China’s Push for IPO Reform Endorsed by San Francisco Fed Study

  • Public listing size too small to affect overall stock market
  • No evidence to support intervention has stabilizing effect

Initial public offerings by Chinese companies have little impact on the stock market, suggesting that the loosening of control over mainland IPOs could improve efficiency without increasing volatility, according to a study by the Federal Reserve Bank of San Francisco.

There’s no statistically significant relationship between the number of IPOs and the returns of China’s equity indexes, Frank Packer, an adviser to the Bank for International Settlements and Mark Spiegel, a vice president at the San Francisco Fed, wrote in a report Monday. That may be because the size of the listings is too small relative to the stock market to have a material impact, the research showed.

At most, issuance in any month last year accounted for 0.06 percent of the market capitalization of the Shanghai stock exchange and 0.14 percent on the Shenzhen bourse. In comparison, the average single IPO makes up 0.25 percent of the equity markets in 22 developing nations, according to the researchers, citing a separate study.

Chinese regulators tend to allow more IPOs in rising markets and restrict new listings during selloffs in a bid to avoid pushing down the prices of existing stocks. While policy makers have pledged to reform the IPO process with a new registration-based system designed to end government intervention and expedite the listings, they have stopped short of announcing the timing of the implementation.

The Fed research finds “no evidence that the regime’s regulatory intervention has stabilized markets,” Packer and Spiegel wrote. “Further, if China were to reform its IPO regulatory practices, our analysis suggests that it should not cause the overall market to become less stable.”