Beijing Plans to Loosen Control Over IPO SystemPledge to Adopt More Western-Style, Market-Oriented Mechanism
By Shen Hong
Wall Street Journal
Updated Nov. 17, 2013 11:35 a.m. ET
SHANGHAI—China's leaders vowed to revamp the country's IPO system, a move that would give companies more say in when they go public.
How initial public offerings in China are timed has long frustrated investors. Chinese regulators were often quick to give the green light for IPOs of state-controlled firms, while private-sector companies that were more attractive to investors were left waiting. Regulators' preference for state enterprises, whose shares have performed poorly in recent years despite a growing economy, have contributed to a malaise in China's stock market, analysts and investors say.
Now, change is afoot. In a 20,000-word document released Friday that serves as the blueprint for economic changes in the next decade, Beijing called for "refining a multilevel capital market system and pushing for reforms on a registration-based stock issuance system." Many analysts and investors are interpreting this statement to mean that companies will be given more options to raise money, including bonds and stock listings on different exchanges.
The statement is the latest sign that the Chinese government is preparing to further relax its grip on the country's capital markets. Although lacking details, that single sentence is the first and strongest pledge by China's top leaders to adopt a more market-oriented approach, similar to practices in the U.S. and Europe, for one of the most popular channels of corporate fundraising.
The listing process in China can include roughly 10 rounds of reviews lasting several years before an IPO candidate receives approval from the securities regulator, which determines whether the company has met certain financial thresholds, such as revenue and profit. Even then, because of restrictions on timing, they aren't free to list at will.
In contrast, under a registration-based system, which is widely used in developed markets, regulators determine only whether companies have met specific legal and financial requirements and then allow them to list, giving investors the choice of whether to buy the stocks. Companies and their bankers, who are responsible for gauging investor demand, decide the scale, valuation and timing of new share offerings.
"It's definitely a positive development, as China is moving in line with international norms in this regard, which is certainly the right path to take," said Steve Wang, research director at Reorient Financial Markets, a research firm based in Hong Kong.
Beijing's pledge to overhaul how it regulates IPOs has propelled shares of some financial-services companies, traders said. Investment-banking revenue in the past year has declined from a lack of IPOs. China's securities regulator hasn't approved an IPO since October 2012.
Even though the statement was released after markets closed Friday, shares of Citic Securities Co.rose 6% and Haitong Securities jumped 7% that day. The rally in these shares came amid anticipation of the news, which some investors saw as a signal that the IPO drought was nearing an end.
The benchmark Shanghai Composite Index rose 1.7% to 2135.83 on Friday but is down 5.9% for the year. Early Monday, the index was up 0.5%.
To be sure, some market experts are warning that change won't happen quickly. Some say the earliest that the new rules could be implemented is March 2014, when the country's legislative body has an annual meeting scheduled. Then, lawmakers would have the chance to amend China's Securities Act.
Because there are widespread irregularities and financial fraud, any rollout of a new system would need to be gradual, especially as China's markets are dominated by individual investors, said Yang Delong, a fund manager at China Southern Asset Management Co., which manages 140 billion yuan ($23 billion) in assets.
"It takes a long time to establish a viable registration-based system, as it requires a high degree of professionalism and ethics among accountants, lawyers and brokers, as well as a group of sophisticated investors," said Amy Lin, a senior analyst at Capital Securities.
Still, investors don't have much to lose by waiting. Under the current system, it can take years for some companies to get listed, while state-owned enterprises are often allowed to list shares within a matter of months.
China's securities regulator also has controlled the flow of IPOs in other ways. Regulators tend to speed approval of new listings when market conditions are strong, which often results in frenzied buying and high prices. Conversely, they restrict supply when investor mood is low to avoid further depressing the market.
Amid the Shanghai index's recent underperformance relative to stock markets in Asia and elsewhere, China's IPO market has been on a de facto hiatus. Meanwhile, more than 750 companies are in line to list.
China's system has prompted many of China's most innovative and ambitious private firms, including technology companies such as Alibaba.com Corp. and Baidu, to seek listings in Hong Kong and New York, analysts say. Just this month, two Chinese lenders—Bank of Chongqing Co. and Huishang Bank Corp. —raised a combined US$1.78 billion via IPOs in Hong Kong.
"Although the new IPO system implies an increase in future supply, it will be a long process and the reform will eventually make the stock market's pricing mechanism function better," said Huang Cendong, an analyst at Sinolink Securities.
—Amy Li contributed to this article.
Write to Shen Hong at hong.shen@wsj.com
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