A market-oriented mechanism of evaluation of flotation applications on the mainland is expected to be established through the reform. Yet with 28 companies having put their listings on hold and new listing approvals suspended, it's still early to predict the story for the second half. Asia News Photo

Amid a shock slump in the mainland stock market, the China Securities Regulatory Commission (CSRC) last Friday suspended the next round of initial public offerings (IPOs).

The move is believed to be aimed at pulling back the A-share market following days of a drastic slide that saw the mainland market plunge by around 30 percent from a mid-June peak.

The evaluation of new IPOs, however, will continue.

The Shenzhen Stock Exchange (SZSE) plans to expand its ChiNext board - the mainland's Nasdaq-style startup and growth enterprise market (GEM) - by lowering IPO requirements.

Performance, or profit, has always been one of the major requirements for IPO applicants in the mainland markets.

However, Wang Hong, deputy general manager at the SZSE, said: "We will increase the ChiNext board's inclusiveness, and making profits will no longer be the sole criteria for IPO evaluation."

"New criteria of market value, such as operating revenue and development potential, will be introduced," Wang said on June 26 at the two-day Lujiazui Forum in Shanghai, which addressed the "new normal" in mainland economic goals.

She said the move aims to better serve startups and innovative enterprises: "It will help enterprises that have yet to post profits but possess huge potential, especially innovative companies in the field of Internet, biomedicine and high technology."

Analysts believe that the current IPO approval system faces many problems, and such reform will likely improve market development.

Ouyang Liangyi, associate professor at the Peking University HSBC Business School in Shenzhen, told China Daily: "Most IPO applications end up rejected because the profitability requirement is too high. Some companies even tried to embellish their statements by financial fraud, and their performance after listing was usually not satisfactory."

According to one of the current regulations, IPO applicants need to have an accumulated net profit of no less than 10 million yuan ($1.61 million) and post continuous profit growth for two years; or have a profit of no less than 5 million yuan and revenue of no less than 50 million yuan in the immediately preceding year.

"If the profitability requirements are not lowered, some companies would have to choose to list in overseas markets. It would lead to a loss of many high-quality IPOs for the mainland stock market," said Yang Delong, chief strategy analyst at China Southern Asset Management Co Ltd.

Some companies that faced difficulties meeting onshore listing requirements adopted a so-called "variable interest entity" (VIE) structure to raise funds in overseas capital markets while retaining absolute equity control of the company.

Some Internet giants such as Baidu Inc, Alibaba Group Holding Ltd and Tencent Holdings adopted such a method. But not every VIE company has been able to gain the trust of overseas investors, and they are thinking of coming back.

Wang at the SZSE said the bourse is exploring ways to solve the problems after these companies "break" the VIE frame and change ownership structures.

The Beijing-based small and medium-sized stock transfer system, or the so-called "New Third Board", has no profitability requirements for companies seeking to list. Companies on this board will be allowed to list on Shenzhen's ChiNext board and Shanghai's new emerging industries board by the end of this year.

Ouyang at the HSBC Business School said: "In the future, all companies in the three stock exchanges, in Shanghai, Beijing and Shenzhen, may become publicly listed. Competition among them is inevitable."

A Shanghai newspaper reported last Wednesday that the Shanghai bourse has chosen Ant Financial Services - an affiliate of mainland e-commerce giant Alibaba Group, Commercial Aircraft Corp of China Ltd, restaurant ratings and group buying website Dianping, and video-streaming website iQiyi as the first four companies to list on the new board.

The ongoing reform of the three mainland exchanges is in line with envisaged stock market overhaul, one of the highlights of which is an overall transformation from an approval-based to a registration-based IPO system.

The existing securities law stipulates that IPOs cannot be launched on the mainland without passing an official assessment. However, after the reform, a market-oriented mechanism will make the decision. But now, with 28 companies having put their IPOs on hold and new listing approvals suspended, it's still early to predict the story for the second half.

The ChiNext Index slumped 4.28 percent at the close of trading on Monday.

grace@chinadailyhk.com

(HK Edition 07/07/2015 page8)