Analysis | China’s regulator rejects the most number of IPOs in four years to control stock market’s quality
CSRC seen as seeking a balance between easing the IPO backlog, keeping the market calm and improving the quality of listed companies
China’s securities regulator is rejecting initial public offering applications at the fastest pace in four years, suggesting it is getting tougher on the rules introduced to improve the quality of listed companies while speeding up the approval process at the same time.
Analysts believe the China Securities Regulatory Commission is seeking a balance between easing the logjam in the IPO pipeline and boosting investor confidence.
They also regard the moves as paving the way for an overhaul that could in the longer term give the market more power over the listing process.
By May 19, the regulator had approved 188 listings after reviewing 257 applicants since the turn of the year, “that’s a 73.2 per cent pass rate”, CSRC spokesman Deng Ge said.
It is also the first time the pass rate has dropped below 80 per cent since 2013, when the commission put a blanket freeze on IPOs for more than a year during the stock market rout.
According to data compiled by accounting firm Grant Thornton China, the CSRC approved 247 new listings in 2016 out of 275 applicants, an 89.8 per cent pass rate. In 2014 and 2015, the pass rate was 83.2 per cent and 89 per cent, respectively.
Meanwhile, the pace of listing approvals has accelerated, with the number of approvals so far in 2017 exceeding 70 per cent of the 2016 total.
Deng also said the regulator “terminated” 35 and “rejected” 18 IPO reviews between January and April mainly due to the discovery of “abnormal business operations or finances”.
Other reasons for terminations or rejections included suspicious accounting methods or connected transactions, earnings declines, adjustments in shareholder structure or company strategy, and false statements made in applications.
The increase in the number of listing reviews is part of a wider overhaul initiated by CSRC chairman Liu Shiyu, who took office in early 2016, as the central government attempted to restore confidence in a volatile stock market and reform its financial system amid a worsening economic slowdown.
“The securities watchdog is trying to seek a balance between easing the IPO logjam and calming the market,” said Wang Zejun, an analyst for Huarong Securities.
Chinese investors often complain that a flood of listings can draw liquidity away from existing stocks.
“Regulators are speeding up the approvals to allow companies to raise capital more easily, but they don’t want to spook investors,” Wang said.
“More importantly, regulators are increasing the scrutiny of IPO reviews to improve the quality of companies. They want the listing system to better serve the real economy with more efficient capital relocation.”
Fu Chuangui, an analyst with Dongguan Securities, also believes the regulators have recently “raised the bar” on IPO reviews to “boost confidence and support the market” as the sentiment in the A-share market is still weak and recovery fragile.
The acceleration in IPO approvals and the tightening are helpful in paving the way for the establishment of a more open registration-based system
After putting IPOs on ice for 14 months, from October 2012 to January 2014, a huge backlog was created of companies eager to raise funds through share sales.
Liu said early this year that the regulator would speed up approvals and shorten that queue, as well as pledging to reform the market and create a registration-based system that would give companies more power on the pricing and timing of their IPOs.
It would also toughen reviews of the applications to weed out companies with poor dynamics, he added.
At the end of last week, Deng underlined the commission would continue to tighten regulations on IPO reviews and prevent fraudulent listings, which commentators, including Lianxun Securities analyst Chen Yong, generally support.
“The acceleration in IPO approvals and the tightening are helpful in paving the way for the establishment of a more open registration-based system,” Chen said.
The central government first mentioned in 2014 that it wanted to move from the approval-based system to one based on registrations, which could ease the state’s control over the IPO process and give investors more power to decide the pricing and timing.
However, it delayed the reform plan due to the market rout in 2015.
“When stock sentiment was weak, slowing the IPO reform helped stabilise the market,” Chen said.
“However, in the longer term, letting the market decide who can list and how much it gets is critical for the healthy development of China’s capital market as it improves the capital relocation to companies with better earnings growth and curbs speculative trading on overvalued stocks.”
