China ushers in new IPO registration system but it’s likely to come with ‘Chinese characteristics’

Beijing officially kicked off the long-awaited “registration-based” initial public offering reform on Wednesday night in a move aimed at reducing government intervention and easing the burden on the country’s cash-strapped enterprises, but analysts said the system will be one with “Chinese characteristics”.

The China Securities Regulatory Commission said detailed rules for the new system would be released for consultation, without specifying a timetable.

“The transition to a registration-based approval system is a gradual process. The authorities will not lose control over [listing] prices and pace completely. Nor will they quicken approvals significantly,” the regulator said.

The mainland is expected to speed up approval of new listings, a source close to the CSRC say, but the new process is unlikely to be free of intervention by regulators or burdensome profitability requirements in the near future.

CSRC chairman Xiao Gang is keen on pushing out the registration-based system “as soon as possible”, but a source said regulators were disagreeing strongly on the details.

Now that the new policy has been unveiled, however, the source said: “Don’t expect a US-style system. It will be a system with Chinese characteristics.”

The term “registration-based IPO” refers to a Western-style system that imposes a lower threshold and simplifies the listing process while emphasising post-listing information disclosure.

That is different from the current approval-based system, which relies on strict financial requirements and stringent reviews by the CSRC’s public offering review committee, and imposes a cap on valuations.

“Regulators remain divided on how ‘low’ and how ‘simple’ is appropriate,” the source said. “The credibility environment in China is different. We cannot rely on post-listing punishment to deter fraud or insufficient disclosure. It is too dangerous.”

A mutual fund manager said it did not matter what the system was called.

 “One thing is for sure: Beijing needs a faster approval process to relieve cash-strapped companies from defaulting on their mounting debts,” the fund manager said. “This is also key to social and financial stability.”

At least seven mainland firms have defaulted on bonds this year.

“The economic slowdown in China is deteriorating companies’ books, particularly those state-owned companies in cyclical industries … and it in turn weighs on banks’ non-performing loan rates,” the fund manager said. “The authorities have to find a way out for them.”

Oliver Rui, professor of finance and accounting at China Europe International Business School, said the fact that retail investors accounted for 80 per cent of share trading, combined with the mainland’s immature judicial system, were hindering the shift to a US-style listing system.

“The key for the US system lies in accountability – underwriters, lawyers and accounting firms are held accountable with criminal responsibility for any fraud or improper information disclosure during the listings,” Rui said. “In China, we hardly see any lawsuits against the listing companies or the agencies in this regard.”

In the absence of strong backing from the judiciary, the CSRC seems to be preparing the market for reform disappointment.

In an article published on Sina on Tuesday, review committee member Lu Xiongying said the mainland “should not copy experience from developed countries” when pushing forward with the reform.

“The reform should be in accordance with China’s fundamental system,” Lu said.

The CSRC said late last month that the review committee should stick to a stricter timetable when handling applications, reducing the whole process to roughly six months. Under current rules, A-share listing applicants should go through at least three rounds of reviews to get approval from the regulator.

The proposed listing price also has to stay below an unofficial cap of 23 times earnings per share. That leads to big post-listing jumps in share prices. This has the side effect of soaking up liquidity from the secondary equity market as investors tend to cash out of existing stocks to subscribe to new offerings.

Beijing has frozen new stock offerings nine times since 1994. The latest freeze started in July and ended last month.