Photographer: Qilai Shen/Bloomberg

Slow Start Seen for China's IPO Reform Amid Stock Turmoil

  • CSRC has two years to build registration-based system for IPO
  • Reform aims to make IPO process more transparent and efficient

Chinese companies hoping for the swift introduction of a new process to list themselves publicly are likely to be disappointed as equity prices continue to tumble and as the government considers a revamp of financial regulators.

Lawmakers in December granted the China Securities Regulatory Commission a two-year window in which to install a registration-based system for initial public offerings, which would end CSRC intervention in pricing and allow companies to go public quicker. While that window theoretically allowed the system to be introduced as early as March 1, Huatai Securities Co. says it’s not likely to happen until 2017 as the regulator allays investor concerns over a more market-reliant process that may damp IPO returns.

While that timing is bad news for the more than 700 companies that have IPO applications pending with the CSRC, Chinese investors burnt by the stock market’s 45 percent plunge since June would welcome the reprieve. Under the existing system, new listings are often priced cheaply due to the regulator’s controls, meaning IPOs are well supported when they start trading, and offer safe havens from the bear market in equities.

“The securities regulator will do it step by step,” said Wong Chiman, a Hong Kong-based analyst at China Galaxy Securities Co. “Market stability is the regulator’s priority at the moment. It doesn’t matter who is in that position, after the June stock-market crisis, nobody is going to implement the registration system in one step.”

New Chairman

In a Feb. 26 statement, CSRC spokesman Deng Ge acknowledged that the various studies involved with changing the IPO process would require a “relatively long time,” adding that the realignment is the “direction of China’s capital market reform.” The regulator didn’t immediately respond to fax and phone requests for further comment this week.

Underscoring the CSRC’s perceived reluctance to rush out any reforms, the regulator has a new chairman, Liu Shiyu, who has been in the job for less than a month. The former Agricultural Bank of China Ltd. chairman replaced Xiao Gang, who was widely criticized for his handling of last summer’s $5 trillion stock-market rout and who oversaw the failed introduction of a market circuit-breaker mechanism in January.

Reasonable Valuations

The regulatory landscape may also be poised to undergo a transformation. Chinese leaders are mulling plans to create a financial super-regulator as early as this year, according to people familiar with the matter, as concerns grow about the best way to ensure market stability and maintain investor confidence.

The proposals being discussed include merging the CSRC with the banking and insurance commissions, the people said. Suggestions may be discussed when the country’s legislature, the National People’s Congress, begins its annual two-week session March 5.

Valuations for stocks on the country’s smaller boards have to return to a more reasonable level before the registration system can start, Yin Zhongli, a researcher with the Chinese Academy of Social Sciences, wrote in the China Securities Journal on March 2. China needs to make institutional investors more dominant in the market to make it more rational, Yin said.

The CSRC imposed an unwritten rule in 2014 that caps IPO valuations under the existing listing system at 23 times earnings. The market-based registration model, if currently active, would see some smaller companies listed closer to the 58 times that the ChiNext Index traded at as of March 3.

The existing system still saw 220 companies complete IPOs last year, compared with 128 in 2014 after a yearlong suspension of new sales as the securities regulator drafted rules aimed at curbing fraud and beefing up protection for investors. Data compiled by Bloomberg show that just 14 companies completed IPOs this year, illustrating the logjam that exists under the current system.

The CSRC has approved another batch of eight IPOs that would raise as much as 4 billion yuan ($612 million), it said in a March 1 statement.

The gradual pace of the registration system’s implementation means IPOs will still be priced at a low valuation, making them the “best investment opportunity” in 2016, according to Luo Yi, a Shenzhen-based analyst at Huatai Securities. Last year’s listings posted an average offer-to-date gain of 168 percent, data compiled by Bloomberg show.

“Liberalization is still the future direction,” Luo said in a Feb. 28 note. “The regulator will gradually loosen up the process and free up pricing as market expectation becomes stable, and the soonest this could happen may be in 2017.”

Making it easier and faster for companies to raise funds through IPOs is key to President Xi Jinping’s policy goal of reducing leverage in the economy and helping companies raise capital to expand and innovate.

“Capital market reform is crucial to China’s economic transformation plan but regulators need to consider the timing of reforms,” said Steven Zhang, Shanghai-based chief economist at Morgan Stanley Huaxin Securities Co. “Introducing reforms at a time when the economy is in a downward channel and the stock market isn’t very stable, the impact could be relatively big.”

— With assistance by Aipeng Soo

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