China’s Third Plenum ended nearly three weeks ago and there still isn’t a strong consensus among experts, analysts and observers about how significant, far-reaching, or fast the various reforms announced are going to be. With many measures yet to be drafted in detail by the relevant departments (such as the long-awaited state-owned enterprise (SOE) reforms), there is precious little of real substance to go on.
One area which seems to be set for a fairly swift change is the business of listing companies on the Chinese stock markets. Initial public offerings (IPOs), have been on hold in China for more than a year, after the China Securities Regulatory Commission (CSRC) launched a crackdown on fraud and serious misconduct in the IPO industry.
On Saturday though, the CSRC issued a statement of collected “ideas” on its website (Chinese available here) suggesting that very imminent changes might be in the pipeline. The last sentence of the statement suggests that around 50 companies might have completed the new IPO registration procedures by January 2014.
While the plenum’s language was fairly broad and short on details, the broad idea of giving “markets a decisive role in resource allocation” announced at the meeting is echoed in the CSRC’s language, “…when and how new shares are issued will be under market constraints and will be independently decided, while pricing of shares will more closely reflect true levels of supply and demand…”
Such language suggests that the CSRC, under the leadership of the forward-thinking Xiao Gang (whose prescient warnings about potential risks in shadow banking last year are increasingly being repeated by others), is indeed on the verge of restarting the IPO market with a more mature system of registration and matching regulations. As Bloomberg summarizes:
“In the new system, the regulator will only be responsible for examining whether applicants are qualified, leaving investors and the markets to make their own judgement about a company’s value and the risks of buying its shares.”
Of course a sudden surge in IPOs is not going to be positive for general valuations in China due to simple supply-and-demand dynamics. Two mitigating factors can be identified though. First, if the new listing rules and concurrent efforts to prevent listing abuses and fraud result in a greater degree of confidence in the stock market (which has never fully recovered from the late 2007 bubble burst).
Secondly, an earlier statement from Xiao Gang, dated November 19, stressed than the implementation of the looser IPO system will have to be “gradual” to avoid shocks to the market. This is just as well – currently the queue for listing approval has 760 candidate companies. It is expected to take a year to complete the relevant audits.
These announcements, along with others suggesting that eligible financial institutions could soon be allowed to issue bonds (from the China Banking Regulatory Commission (CBRC)) and that the CSRC will support banks issuing preferred shares in the future, are significant. At the very least, they suggest that the financial authorities of China – who have been some of the strongest proponents of reform in recent years – were already prepared to get down to the nitty-gritty of actually changing policies.