China regulator to loosen IPO restrictions

Newly listed companies to benefit from plans for a registration-based system

China’s government has pledged its intentions to reform the country’s capital markets, with revisions including loosened controls over China-listed IPOs.

In a document released last week, Chinese officials set out their plans for economic changes over the next 10 years in 20,000 words. One aim was set above all others: the intention to ‘refine a multi-level capital market system and push for reforms on a registration-based stock issuance system.’

Many investors and analysts are hoping this will mean companies will be given more options to raise cash when first listed, including provision for using bonds or the ability to list themselves on other, foreign exchanges.

Any changes would be in addition to those set out in December last year, when the China Securities Regulatory Commission removed the requirement for companies to have a net income of at least 60 mn yuan ($9.9 mn), net assets of at least 400 mn yuan and to raise at least $50 mn before they could apply to launch an IPO outside of the country.

Though the document lacks any further details, it is to date the strongest indication by China’s leaders that the country may adopt a more market-based approach for corporate fundraising.

The way in which Chinese IPOs are conducted has long served to frustrate interested investors. Chinese regulators have, historically, been quick to allow state-controlled firms to list themselves easily, while more attractive investment propositions have been left waiting. A number of commentators attribute the poor performance of China’s market to this preference for state-run companies, whose shares have performed poorly in recent years despite the country’s growing economy.

The Chinese listing process includes around 10 interviews over the course of several years before potential IPOs even receive approval from the regulator. Beyond this, there are still several financial benchmarks that have to be met and, because of several restrictions on timing, companies are not free to list at will.

Under the suggested ‘registration-based’ system, however, the regulator would instead only have to determine whether companies have met some legal and financial checks before they would be allowed to list. Companies would then be at liberty to decide the value, scale and timing of their launch onto the stock market.

The latest EY Global IPO Trends report reveals that 78 new IPOs were launched in the Asia-Pacific region in Q3 2013, exactly matching the number seen in Q2. The figures are some way short of the 125 new listings registered in the same period in 2012, however, as restrictions on Chinese IPOs have prevented a number of deals from proceeding.

‘The success of big-ticket listings near term, such as the $1.3 bn IPO of China Huishan Dairy at the end of September, will set the tone for the market in Q4 2013,’ the report notes. ‘At the same time, a move from China’s regulators to reopen its IPO market would be a welcome boost to the Asian IPO market.’

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