Markets

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Can authorities in China really take a back seat? In the midst of a bull market (stocks are up more than 20 percent from their August lows), Beijing appears to be handing control over to companies for all new initial public offerings from March onward. 

The shift toward a more U.S.-style disclosure system, where any company can list so long as they provide the requisite information, has been a long time coming. In a more market-oriented system, the regulator concentrates on supervising publicly traded firms rather than acting as a gatekeeper. Such a system would give China's cash-strapped corporates a funding alternative to shadow banks and online peer-to-peer lenders, and help clear a logjam of almost 700 companies waiting to sell shares for the first time.

Tapping Investors
IPO volumes in China until freeze in July
Source: Bloomberg

The question is, can Beijing truly stop its tinkering?

According to KPMG, China has imposed moratoriums on IPOs nine times in the A-share market's relatively short 25-year history -- four of those in the last decade during periods when things were heading south. The most recent halt, enforced in July after several blockbuster share sales and some stomach-churning stock declines, ended only last month when a government-engineered rally revived the market.

Even when IPOs have been approved, social policy dominates. A few years ago, when China was trying to cool its then-heady real estate sector and rein in burgeoning bad loans, no developer or city commercial bank would have stood a chance getting listing approval. Instead, some went to Hong Kong to raise funds.

Stop and Start
China has halted IPOs at least four times in the last decade

The conundrum for the China Securities Regulatory Commission is that letting any (qualified) company sell shares would result in a glut and damp appetite for the state-owned firms that dominate the market. However, rationing admittance to the IPO market means bureaucrats rather than investors are making the decisions, and has resulted in an insatiable demand for new stock.

An even bigger challenge for the CSRC, whose seven-member listing committee currently vets IPO applications, is managing investor expectations. In a nation where investment options tend to be limited to volatile wealth management products, equally choppy real estate or low-yielding bank accounts, people have little recourse for their some $22 trillion in savings beyond stocks.

That explains why retail investors own about 80 percent of publicly traded companies' tradeable shares unlike the U.S., where institutional investors dominate. Such a prevalence of individuals, who don't have class action lawsuits to fall back on in cases of corporate malfeasance, also makes for a stock market more akin to a casino than a funding tool.

New listings have always spelled easy money for China's investing public, with regulators steering share sales toward the low end of valuations to ensure a first-day pop.  All of the 211 companies that listed this year before the July freeze rose by their daily limit of 44 percent, and surged an average 255 percent in their first month of trade, Bloomberg data show.  In the U.S, the 175 IPOs of 2015 rose on average 18 percent on day one and after a month had barely budged.

Early gains haven't shown any sign of abating since China began allowing IPOs once more. Of the 28 companies that had been approved to debut before the gates closed, 20 have come to market, and their shares have soared. Stock in moon-cake maker Shenyang Toly Bread, which raised about 619.7 million yuan ($95.5 million) and started trading Dec. 22, is up 111 percent on its 13.76 yuan sale price while Chunghsin Technology is at 22.19 yuan versus the 10.52 yuan investors bought for.

If any company could IPO as and when it wished, such surges would be rare. It won't be easy to take those kind of advances away from an investing public accustomed to them. And it won't be easy for the CSRC to accept an issuance flood that diverts billions of dollars away from long-established stocks including not least of all state-backed ones. But for China to have a true capitalist economic system, those are the hard steps it must take. Stop meddling, and markets will mature.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net