According to a report from the Wall Street Journal,"China's leaders vowed to revamp the country's IPO system, transforming it from one under which the government decides which companies can list to a Western-style system in which companies can go public on their merits".
"The shift is a significant loosening of government control over China's struggling stock markets, which have performed dismally despite strong economic growth. The change in rules for initial public offerings would remove a major regulatory obstacle that has long been criticized for distorting supply and demand and artificially inflating valuations of new listings in one of the world's largest capital markets".
"In a 20,000-word document released Friday, that serves as the blueprint for economic changes in the next decade, Beijing called for "refining a multilevel capital market system and pushing for reforms on a registration-based stock issuance system." What it says is that companies will be given various options to raise money, including bonds and stock listings on different exchanges, and that the IPO process will be revamped.
Although lacking details, that single sentence is the first and strongest pledge by China's top leaders to adopt a Western-style, market-oriented mechanism for one of the most popular channels of corporate fundraising.
One criticism of the system is that it can take years for companies to get listed.
The process in China can include roughly 10 rounds of reviews lasting several years before a listing aspirant receives approval from the securities regulator, which determines whether the company has met thresholds in terms of revenue, profit and the like. And even then, because of restrictions on timing, they aren't free to list at will.
In contrast, under a registration-based system, which is widely used in developed markets, regulators determine only whether companies have met specific legal and financial requirements, and then allow them to list, giving investors the choice of whether to buy the stocks. Companies and investors decide the scale, valuation and timing of new share offerings.
China's system has prompted many of China's most innovative and ambitious private firms, including technology companies such as Alibaba.com Corp. and Baidu, to seek listings in Hong Kong and New York, analysts say. Just this month, two Chinese lenders—Bank of Chongqing Co. and Huishang Bank Corp. —raised a combined US$1.78 billion via IPOs in Hong Kong.
According to one Chinese investment banker, implementation of the new system will have to wait until at least next March, when the country's legislative body at its annual meeting will need to amend the Securities Act.
In the immediate term, Beijing's pledge to overhaul its IPO policy is widely expected to boost stock markets when they reopen Monday, with shares of brokerages such Citic Securities Co. and Haitong Securities, likely to surge further, analysts said. Rumors of the rules, which were release after markets closed Friday, send shares of Citic up 6% and Haitong up 7% ahead of the news.
The reform will be a long process but eventually, the reform will make the stock market's pricing mechanism function better," said Huang Cendong, an analyst at Sinolink Securities".
