China is set to make market-oriented changes to the way initial public offerings are approved, as it tries to reset the economy and rebuild investor confidence after a chaotic exit from zero-Covid.
Once implemented, the reforms will mark the culmination of a decade-long attempt by the country to liberalize its nearly $12 trillion stock market, which could make it easier for companies to raise money from domestic investors.
The new registration-based IPO system, based on the model in the United States, will apply to all domestic stock exchanges, including the main ones in Shanghai and Shenzhen, according to an announcement by the China Securities Regulatory Commission (CSRC) on Wednesday.
The regulator is soliciting public feedback about the proposal until February 16. It isn’t expected to garner much opposition.
Under the new system, regulators will stop vetting planned share sales by companies. Instead, the stock exchanges will take the primary role. The new system is expected to streamline the review process and give companies and investors more control over the pricing and timing of IPOs.
The concept was first proposed by the government in 2013. A pilot scheme was carried out on the tech-focused STAR Market in Shanghai in 2019. It was later adopted by the start-up board of ChiNext in Shenzhen, and then the Beijing Stock Exchange.
Currently, listings on the main boards of the Shanghai and Shenzhen stock exchanges must be reviewed and approved by regulators before they can be launched.
“The essence of this reform is to let the market decide,” the CSRC said.
No administrative restrictions will be set on the pricing and scale of new share sales, which should significantly improve the “efficiency” and “transparency” of listing reviews, it said.
“This is an important step to reform the capital market. The government will allow market [forces] to play a bigger role allocating resources,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
“It is one step in the right direction,” he said, adding that it’s “encouraging” to see changes finally happening after years of talks.
Economic reset
China’s economy has slowed to one of its worst growth rates in nearly half a century. Financial stress has surged, even as the economy has started to recover after three years of strict pandemic controls.
Following a chaotic exit from its zero-Covid policy, Beijing is trying to reset the economy and rebuild the trust of investors and businesses. Chinese leader Xi Jinping reaffirmed his plans on Tuesday to revive domestic consumption, stimulate private investments in emerging industries and achieve tech independence in the longer term.
The timing of the CSRC announcement was “ahead of market expectation,” according to Citi analysts.
The faster-than-expected progress was mainly driven by a “pressing need” to help companies raise money outside of bank lending channels. Many banks are seeing their balance sheets deteriorate because of bad debts piling up from struggling local government financing platforms and property developers, they said.
Meanwhile, buoyant market sentiment in China following policy pivots on zero-Covid and the property sector has led to a big rally in stocks, making capital market financing a viable tool in the eyes of regulators, they said.
