China’s Securities Regulator Prepares to Reopen IPO Market in January 2014

By Catherine Matacic

Nearly 50 companies are expected to list on China’s stock markets in January 2014, bringing to an end a 13-month moratorium on initial public offerings (IPOs) on the Shanghai and Shenzhen exchanges. China’s last IPO took place in November 2012, when auto parts maker Zhejiang Shibao Co. Ltd. listed on the Shenzhen exchange.

Since then, China’s securities regulator has said that the reopening of IPO markets would depend on the release of new rules designed to increase investor protections.  On November 30, the China Securities Regulatory Commission (CSRC) finally issued those rules as part of a plan for stock market reform. Among other measures, they call for greater information disclosure by listing companies, a longer listing window, and penalties for underwriters who fail to adequately disclose risk to regulators.

The plan also calls for a shift away from China’s current approval-based IPO system toward a registration-based system. Under an approval-based system, regulators determine whether companies are able to finance their operations and turn a profit, a lengthy process prone to corruption. Under a registration-based system—like that used in the United States—regulators simply determine whether companies have met certain standards for financial and legal disclosures before allowing them to list.

Now that the listing process is shorter—CSRC rules say it should take only three months from application to approval—the regulator hopes to start processing the roughly 760 companies waiting to list on China’s exchanges. According to the CSRC, it will take about a year to clear the backlog, with the first 50 companies expected to list in January 2014.

The CSRC has said that it froze listings last year in order to improve the IPO vetting process and increase investor protections. But many analysts believe the real reason behind the freeze was to stem the tide of new IPOs until the market was solid enough to support all listed companies. Since 2007, the Shanghai Composite Index has lost two-thirds of its value. And according to Bloomberg, nearly half of the 870 companies listed in China after June 2009 now trade below their issuing prices.

For foreign companies doing business in China, the IPO freeze has meant fewer opportunities to invest in small to medium-sized Chinese businesses that need to list in order to raise much-needed capital. It has also meant that private equity firms already backing these businesses have lost the ability to exit their investments via IPO. In a July interview with GAA Accounting magazine, investment fund chairman Peter Fuhrman said that private equity investors had as much as $40 billion worth of investment locked up due to the IPO freeze.

[author] Catherine Matacic ([email protected]) is associate editor of the China Business Review. [/author]