Regulators work on listing plan

China's securities watchdog suspended new IPOs in mid-September 2008 and 36 companies have been delayed from floating 1.84 billion shares. Jing Wei

Signs of recovery from the bear run in the past 18 months have greatly increased pressure on the Chinese stock market regulators to lift the ban on new listings and introduce new funding channels for cash-starved domestic businesses.

The new listing suspension, introduced in September 2008 because of widespread abuse, has crippled the Chinese stock market's primary function as a source of capital for domestic businesses.

Investors, inspired by the government's 4-trillion-yuan economic stimulus package, have returned to the stock market in droves this year. The fresh capital they poured into the stock market has helped push the bench mark index up over 20 percent, despite occasional faltering, to above the 2,300 level.

But many market intermediaries, corporate executives and investors want to know when the China Securities Regulatory Commission (CSRC) will allow domestic businesses to raise capital from the market again by offering new shares for sale to the public (called an initial public offering, or IPO, when done for the first time).

They are also keenly awaiting the launch of a growth enterprise market where companies with great potential but scant track records can raise capital directly from investors.

But the commission is hesitating because it unsure how to set about reforming the IPO system, which spawned problems greatly magnified by the stock market crash in 2008, and a pricing mechanism that was frequently abused by issuers and market intermediaries.

"The huge gap between the issuing price and the opening price set through collective bidding has to be addressed first and that's why we have suspended new IPOs for the time being," said Fan Fuchun, vice-chairman of the CSRC.

According to Fan, the regulators will soon solicit public opinions on the draft rules.

"The new listing scheme should reform the system of price inquiry, new stock purchase transactions and restricted shares to help narrow the gap between the issuing price and the trading price on stocks' debut," said Jiang Lianhai, head of Jilin provincial securities regulatory bureau.

The new rules will likely be launched along with the Growth Enterprises Board (GEB) or a litter earlier, said Jiang.

"The CSRC is studying several projects, including enlarging the proportion of circulating new shares, and unlocking restricted shares based on a certain price. When the conditions are right the rules can be implemented in stages," said Jiang.

The listing scheme has been revised seven times since the A-share market debuted in 1992. The current regulations, which came into effect in 2006, have created a price gap between the primary market and secondary market and limited the role of individual investors on the primary market.

Many domestic companies listing for the first time in recent years saw their share price surge far above their underlying value.

According to market researcher Wind Info, in 2007, 125 companies were listed with an average PE (price -earnings) ratio of about 30 and their shares increased about 191 percent on average on the first trading day. Shenzhen Topband Electronics & Technology Co even saw its shares rise 500 percent to close at 60 yuan. But its current share price is around 13 yuan.

"Under current regulations, issuers and brokers are the two largest beneficiaries," said Xiao Luming, an analyst with investment research firm ChinaVenture.

"Underwriters set high issuing price during the bull market, since ample liquidity and investor confidence in the market makes IPO securities an easy sell. So shares broke their issuing prices on the first trading day," Xiao said.

But the chances of individual investors getting early shares in an IPO were slim, so large numbers of individual investors chased after the new shares in the secondary market, which made the share price rise far from its underlying value.

China's securities watchdog suspended new IPOs in mid-September 2008 and 36 companies have been delayed from floating 1.84 billion shares indefinitely.

Officials offered some clues on a potential new listing scheme during the two legislative sessions earlier this month.

The CSRC's assistant chairman Zhu Congjiu said that reform would focus on setting a market-oriented pricing mechanism, strengthening the power of buyers and balancing the interests of market participants, especially individual investors.

Li Jiange, chairman of China International Capital Corporation (CICC), suggested that the policymarkers could introduce an IPO stock issuing, which allows to-be listed companies to allocate new shares to individual investors.

"Investors would get a good idea about stock provision in this system," said Li, who is a former vice-chairman of the CSRC.

The CSRC's Chairman Shang Fulin said during the two sessions that IPO stock issuing was under research now but there are some legal barriers in the way.

According to current corporate law, the shares issued before listing can only be traded one year after the companies are listed on the bourses.

"Preparing a new listing scheme will take four or five months and IPOs will likely be reintroduced in the second half of the year, potentially coinciding with general economic recovery," said Frank Lyn, the China markets leader of PricewaterhouseCoopers.

"The market has plenty of capital and investor confidence can be restored if an improved listing scheme comes out," said Li, the CICC chairman.

(China Daily 03/30/2009 page4)