IPO reform will promote market's 'decisive role' in China's economy
Hu Shuli welcomes the regulator's new listing approach that will free investors and the market to price stocks based on accurate information
With the government's pledge of letting the market play a "decisive role" in the allocation of resources still ringing in our ears, change is already afoot. On November 30, the China Securities Regulatory Commission announced a series of reforms aimed at modernising its stock listing approach. Public feedback has been largely positive.
The Communist Party's third plenum, which backed IPO reform, has sped up the pace of change.
The securities regulator pledged to clarify the role of the market and that of the government. It will seek to "improve the disclosure of information, strengthen the role of the market and encourage market participation, so as to build a good foundation for an IPO registration system".
For the past 20 years, the development of China's stock exchange has been meandering at best. The listing system's multiple changes since its launch can be broadly categorised under three phases. The first, between 1990 and 1999, was marked by strict government control, with provincial authorities and government commissions directly deciding who could be listed. The second phase, from 1999 to 2009, saw the introduction of some market-friendly measures, such as permitting institutional investors and book building, but the changes only scratched the surface of true market reform.
The third phase began in 2009. With the birth of a more complex capital market, the authorities have tried to fine-tune the listing system to accommodate different types of companies. But while time and attention was spent trying to curb the problems of overly high valuation, prices and fees, the listing system remains fundamentally unchanged - one based on approval.
Under its former chairman Guo Shuqing , the securities commission had signalled it intended to do away with an approval system. Last month's publication of its latest plans as good as announced that reform is for real this time.
The market favours a US-style registration system. For too long, China's regulator has been responsible for vetting an applicant's future earnings and the soundness of its finances. So naturally it bears the blame when, after listing, a company's performance - and its stocks - begin to slide. To stabilise the market, the regulator then resorted to adjusting the pace of IPO launches, interfering in price-setting and even suspending initial public offerings. China has suspended IPO launches eight times in just over 20 years - surely an oddity in the history of capital market development.
A week after the end of the third plenum, current commission chairman Xiao Gang said a listing approach based on registration would safeguard the rights of the investor. He also said that any change must be gradual to avoid shocks to the market.
Market reform means letting the market decide on prices, with investors free to assume the risks and enjoy the profits. The new system is based on disclosure.
The regulator will only be responsible for ensuring an applicant's information is accurate and complete, and will leave investors and the market to assess the company's value and the risks of buying its shares. An applicant may also choose to raise capital through different ways - ordinary or preferred stocks, bonds, stocks or a combination of both. Further, the pace of IPO launches will be decided by the market to a greater extent.
The commission has stressed the need for government agencies to avoid "overstepping boundaries". On this, it must set a good example, so that it may - in the words of the plenum blueprint - "better perform the role of government". The regulator's first duty is to see through market reform - to set, improve and properly implement market rules.
It must be aware of the many hurdles that lie ahead. For instance, how will it deal with compensation for investors if an applicant flouts the rules? Much will depend on the transparency and soundness of the registration system. And what would it do in the event of a market plunge? Many problems will test its resolve, integrity and professionalism.
Truthful, accurate and complete disclosure of information is the foundation for correct pricing. Investors depend on it. Thus, disclosure must be the focus of the work of the regulator and other relevant government agencies.
The public plays a role too - as watchdog. It can help ensure companies toe the line. The securities regulator must be open to such scrutiny.
A commission spokesman made it a point to say the new rules should not be taken as a sign that the government would take a hands-off approach. Actually, few would see it that way. The IPO system is but one of the problems that plague China's capital markets. Some of these problems originate elsewhere. The commission's plan will get the ball rolling on reform. We have reason to be hopeful.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com