China’s securities regulator has long been a gatekeeper of new equity listings through its listing approval process, but the approving officers are bestowed so much unbridled power that issuers end up paying for the privilege to go public.
The IPO approval system is something China Securities Regulatory Commission (CSRC) needs to reform urgently, noted Minggao Shen, Greater China economist at Citi. “The procedure with only a small group of people reviewing listing applications causes many problems,” he said.
“IPO approving officers have unchecked, unbridled absolute power; the system brews corruption,” he added.
The Public Offering Review Committee, a powerful arm of the CSRC, decides which among the hundreds of cash-hungry listing applicants can tap the equity markets and also when and sometimes how they can do it. Observers say this roughly 20-member team may not fully understand the equity markets and the businesses of the applicant companies.
The reviewing process could easily fail to spot inaccurate and incomplete information in the applications, Shen said. That leaves little protection for investors.
Another problem caused by the system, he said, is that when investors look at a listing candidate they tend to focus more on the fact that it has been approved for listing than on its asset quality.
Guo Shuqing, chairman of the CSRC, is on a mission to push for greater market opening and transparency. Soon after he took office in late 2011, Guo publicly questioned whether the regulator should simplify the tedious listing approval process.
Investment bankers welcomed his idea that the CSRC shift away from its traditional role as a gatekeeper for new share listings and focus more on supervision. Guo has reshuffled personnel in the agency to root out corruption but no major reform has been made to the IPO reviewing process. There have been no new listing approvals since last summer when China entered a virtual IPO freeze, and industry insiders estimate there will be no new IPOs until June at the earliest.
The CSRC announced more than 70 new measures over the past year. And despite the continued weak market sentiment, Guo’s policies are widely applauded.
“He is certainly leading the stock market in the right direction,” said Citi’s Shen. “He has been working on improving market discipline, transparency and information disclosure. These are much-needed reforms.”
His reforms have put the A-share market on a more solid footing, although it will take some time to see major progress, said one investment banker. “Guo needs to make sure things are being implemented correctly. The market needs to adjust accordingly before doing anything drastic.”
Liu Jun, an analyst at Changjiang Securities, noted that Beijing has mixed thoughts about the CSRC reforms. “Guo is expected to substantially improve the stock market and meanwhile ensure China’s financial order. In other words, [the reforms have to happen] without generating too many waves in the country’s banking system and while still maintaining the state-owned enterprises’ privileged status.”
