Over the weekend, China’s securities regulator announced plans to lift a 13-month moratorium on initial public offerings in January. The China Securities Regulatory Commission (CSRC) said it would streamline the country’s cumbersome IPO process, give listed firms more options for raising cash, and do more to protect retail investors.
Those are all necessary moves, part of a larger campaign to upgrade China’s financial system and let markets play a “decisive” role in setting prices—as officials laid out in the Third Plenum last month. So how did investors react? Most Chinese stocks fell on the first day of trading after the announcement—about seven fell for every one that rose on the Shanghai Composite Index, China’s main index, according to Bloomberg. By 11am in China, China’s tech-focused ChiNext index has dropped 7% and was on track for its biggest fall since last January.
Why the fall? Because a glut of 760 firms are waiting to list—though officials say only about 50 will be approved next month—what investors call a dammed lake, or yanse hu 堰塞湖 of IPOs waiting to flood the market. Regulators say it will take about a year to audit all of the existing applications.
Investor sentiment ahead of this flood demonstrates the fact that the CSRC’s on-and-off bans of IPOs, a tool it’s used over the past decade to try to boost market sentiment, is pretty toothless. Analysts say that officials suspended IPOs last November in hopes of shoring up the country’s stock markets, some of the worst-performing in the world over the past few years. But the Shanghai Composite had only risen about 5% since the moratorium, until late November. (We’ve described other backfiring IPO bans in 2006 and 2009.)
The reforms announced Nov. 30 are still a step in the right direction. Critics say China’s IPO system privileges state-owned enterprises and leaves retail investors in the dark. The CSRC said China would move toward a registration-based IPO process—where regulators simply look at whether a company meets listing requirements—rather than the current model in which officials judge whether a firm is able to stay profitable. Under the new rules, applications may take just two or three months (paywall) instead of the several years the process can take now. Separately, officials said they were preparing a pilot program to let listed companies issue preferred stock (link in Chinese), a way to raise cash without diluting existing publicly-traded shares.
These new rules should help investors in China, who’ve long been lured into buying shares of companies that release minimal or inaccurate financial information. “IPO reform does not mean deregulation,” the CSRC said in its statement (link in Chinese) on Nov. 30, adding that companies will have to disclose more information earlier on during the listing process.
The CSRC’s goal is an admirable one—to make the market more independent. But given that the reforms didn’t include any mention of putting a stop to IPO suspensions, it’s likely the CSRC will still keep a firm hand on the country’s IPOs.