China Ends 4 Month Moratorium On IPO’s
China’s move to end a 4-month long moratorium on IPOs (initial public offerings) has rekindled investors’ spirit as the country’s reform drive builds a healthier stock market.
The China Securities Regulatory Commission announced Friday it will allow 28 companies, whose listings were already approved but halted in July, out of the gate by the end of this year.
Chinese investors rejoiced on Monday, the 1st trading day after the announcement, with the benchmark Shanghai Composite Index rising 1.58% to 3646.88 points.
The commission also introduced significant changes to IPO procedures, allowing investors to subscribe without paying into escrow accounts in advance, giving more priority to information disclosure instead of pre-IPO approvals, and simplifying procedures for smaller IPOs.
The relaunch came earlier than expected, showing regulators’ resolution and confidence in accelerating capital market reforms and their judgement that the market is now back to normal.
IPOs in China were suspended in July after the main market index dove 30% from its June 12 peak, as panic-triggered sell-off spiked a market bubble that was inflated partly by heavily-leveraged trading.
Authorities have since then cracked down on the use of leverage, which magnifies both gains and losses, while pouring funds into the market and investigating “malicious” short selling.
Before the IPO resumption, Chinese shares rebounded more than 20% from a 20 August low.
Before the reforms, investors had to freeze big sums of funds in escrow accounts ahead of IPO subscriptions. Under the new rules, they pay only after the allocation of the shares is confirmed.
IPOs in China were often oversubscribed by more than a 100X’s.
Early in June, when 25 IPOs took place, nearly RMB 6-T (US$944-B) of funds were tied up. Under the new rule, only RMB 41.4-B would have been locked.
While withdrawal of funds before an IPO often led to sinking stock prices, the return to the market after subscriptions sent prices high, leading to market instability.
“The reforms will help reduce speculation and cyclic disruptions,” Guan said.
Viewed against the backdrop of China’s economy, the reforms will have broader repercussions.
Funding difficulties are among the biggest headaches troubled Chinese enterprises, especially small and private firms, at a time of economic slowdown.
The changes on Friday eliminated the book-building process for IPOs with fewer than 20-M/shares, which will streamline IPO procedures and reduce their listing costs.
That will benefit small and medium-sized enterprises, making it more convenient for them to seek funds from the stock market.
Unlike in more mature economies like the US and EU, the stock market only contributes to a small part of corporate financing in China, though the government has long called for an increase.
Direct financing, including stocks and bonds, took up less than a fifth of the country’s total social financing, according to official data for the 1st 8 months of Y 2015.
As banks are reluctant to lend to small companies for fear of risks, the stock market is increasingly viewed as an alternative.
A larger share for direct financing has been written into the Communist Party of China’s proposals for a new 5-year development plan for the Y’s 2016-2020 frame. To achieve it, an overhaul of the IPO rules is a must.
Authorities set the reform target to allow firms to go public without the current administrative approvals, by phasing in a registration-based system that relies on full and truthful information disclosure
Friday’s moves were viewed as a major step in that direction. Regulators will remove some criteria for IPO approvals and strengthen requirements for information disclosure instead.
That signifies a shift of focus from administrative approvals to information disclosure for IPOs.
“This effectively provided policy support for the finishing touch on registration-based IPOs,” Dong Dengxin, a securities researcher with Wuhan University of Science and Technology said.
Stay tuned…
HeffX-LTN
Paul Ebeling
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