China may lift a 12-month ban on new share sales this year following a Communist Party policy summit, according to the nation’s largest brokerage by market value.
The nation’s top party officials will meet in Beijing from Nov. 9-12 to map out a blueprint for reform. Regulators suspended initial public offerings in October 2012 and pledged not to lift the ban until new rules are introduced to curb misconduct and boost protection for investors. The benchmark Shanghai Composite Index, which plunged to the lowest levels in four years in June, has since rallied 10 percent.
“We still have reasons to believe that the IPOs may resume before the end of this year, as the policy meeting ends Nov. 12,” Boming Cheng, president of Citic Securities Inc., said in an interview in New York, where he was attending the Chinese Finance Association’s annual conference.
The China Securities Regulatory Commission is drafting rules to curb misconduct that would establish stiff penalties for investment banks before ending the freeze on IPOs. The CSRC regulations, published in draft form June 7 on the agency’s website, call for penalties against banks and their employees for transgressions such as including inaccurate information in a prospectus and poor risk disclosure.
Of the 622 companies that have submitted self-inspection reports, 268 have withdrawn their IPO applications, according to an Oct. 11 statement on the CSRC website. China hasn’t had a new listing since Oct. 11, 2012, when Org Packaging Co. and Haixin Foods Co. started trading in Shenzhen. The Shanghai Composite added 0.1 percent to 2,151.82 at 1:25 p.m. local time.
Smaller company stocks may be most affected when the IPO ban is lifted, according to Zhang Yanbing, analyst at Zheshang Securities Co. in Shanghai. The ChiNext index of Shenzhen-listed companies doubled in the 12 months through Oct. 9, compared with a 5.8 percent advance by the CSI 300 Index of larger companies. The 100-member ChiNext, which trades at 54 times reported profits, has lost 13 percent from its October peak.
The restart of IPOs will be a “big negative” for the market, Zhang said by phone. “It will exacerbate the fear of tight liquidity. Small-cap companies, which are already performing badly because of the high valuations, will be hit because money would be diverted to the new companies.”
The securities watchdog hasn’t said when the new rules will be implemented and IPOs allowed to resume. A China Daily report on Oct. 12 cited an unnamed CSRC spokesman as saying there was “no new progress” on IPOs restarting.
The market freeze has been a blow to investment banks, whose revenue had soared as China became the world’s biggest market for IPOs in 2010 with a record $71 billion raised, surpassing the U.S.’s $54 billion that year and Hong Kong’s $53 billion, according to data compiled by Bloomberg. Since that bonanza, fundraising from IPOs in China dropped to $40 billion in 2011 and $14.4 billion last year.
Some companies are turning to overseas markets to raise funds. Five Chinese firms have completed U.S. IPOs this year, rallying an average 43 percent, according to data compiled by Bloomberg. Qunar Cayman Islands Ltd., a travel-booking service controlled by Baidu Inc., and 58.Com Inc., a Chinese online marketplace similar to Craigslist, jumped last week after selling shares above their price targets.