China IPO Reform Again Put on Back Burner

(Beijing) — For all that China promised this weekend to address key concerns in the financial sector, one missing element was IPO reform.

Premier Li Keqiang said Sunday that the government will further build a multilayer capital market structure, broaden the channels through which insurance assets bolster the real economy, and develop green financial services that can fund companies to undertake business with environmental benefits.

But the government report Li delivered did not mention highly anticipated reform to the nation’s system of initial public offerings (IPOs).

It was the second year in a row that the switch to a market-oriented, registration-based IPO system was absent from the annual government report that’s presented at each year’s spring meeting of the National People’s Congress (NPC), the nation’s top legislature. Currently, IPO decisions are largely the sole discretion of the China Securities Regulatory Commission (CSRC).

IPO reform first appeared in a communiqué issued after the Third Plenary Session of the 18th Communist Party Central Committee, held in 2013, in which senior leaders vowed to push ahead with registration-based reform on the issuance of shares, along with other major decisions to further upgrade China’s economic growth and political system.

This year, a revised draft of the Securities Law — first reviewed almost two years ago —likely will be sent to the NPC’s Standing Committee in April, NPC spokeswoman Fu Ying said at a news conference on Saturday.

The move toward registration-based IPOs was regarded by the government as one of its major tasks in 2015. But it was stalled that year when the Chinese stock market suffered a crash that saw a 40% slump in the benchmark Shanghai Composite Index over a two-month period in the summer.

A registration-based IPO system is meant to be market-orientated. It would allow the Shanghai and Shenzhen bourses to play a bigger role, examining IPO applications after reviewing the information disclosures filed by the candidate companies, then filing documents with the CSRC to register the IPOs. Share prices and the scale and timing of the IPOs would be determined by the participants in the market, and investors would make their own judgments and bear their own risks. Meanwhile, the CSRC would step up its efforts to fight fraud and any other regulatory violations.

Unlike developed economies around the world, in China, whether a company can start issuing shares in the county’s stock exchanges in Shanghai and Shenzhen is at the discretion of the securities regulator. There is a huge backlog of applicants, with 610 companies on the waiting list to launch an IPO as of March 2.

“The life and death of an IPO candidate company is currently at the hands of the Public Offering Review Committee under the CSRC,” said Guo Shiliang, a finance columnist and pundit. “China is still trying to create favorable conditions for a switch toward the registration-based IPO system, including cutting the backlog and allowing the CSRC to delegate its power to the stock exchanges.”

Contact reporter Dong Tongjian (tongjiandong@caixin.com)