White Collar

China’s loss is Hong Kong’s gain, as CSRC drags its heels on IPO reform

Mainland companies are likely to continue eyeing Hong Kong as a choice listing destination

PUBLISHED : Monday, 29 February, 2016, 11:47am
UPDATED : Monday, 29 February, 2016, 11:47am

The decision last week by mainland Chinese regulators not to change the system whereby companies list on the stock market is good news for Hong Kong and its efforts to attract quality mainland companies.

The China Securities Regulatory Commission on Friday announced there would be no immediate change of its Shenzhen based ChiNext listing process. The announcement came a day after speculation that the mainland would start a new IPO registration system from March 1. Those rumours helped to drag the Shanghai Composite Index 6.4 per cent lower on Thursday as investors fretted the new system would unleash a pipeline of new listings and affect the valuation of the A-share market.

The CSRC statement said although the new IPO registration system has been approved by the State Council in November, it would need “a long time” to carry out a “careful study of the details of the system”.

This means the new the IPO registration system won’t come to fruition any time soon. In other words, the current system in which CSRC approves and control the pace and size of all IPOs will remain intact.

Why does this matter to Hong Kong?

Whenever the CSRC slows down or suspends the listing process, mainland companies inevitably begin looking over the border to Hong Kong.

During the past two decades, the CSRC has suspended company listings eight times, most recently from July to October last year.

As a result, last year Hong Kong regained its title as the world’s largest IPO market.

If China chooses to revamp its IPO registration system along lines similar to Hong Kong, the resulting system will enable companies and their investment bankers to choose when they go to market, and how much money they raise.

Still, Mainland shares trade at valuations 40 per cent higher than those in Hong Kong, which means if they had their choice, most companies would choose to sell shares in Shanghai or Shenzhen if the listing regime was the same.

For now companies are happy to accept a lower valuation to list in Hong Kong.

Hong Kong brokers and investment bankers are no doubt smiling inwardly on the news that the CSRC will need a long time to study the details of the new registration system before launch.