New IPO rules likely to test bourses' mettle

Securities regulator gives green light to seven firms to raise $608 million through public floats, one at a time

Fundraising by seven companies under the new rules for initial public offerings could test the country's fragile stock market, analysts said on Wednesday.

The China Securities Regulatory Commission on Tuesday night approved seven companies to issue IPOs, raising an estimated 4 billion yuan ($608 million) in total.

Three of them, including Eastern Pioneer Driving School Co Ltd and Southern Publishing & Media Co Ltd, will float their shares on the Shanghai Stock Exchange, while the other four will do so on the Shenzhen market.

Bidding for the seven IPOs will be carried out under the new system after the regulator removed the requirement for full subscription payment before share sales to prevent IPOs from locking up too much capital and draining market liquidity.

The regulator will also carefully control the IPO pace, allowing only one IPO per day, according to its statement. The seven companies are expected to launch their IPOs before the Chinese Lunar New Year holidays in February.

The new IPOs, while being carefully managed by the regulator, would still pose downward risk for the fragile A-share market, which has seen a 16 percent decline since this year, some analysts said.

The lingering uncertainty will be how the new share supply will transit with the launch of the registration-based IPO system, they said. Currently, there are more than 700 companies waiting for IPO approval, according to data from the CSRC.

"The focus of the market attention is whether the legal and regulatory framework of the registration-based system is suitable for the A-share market so that it can prevent unexpected incidents similar to the short-lived circuit breaker mechanism," Wang Fen, an analyst with Shanghai Securities Co said in a research note.

Investment in IPOs has long been viewed as an almost risk-free option as stock prices often rise above the offer price on the first trading day, a process administratively stipulated by the regulator to protect small investors.

The old mechanism encourages investors to hoard cash to bid for IPOs, which often resulted in dramatic shrinkage of market liquidity and sharp volatility in stock prices prior to the IPOs.

Given the scale of the latest batch of IPOs, most analysts said that they will have limited impact on the market as the new IPO rules no longer require pre-payment for share subscription, which will help ease the liquidity pressure in the market.

Meanwhile, investor concerns about seasonal liquidity crunch before the Spring Festival holidays were eased after the People's Bank of China, the central bank, said it will inject liquidity of more than 600 billion yuan through refinance tools to accommodate mid-term liquidity demand.