China’s planned new rules for share sales will boost the role of market forces, securities regulator Xiao Gang said, as the government pledges to loosen its control of the world’s second-largest economy.
The switch to a system of registration rather than approval of IPOs is the key to all capital-market reforms, Xiao said at a conference in Beijing today, in his first major public speech since taking over the China Securities Regulatory Commission in March. Under the rules, regulators will be responsible only for ensuring companies’ disclosures meet requirements, rather than approving the share sale itself, he said.
Xiao’s remarks follow a pledge this month by the country’s top leadership to make markets “decisive” in allocating resources, in the biggest expansion of economic reforms since at least the 1990s. Citic Securities Co., the country’s largest brokerage by market value, has jumped 17 percent this month in Hong Kong trading, leading peers higher amid speculation the policy changes may signal the end of a 14-month freeze on IPOs.
“The capital market is still an administration-led one, and its operation mechanisms aren’t in line with an orientation to supply and demand,” Xiao said. “Prices remain distorted.”
Under current rules for public share sales, the CSRC’s listing committee must examine each application and determine whether a company is fit for listing. The country hasn’t had an IPO since October last year, leaving more than 700 companies awaiting regulatory approval.
The shift to the new system must be gradual to avoid shocks to the market, Xiao said. Before ending the freeze the CSRC is also drafting rules to curb misconduct that would establish stiff penalties for investment banks.
China’s stimulus following the global financial crisis led banks to advance more loans in the last four years than in the previous six decades since the founding of the People’s Republic, Xiao said. Direct financing through capital markets is still too low, he said.
“China can’t rely on such high leverage for its growth -- it has reached the limit,” Xiao said. “This will create a rare opportunity for the capital market. The situation is crying out for a change, as the model of dependence on bank loans has reached its end.”
China will open its capital markets further because the current Qualified Foreign Institutional Investor channels are too narrow, Xiao said. The country has no plans to introduce an “international board” for trading shares of foreign companies, because the time isn’t ripe, he said.
The benchmark Shanghai Composite Index fell 0.2 percent today, extending this year’s decline to 3.4 percent.