China expands IPO reform to help companies raise capital

China Securities Regulatory Commission (CSRC) building in Beijing
A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/File Photo

SHANGHAI, Feb 1 (Reuters) - China published draft rules on Wednesday to broaden the registration-based initial public offering (IPO) system, marking a big step towards reforming the world's second-biggest stock market.

Expanding the U.S.-style IPO mechanism to all corners of China's stock market will speed up listings and corporate fundraising, as Beijing seeks to revive a COVID-ravaged economy.

The fresh reform will also benefit investment banks and private equity funds, though some fear a flood of listings could drain market liquidity.

The registration-based IPO system, first adopted by the tech-focused STAR Market, was later rolled out to start-up board ChiNext and the Beijing Stock Exchange. It will now be expanded to the main boards in Shanghai and Shenzhen, the China Securities Regulatory Commission (CSRC) said.

The IPO reform is designed "to give the right of choice to the market," and make IPOs more transparent and predictable, the CSRC said in a statement.

Currently, IPOs on the main boards - home to China's blue-chip stocks - need a nod from the CSRC under an approval-based system, and IPO prices there are capped by the regulators.

Under the new system, stock exchanges will vet IPOs with a focus on information disclosure, while the CSRC will only make sure listings are in line with national industrial policy.

"This is a milestone event in China's capital markets," Bosera Asset Management Co said in a statement.

"It will increase the proportion of direct financing and strengthen the role of finance to serve the real economy."

However, some are worried that the reform will lead to a growing number of low-quality listings, potentially burning investors.

"I think the market will be negatively impacted," said Chun Xu, fund manager at JSVest Shanghai Ltd.

"The quality of listed companies will be lower, which will be increasingly dangerous to investors."


The CSRC said on Wednesday that after four years of the pilot scheme, conditions were ripe to expand the IPO reform.

However, the registration-based system doesn't mean less stringent quality control, the CSRC said.

"It doesn't mean any company can list as long as it wishes to," the regulator said, adding candidates must meet certain thresholds and strict information disclosure requirements.

The CSRC will consolidate IPO rules for Shanghai, Shenzhen and Beijing bourses.

Under draft rules published on Wednesday for public opinions, no daily trading limit is set for IPO shares during their first five trading days. However, stocks listed on the main boards are still subject to the 10% daily trading limit afterwards.

In addition, stocks are eligible for margin trading and securities lending on trading debuts.

"IPOs will accelerate, and the number of listed companies will grow more rapidly," said Ade Chen, general manager at Guangdong Fund Investment Co.

"Bad companies will turn into zombie stocks, and get delisted."

Reporting by Samuel Shen, Jason Xue and Brenda Goh; Editing by Andrew Heavens and Bernadette Baum

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