CSRC’s latest IPO plan: public folly or sensible policy?

Sceptics say few in China’s listing queue likely to benefit from planned fast-track reform

PUBLISHED : Thursday, 15 September, 2016, 5:16pm
UPDATED : Thursday, 15 September, 2016, 10:09pm

Chinese policy makers have given the green light to what effectively amounts to companies in impoverished areas being allowed to go public.

Proposals published by the China Securities Regulatory Commission last Friday said it is to allow companies registered in one of 592 impoverished regions nationwide to skip the 836-long waiting list of groups currently waiting to float in Shanghai or Shenzhen.

But market watchers are divided on what is being seen as a controversial decision.

Some describe the new policy as plain “weird”, even“ridiculous”, while others simply suggest it is a clumsy government move to reallocate wealth, rather than ease what has become an unwieldy IPO bottleneck.

“To tell you the truth, I took it as a joke when I was told the news ,” said Su Peike, chief researcher at the Public Policy Research Centre at Beijing’s University of International Business and Economics (UIBE).

“How can the IPO market help impoverished counties?

“What the new proposals bring is just interference to fair market competition, and they will make the capital market regress,” adding it underlines too, the lack of visible progress towards market reform.

Larry Hu, the head of China economics at Macquarie Securities in Hong Kong is also more than sceptical on the planned policy, and thinks it’s important to know just how Chinese policy makers plan to roll out the plan.

China’s IPO reform has been led by CRSC chairman Liu Shiyu, who took over the position in February after January’s stock market turmoil.

To tell you the truth, I took it as a joke when I was told the news...How can the IPO market help impoverished counties?
Su Peike, chief researcher, Public Policy Research Centre, Beijing’s University of International Business and Economics

The official line on the CRSC’s website, released last Friday, is the latest measures are aimed at improving industrial development in poor regions and help people raise themselves out of poverty.

The CRSC suggests Yunnan, a province in China’s south-west region, offers solid evidence to prove its aim is poverty alleviation. It has some of the country’s most impoverished counties, 73 in total, it said, but only six companies based there are waiting to go to public.

However, according to a survey by the Securities Times, a subsidiary of the flagship party newspaper People’s Daily, the beneficiaries of the policy could be as few as four of the 836 companies in the IPO queue.

Hong Hao, chief China strategist at Bocom International, agrees the plan might help shorten IPO waiting times, and at the same time expose the creation of shell companies.

“Companies waiting to float in the mainland will have another listing channel after the new proposal takes effect.” said Hong.

“I expect some companies to follow the new practise in search of a quick listing.”

As well as the 836 companies listed by the CSRC, local media reports have indicated there are more than 700 still waiting for approval at the provincial level before they can even join the queue proper for a listing, and the combined backlog could take years to work through for Chinese regulators.

“Without the new proposal, a company either spends several years waiting for a listing or spends billions buying a shell company,” said Hong.

“The two choices sound not as efficient as altering registered address to the impoverished counties for an immediate listing.”

“The proposals will help to further cool down the overheated market for shell companies if they have another more cost-efficient choice for a listing,” he added.

“But it will take much more to buy a shell company than change a registration address.”

Hong said the new policy may also be viewed as a pretext for implementing a registration-based IPO system in mainland China.

Su from UIBE said his opposition to the IPO reform does not mean capital markets cannot play a role in helping some counties rid themselves of poverty, but “not in such a form”.

“Encouraging thousands of listed companies to develop their industrial business in poor regions may be a better choice,” Su said.

“But it should be a two-way selection for listed companies and indigent regions, and not an administrative order.”

Shanghai stock market ranked second globally for IPOs in the first half of this year, raising about HK$128.7 billion compared with Hong Kong’s HK$129.4 billion according to Dealogic data.

But the growing backlog remains a serious issue for officials.

Administration orders are not unknown in China’s equity market to relive pressure.

Officials suspended all new listings during times of stress in 2014, and the ban was briefly reimposed in the summer of 2015 to constraint the crash that followed mainland markets’ spectacular rally.