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IPO resumption reignites market spirit, reform drive

Updated: Nov 10,2015 8:17 AM     Xinhua

BEIJING — China’s move to end a four-month long moratorium on initial public offerings (IPOs) has rekindled investors’ spirit as the country’s reform drive builds a healthier stock market.

The China Securities Regulatory Commission announced on Nov 6 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 Nov 9, the first trading day after the announcement, with the benchmark Shanghai Composite Index rising 1.58 percent 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.

It is not the first time China has frozen IPOs.

“Similar actions have taken place eight times in the past. A restart to IPOs often points to investors gathering confidence again,” said Ping An Securities analyst Wei Wei.

This time, the relaunch came earlier than expected, showing regulators’ resolution and confidence in accelerating capital market reforms and their judgment that the market is now back to normal, Wei said.

IPOs in China were suspended in July after the main market index plunged 30 percent 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 percent from an Aug 26 low.

“The time is ripe for resuming IPOs, as over-the-counter leveraged trading has been almost cleared,” said Guan Qingyou, researcher with Minsheng Securities.

The reforms announced on Nov 6 also prevented a supply of new shares from causing turbulence in the market, he explained.

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.

Investors have embraced the change well. “No freezing money for IPOs? That was like a free lottery!” an Internet user wrote on Chinese microblog Weibo.

IPOs in China were often oversubscribed by more than a hundred times. Early in June, when 25 IPOs took place, nearly 6 trillion yuan ($944 billion) of funds were tied up. Under the new rule, only 41.4 billion yuan 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.

They will bring down the yields for IPO subscriptions, helping strain the overall liquidity and boosting the funding costs for other parts of the market, said Guotai Junan Securities analyst Ren Zeping.

Funding difficulties are among the biggest headaches troubling Chinese enterprises, especially small and private firms, at a time of economic slowdown.

The changes on Nov 6 also eliminated the bookbuilding process for IPOs with fewer than 20 million 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, said Wei.

Unlike in more mature economies like the United States, 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 first eight months of 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 five-year development plan for the 2016-2020 period. To achieve it, an overhaul of the IPO rules is a must.

Authorities have 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

The moves on Nov 6 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,” said Dong Dengxin, a securities researcher with Wuhan University of Science and Technology.

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