial disclosure, is seen as one of the most important steps to reform China’s tightly controlled capital markets.
It has long been discussed within government and pushed by veteran financiers, such as CSRC chairman Xiao Gang, who has been tasked to restore the stock market in the wake of this summer’s turmoil, according to domestic media reports.
The market downturn, which sent the benchmark Shanghai index plunging by 43% to a low in late August and wiped almost $5 trillion off the total market value, delayed the reform process and spurred Beijing to curb IPOs on the mainland for four months until early November.
Currently, more than 600 companies are queuing in the equity pipeline, seeking regulatory approval from the CSRC.
According to Huang Yanming, head of research at Guotai Juntai Securities, a registration-based IPO system would be a “cornerstone” for the healthy development of capital markets.
“It will create a fairer financing environment for companies that cannot generate returns now but are of high growth potentiality ... and lay the foundation of the long-term prosperity in the stock market,” he said in a note on Wednesday.
Track record restrictions
Under current listing rules, IPO candidates for the main board are required to ensure net profits for the last three fiscal years ahead of the listing and have cumulative net returns of at least Rmb30 million during these three years.
This dents the chance of many good-quality small and medium cap stocks to list on the main bourses to enjoy better liquidity and exposure to investors.
Developed markets such as the US typically employ a registration system for IPOs, which involves companies registering with the stock exchange when they plan to list equities. It also gives companies and the market a bigger say in the listing timing and pricing.
But their Chinese counterparts seeking to go public have to win approval from the CSRC, which tightly controls the pace of listings and imposes an unspoken ceiling on valuations – less than a multiple of 23 times earnings.
It remains unclear how much the Chinese securities regulator would loosen its grip over the IPO turf and whether a registration-based system would be fully implemented.
“The registration system is a complex project. After its launch, there could be unexpected fluctuations [in the market], the policy could go backwards. It would hit the market confidence in the reform,” Guan Qingyou, director of research at Minsheng Securities, said in a note on Wednesday.
Meanwhile, market critics say the current CSRC approval-based system and the regulator’s role as the gatekeeper for IPOs could make the system itself and securities officials subject to corruption.
Last month, the CSRC’s vice chairman Yao Gang was being investigated by China’s anti-graft watchdog for suspected “serious breaches of discipline”, its terminology for suspected corruption.
Until March this year, Yao had been in charge of all IPO approvals over the past 13 years, deciding which companies can list on the mainland’s bourses. His long-tenure and powerful role in overseeing the new listings led Chinese media to dub him “the king of IPOs”.
Also on Wednesday, the central government announced it had removed Yao from the post of CSRC vice-chairman.
