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Categorized | Financial

IPOs set to resume in China

Posted on November 30, 2013

China is to lift its year-long freeze on stock market listings and introduce new rules for initial public offerings.

The China Securities Regulatory Commission (CSRC) on Saturday published guidelines for reforming the country’s scandal-plagued IPO system, vowing to give market forces more clout and to reduce the role of the government.

    The CSRC said it expected IPOs would be able to resume in January, some 14 months after the last company floated shares in China.

    Along with allowing time for reforms to be implemented, the suspension of equity listings was widely seen as a tactic by regulators to support China’s beleaguered stock markets, which have been among the worst-performing in the world over the past three years. But the benefit has been minimal, with the Shanghai Composite, the country’s main index, rising just five per cent since the freeze began.

    Analysts have long predicted the resumption of listings would weigh on share prices. “This is a signal that the IPO floodgate may be opened soon,” said a senior executive in a Chinese brokerage.

    In an effort to allay fears about a sudden rush of new listings, the regulator said that of the 760 companies waiting to go public, only about 50 would actually be ready by January and that it would need a year to finish its checks on the others.

    The revamping of the IPO process has been one of the test cases for China’s new leaders’ commitment to allow the market to play the “decisive role” in the economy they have promised.

    As laid out on Saturday, the reforms fall short of the market-determined IPO registration system that is common in more developed financial systems, but they should help limit the government’s influence over the pricing of share offers and also boost transparency.

    The regulator said it would still conduct strict checks to ensure that information provided by IPO candidates is full and accurate before permitting them to list, but beyond that it vowed that assessments of risks and valuation would be up to investors themselves.

    “What needs to be emphasised is that this . . . cannot be understood as meaning that the regulator will have no oversight,” the CSRC said in a statement. “It does not mean that IPOs won’t be audited or that junk stocks can be easily issued. Rather, it means that the auditing system will be reformed.”

    In the past, companies in China have been able to issue shares with minimal or inaccurate information disclosures, reaping huge price gains as retail investors are lured in to buy stocks. To increase transparency, the regulator said companies would have to publish more extensive financial records and make them publicly available earlier in the listing process.

    It also said it would make securities firms more accountable for the listings they underwrite. For example, should any company suffer a more than 50 per cent loss in profits in the first year after it goes public, the regulator will have the right to suspend the sponsor’s underwriting license.

    In another announcement on Saturday, the securities regulator said it would start a long-expected trial permitting companies to issue preferred shares, which will allow them to raise more equity without immediately diluting existing investors.