China’s securities regulator has rejected more applications for initial public offerings this year than in the previous four years combined, as regulators block fundraising deals that undermine economic policy goals.
China’s government maintains strict control over the flow of IPOs in Shanghai and Shenzhen, unlike in developed markets, where privately owned stock exchanges enforce only minimum thresholds.
The China Securities Regulatory Commission has rejected or deferred 105 IPO applications this year, compared with 114 such decisions in the five years through 2016, according to data from Wind Info. A further 155 applicants, facing dim prospects for approval, voluntarily suspended or terminated their applications this year, more than double last year’s figure.
“We must sternly guard the quality barrier” for companies seeking access to the market, CSRC chairman Liu Shiyu said at the inauguration ceremony for the new issuance review committee in October.
The new committee has rejected or deferred 40 per cent of the applications it reviewed, compared to an 18 per cent rejection rate from 2010 to 2016.
Yet the CSRC has simultaneously increased the pace of approvals. Some 426 companies have listed this year, raising Rmb224bn ($34bn), the highest fundraising total since 2011. The applicant queue had shrunk to 441 companies by early December, down from 725 in November 2016.
Analysts say that the CSRC wants to block deals that would finance speculative investments, while promoting those that boost real economic activity and sunrise industries like technology.
“The application cycle is shorter, so for companies doing real business, the opportunity is greater,” said Yang Hai, strategist at Kaiyuan Securities in Xi’an. “The rejected companies typically have problems with their disclosures. Their assets aren’t clearly described, or they’re not real. China isn’t ready yet for the ‘wide entry’ style of some foreign markets.”
Country Garden, China’s third-largest property developer by sales, last week scrapped a plan to spin off its property management unit in a Shanghai listing, citing the stricter approval process. Mr Yang says that regulators want to discourage financing deals that will further inflate the frothy real estate market.
For years, reform advocates have called on China to deregulate the IPO process, empowering investors to decide whether and when companies can sell shares. Easing access to equity capital through IPOs would help Chinese companies reduce their heavy reliance on debt.
The power of low-paid civil servants to decide the fate of lucrative fundraising deals has also led to corruption in the IPO process, as companies, underwriters and private-equity investors use political connections or bribes to jump the queue. A number of CSRC officials responsible for IPO approvals have been arrested in recent years. New rules this year require the CSRC to conceal which members of the broader issuance committee will decide on particular deals, a move to keep bribers in the dark.
Some observers believe that accelerated decision-making this year is aimed at shrinking the IPO queue to a manageable size in preparation for a transition to a lighter-touch “registration” mechanism for IPOs to replace the current approval system. A smaller queue is seen as a precondition for such an overhaul, which could otherwise lead to a disruptive surge when the floodgates open. Under Mr Liu’s predecessor, CSRC pledged in late 2015 to implement a registration process within two years, but the commitment has not been met.
While the higher rejection rate seems to cut against the move towards a market-based mechanism, few expect that a registration process would ever entail full deregulation.
“We’re forging ahead towards a registration system, but registration doesn’t mean no inspection and examination. They won’t completely let go of the process,” said Li Daxiao, chief economist of Yingda Securities in Shenzhen.
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