IPO resumption paves way for capital market reform

Pave way for capital market reform

China will restart initial public offerings (IPOs) which had suspended in the mid-year in the wake of a stock market rout, and will launch five measures to reform its current IPO system, the China Securities Regulatory Commission (CSRC) announced on Nov. 6.

In the middle of this year, A-share market suffered sharp fluctuations. China has rolled out a series of measures, including suspending IPOs, to stabilize the market, preventing panic and systemic risk in the market. Now that investors restore their confidence and the market is back to the track of self-adjustment following the suspension, a temporary action taken for emergency, it is necessary to resume IPOs.

The market generally believes that as A-share market has returned to a “normal state” from the previous “abnormal state”, it is appropriate and necessary to restart IPOs now.

The IPO suspension starting from July has lasted only 4 months, the shortest suspension in China’s history. Even so, the IPO resumption will not be simple: the government has taken various measures to reform IPO, including cancelling advance payment for subscriptions, improving IPO pricing mechanism and enhancing protection of investors' rights and interests.

Specifically, subscriptions will not be required to be paid in advance, which will minimize money supply’s impacts on the secondary market, and reduce investors’ transaction costs and alleviate the disturbance that IPO might cause to the capital market in the future. IPO with less than 20 million shares will be priced directly, which will shorten issuance cycle, improve issuance efficiency and help small and medium-sized enterprises to save their issuance costs. The new measures also include strengthening supervision on agencies, establishing the system that sponsor institutions should pay compensations first and issuing guidelines for dilution of immediate returns in IPO, re-financing and significant asset reorganization, which will further enhance the protection of investors’ interests.

Subsequent offerings will also gradually resume step by step. There will be no “one size fits all” mode. The CSRC will resume IPO approval meetings. IPO will fully apply new rules after their implementation. The move not only has spared some time for investors in the secondary market to adapt themselves but also will mitigate the effects of IPO resumption to the stock market.

A shares will maintain upward trend

IPOs will officially launch this month. There will be 28 enterprises which have previously gained approval and launched IPO procedures will go public first. Among them, 10 companies that had accepted subscriptions will first launch their IPOs, which is expected in two weeks later. The other 18 companies will go public in two batches by the year end. Meanwhile, the IPO approval meetings which suspended in early-July will also resume. According to data previously disclosed, the first 28 companies have raised about 10 billion yuan funds.

Some private funds believe that as the P/E ratio in the market remains low after two rounds of decline, to resume IPOs at this point will solidify market expectations for a bull run instead.

“When the stock indexes stand high, the IPOs will take the market capital, which will strengthen expectation on market plummet. When the market stays low and off-market capital is sufficient, the restart of IPOs will lead to speculation on new stocks, which will result in surge of stock prices.” Liao Lihui, president of Shenzhen Jingliang Investment Management Co., Ltd., said frankly that the stocks leading the hike last week were blue-chip stocks including securities brokers, insurance and bank sectors, which was obviously due to capitals from institutions. Market sentiment has recovered and the off-market capital is sufficient, which is able to undertake the new IPOs. There are generally some favorable policies so as to ensure successful IPOs. This is the reason why the IPOs resumption causes the market to rise after drastic plunge in history.

However, according to stipulations, the 28 companies launching IPOs within the year will follow the existing rules. Li Lifeng, chief strategy analyst of Sinolik Securities, believed that this may influence the capital supply in a short term but will only smooth the increasing trend in the market.

Yang Ling, general manager of Beijing Starock Investment Management Co., Ltd., considered that resuming the IPOs basically accords with the expectation. Capital market plays an import role in facilitating economic reform and transformation and securities market features financing function; therefore, it is appropriate to restart the IPOs. Besides, as the market gets stabilized with recovery recently and the stock market gradually enters a growing trend, the market also has certain expectation on IPOs resumption. Hence, it is not beyond the expectation. 

Restarting the IPOs won’t change the upward tendency. Yang Ling believed that China is experiencing shortage in assets allocation and several cuts in reserve requirement ratio and benchmark interest rates by the People’s Bank of China. The market is affluent with liquidity, allowing it to meet the new IPOs. The IPOs resumption will lead to market consolidation in a short term at most but won’t change the growing trend with fluctuation in a medium and long term.