China’s move this week to make it easier to list on the stock market isn’t likely to lead to a flood of IPOs, say bankers. This is because the government could step in for reasons of national security or other reasons that would cause delays.
Beijing released a draft of rules Wednesday that would expand its new registration-based IPO system. This would bring the U.S.-style mechanism to all parts of China’s stock market, which would speed up the process of listing companies and raising money for them.
Under the new system, China’s stock exchanges will be in charge of vetting IPOs, with a focus on sharing information. At the moment, IPOs on China’s blue-chip boards need approval from the China Securities Regulatory Commission (CSRC). This is because China has an approval-based system, which means long delays and caps on IPO prices.
Analysts and state media praised the reform as a major step forward that would make China’s IPO market more open, clear, and efficient.
But bankers say that in reality, the IPO process will be mostly up to the government, which sees stock markets as a tool in a global power struggle and in national rejuvenation. Under the new rules, the CRSC’s job will be to make sure that listings are in line with Beijing’s industrial policy as a whole.
“Under China’s system, the government tells IPOs what direction they should go.” “National policies are used to evaluate applicants.” Terence Lin, a partner at TRSD Capital, a small investment bank that helps Chinese companies list in the U.S., said this.
According to public filings, more than 30 people who wanted to do an IPO stopped the CSRC registration process, and hundreds gave up on their plans to go public during the tough vetting process by the exchanges in the pilot registration-based scheme.
A banker at a large Chinese brokerage who didn’t want to be named because he wasn’t allowed to talk to the media said that China’s IPO system, even though it’s based on registration, still needs approval from the government.
“It’s very hard to get approval to list a company domestically if it’s neither big enough nor new enough,” he said. He said that in the new IPO system, “paternalism and politics continue to play a big role.”
When the tech-focused STAR Market in Shanghai opened in 2019, it was the first place to use the registration-based IPO system. President Xi Jinping backed STAR, which was made to help pay for China’s tech independence as tensions with the US got worse.
Later, the new IPO system was brought to the start-up board ChiNext and the Beijing Stock Exchange. The China Securities Regulatory Commission (CSRC) said on Wednesday that the reform will be extended to the main boards in Shanghai and Shenzhen. These are the places where dollar stocks like Kweichow Moutai and Bank of China are traded.
On Thursday, the CSRC made clear what its job is. It said it would make the Chinese Communist Party even more powerful in the capital markets and promised to combine market forces with government roles as it moves forward with the IPO reform.
“This means that the CSRC still has the final say on whether the company wants to be listed in the right sector,” said Yi Jiansheng, a capital markets lawyer at Jia Yuan Law Offices, in a research note released on Thursday.
Bankers say that the cancellation of Ant Group’s planned $37 billion IPO dual-listing in Shanghai and Hong Kong just days before its scheduled listing in late 2020 is the clearest example of state intervention in a registration-based system.
“We thought the registration-based IPO mechanism would let more types of companies list and give the market more power,” said another banker at a Chinese brokerage, who did not want to be named because he was not allowed to talk to the media.
“But as IPO sponsors, we see on the ground that companies are facing more and more scrutiny from regulators, which goes against what the reform was meant to do.”