Backlog of Chinese IPO applicants tests regulator’s reform resolve
More than 800 companies are queuing up for A Share listings as regulator backtracks on listing reforms designed to stabilise the market
A huge backlog of listing applications for the A share market has built up over the past two and a half years with more than 800 companies in the queue to go through the regulator’s initial public offering (IPO) procedure.
The chasm between the strong demand for financing and the daunting task of stabilising the market has put Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), in the hot seat only three months after he took up the job.
IPOs have long been a thorny issue for the securities regulator, often prompting finger-wagging from the media and investors amid the roller coaster ride on the mainland market.
It could also be a major issue affecting Liu’s political fate after the former deputy central bank governor and Agricultural Bank of China chairman was appointed CSRC chief to bail out the beleaguered market.
The number of IPO applicants topped 800 at the beginning of June as a result of the CSRC’s slowing down of approvals for new share sales. In an apparent effort to shore up investor confidence, the regulator attempted to curb fresh equity supply so that existing holdings wouldn’t be diluted.
Since he took office in March, Liu has put on hold the plan to implement the registration-based IPO system which was designed to ease the fundraising process for companies.
Beijing suspended IPOs between November 2012 and the end of 2013 to buoy the then weak market, and restarted vetting new listing applications in 2014. The CSRC said at that time it would study a new IPO system based on market forces.
In the past, the CSRC would halt IPOs or slow down approvals to bolster a plummeting market while it would accelerate IPO issuances to cool buying during a bull run.
A stock market rout that wiped out as much as US$5 trillion in capitalisation last year forced the regulator to give priority to market stability.
The move to refrain from approving new share offerings, however, was seen as an embarrassment to policymakers since it was a U-turn from the previous goal of letting firms raise more funds on the stock exchanges as part of the transition to broader market reform.
It is estimated that nearly 200 listed firms with refinancing plans are waiting for the nod from CSRC to conduct additional share sales.
“The fundraising issue will be a stern test for the new chairman,” said Dong Jun, a Shanghai-based hedge fund manager. “A stock market without active fundraising deals would be very strange indeed.”
According to Reuters, mainland firms have raised US$4.1 billion in capital via A-share IPOs so far this year, a sharp drop of 82.4 per cent from the same period in 2014.
The current leadership is now focusing on quality of growth, rather than quantity.
A healthy stock market could be an effective financing venue for growth firms to secure much-needed funds to speed up technology innovations and move Chinese-made products up the value chain.
Last year the CSRC, under the leadership of Xiao Gang, made efforts to pave way for the launch of a registration-based IPO mechanism which required full information disclosure while giving listing applicants fast access to funds.
Under the proposed system, the regulator would leave it to market forces, or the investors, to decide the value of the IPOs.
It was a major part of market-based reforms to revamp the mainland’s volatile stock market where millions of retail investors were stuck with heavy paper losses.
Late last year, the State Council also gave the green light to the creation of a new board for emerging industries to be traded on the Shanghai Stock Exchange, which is slated to accept the relisting of dozens of Chinese tech firms previously listed on Nasdaq.
However, the plan for the new board has been cancelled owing to concerns about market stability.
The regulator has come a full circle, after years of efforts to reform the market, to a situation where IPO procedures are tightened again to avoid a liquidity drain from existing listed firms.
The benchmark Shanghai Composite Index is now 44 per cent shy of the close on June 12, 2015 when the boom-bust cycle started.
“Based on fundamentals and current prices, some of the A share companies have turned out to be good buys, but the regulators still need to go back to the reform agenda to pursue long-term healthy growth of the market,” said Shi Jianjun, deputy chief of the wealth management division at HuaAn Securities.