The mainland's securities watchdog needs to reform its listing rules, allowing market forces to have more clout in approving initial public offerings (IPOs), says a senior investment banker and member of the mainland's top advisory body.
Such reforms could give two national stock bourses in Shanghai and Shenzhen more power to allow qualified companies to list, said Fang Fang, vice-chairman of JP Morgan Asia Investment Banking.
As a result, Beijing can also transform its domestic stock market into a more attractive place for global investors and, ultimately, establish Shanghai as an international financial centre, said Fang, the only member of the Chinese People's Political Consultative Conference (CPPCC) whose career background is from a Western financial institution.
His comments come after remarks from Guo Shuqing, the newly appointed chairman of the China Securities Regulatory Commission (CSRC), who posed the question of whether the mainland could do away with its current IPO approval system.
Companies that want to list on the mainland must receive approval from the CSRC, but the disappointing performances of the local stock market has drawn investors' criticism. About half the 200-plus IPOs in 2011 were trading below their offer prices by the end of last year.
Analysts said companies that want to list on the mainland but do not meet the requirements often bribe their way through the regulatory bureaucracy, or call on private equity companies or someone with political connections to influence approvals.
Fang said: 'China's stock market does not necessarily need to rely on a government regulator to make every judgment on which companies deserve or can be listed.' He said that the country should instead let market forces play a larger role during the listing process.
The underlying unspoken assumption for an approval-based listing procedure, as opposed to a disclosure-based procedure, which is considered a common practice in Western markets, is that Chinese investors lack sufficient judgment on risks and return trade-offs, Fang said. 'The regulator needs to find a balance between exercising its vetting power and relying on market efficiencies to determine which companies can go public and at what price,' Fang said.
Fang said the Hong Kong stock exchange set a good example in striking this balance. It relied on market efficiency most of the time, but also had a listing committee to block companies it deemed unfit, such as ones that failed to meet certain revenue requirements.
About 40 deals were shelved last year because of low market sentiment, the highest number in a decade, according to the accounting firm Deloitte. The firm forecast that Hong Kong will have about 100 deals, totalling HK$230 billion, this year, a decline of about 15 per cent in value terms from 2011.
However, Fang said he was hopeful that the value of IPO deals in Hong Kong would increase in 2012. JP Morgan's pipeline of clients wanting to list overseas has nearly doubled compared with the same time last year, with most of those companies eyeing the Hong Kong main board, he said.
Fang said that during the CPPCC meetings he would provide more suggestions on developing Hong Kong's offshore yuan business, calling especially for more investment channels.