China’s stock market regulator has accelerated approvals for initial public offerings in recent months but market watchers say that long-awaited deregulation of the process is still years away.
IPO fundraising in Shanghai and Shenzhen has totalled Rmb87bn ($13bn) since November, the biggest three-month total since the second quarter of 2015, when China’s stock market bubble reached its height.
The surge of new offerings reflects the relative stability of China’s stock market over the past year. Investors in the secondary market often complain that IPOs “suck the blood” from the market, but recent stability has given regulators confidence that increasing IPOs will not undermine prices for existing shares. The Shanghai Composite Index is up 19 per cent from its 2016 low point in late January last year, though it remains 27 per cent below its level at the peak of the bubble in June 2015.
Tight regulatory control over IPO approvals is an obstacle to new listings in Shanghai and Shenzhen. Some 629 companies were queueing for approval as of January 19, and wait times of more than two years are common. The China Securities Regulatory Commission froze IPOs in July 2015 in an effort to stabilise the market after the bubble began to unwind. They were restarted four months later.
Hu Wensheng, an IPO sponsor at Xiangcai Securities in Shenzhen, said: “Once you push ahead with a registration system, the number of listings will increase massively, and it will influence stock prices and create turbulence. At the moment CSRC won’t rise this issue. It’s too sensitive.”
For years, economists have argued that the approval system creates huge market distortions by artificially restricting the supply of new shares and capping issuance prices. IPOs are routinely oversubscribed by hundreds of times as investors scramble to lock in arbitrage profits from huge price pops that invariably occur on the first day of trading.
Officials have long floated the possibility of moving to a simplified registration system in which stock exchanges, rather than the CSRC, supervise the process. Regulators would focus on ensuring proper information disclosures but would no longer conduct detailed evaluations of a company’s business. But few believe that fundamental reform of the IPO system is likely to move forward this year.
IPO registration was not mentioned in the government work report approved by China’s parliament during its annual session in March. The report is considered an authoritative guide to policy priorities for the year. IPO registration had been mentioned in 2014 and 2015. Market watchers believe that following the boom-bust cycle of 2015, the government is focused on stability and will proceed cautiously on deregulation. With a crucial leadership reshuffle due in late 2017, most believe this conservative approach will continue this year.
“If Chinese financial reform were improved, the IPO queue wouldn’t be so long,” Fang Xinghai, CSRC vice-chairman, told a panel discussion at the World Economic Forum in Davos, without offering clues as to when reforms would resume.
Even as regulators loosen the reins on IPO approvals in recent months, they have tightened them on follow-on offerings by listed companies. Such offerings totalled Rmb63bn in January, on pace for the second-weakest month since November 2015. Secondary offerings do not have the same “blood sucking” impact as IPOs because many such offerings are sold through private placements to institutional investors, so do not siphon retail money from outstanding shares.
Market watchers say regulators are slowing the pace of secondary offerings in part out of concern that such fundraising has financed reckless acquisition sprees and fuelled asset bubbles. Some listed companies have used funds to purchase financial assets, including bank wealth management products.
Zhu Bin, equity strategist at Southwest Securities in Shanghai, said: “In the past, secondary financing has caused listed companies to lose focus on their core business and get distracted by mergers and acquisitions. This isn’t good for the development of the real economy.”
Additional reporting by Ma Nan