China Sets IPO Reform Plan Signaling End of Listing Freeze

China's securities regulator issued a reform plan for initial public offerings, as the government prepares to lift a more than one-year freeze on new listings in the world's second-biggest economy.

About 50 companies are expected to complete the IPO approval preparations and list or be ready to do so by the end of January, the China Securities Regulatory Commission said in a statement on its website today. There are more than 760 companies in the queue for approval and it will take about a year to complete an audit of all the applications, the regulator said.

China, the world's largest IPO market in 2010, with a record $71 billion raised, hasn't had a new listing since October 2012 as the CSRC cracked down on fraud and misconduct among advisers and companies. Communist Party leaders pledged this month to change the IPO system as part of a package of reforms that signaled the biggest expansion of economic freedoms since at least the 1990s.

"This is positive for the long-term development of the market as both companies and stock investors will gradually have more choice under the new policy," He Zongyan, an analyst at Shenyin & Wanguo Securities Co. in Shanghai, said today by phone. "It may add downward pressure on the stock market in the short term as 50 new IPOs in the next few months may drain capital and force a correction in some inflated stocks."

Hurt Confidence

The regulator stopped reviewing applications for listing on the country's stock exchanges in Shanghai and Shenzhen amid concern a flood of new shares could hurt investor confidence. Xiao Gang, a former central banker and Bank of China Ltd. (3988) chairman who was named head of the CSRC in March, said Nov. 19 the shift to a looser IPO system must be gradual to avoid shocks to the market.

China's benchmark Shanghai Composite Index (SHCOMP) has dropped 2.1 percent this year and the CSI300 Index has fallen 3.3 percent, the worst performers among 20 primary equity indexes in the Asia-Pacific region tracked by Bloomberg.

In a separate statement, the CSRC said it will draft rules for a trial to allow companies to sell preferred stock, based on guidance issued today by the State Council, and seek public feedback on its proposals.

The use of preference shares will help deepen corporate reform, provide a flexible financing tool for companies and promote the stable development of the capital market, the State Council, China's cabinet led by Premier Li Keqiang, said in guidelines issued on the central government website.

Capital Requirements

Banks will be able to include preference shares in calculations of their tier-one capital, giving them a new financing instrument to meet capital requirements of the Basel Committee on Banking Supervision, CSRC spokesman Deng Ge said in the statement. Preference shares will also help reduce corporate debt levels, Deng said.

The CSRC's announcements build on reform pledges made in a 60-point document released by the Communist Party on Nov. 15 after its top leaders met to map out policy changes for the coming decade. They vowed to give markets a bigger role in the economy and reduce government interference.

Item 12 on the list focused on improving financial markets, including moving to a registration-based system for issuing stocks and increasing the proportion of funds companies raise through direct financing.

Sole Discretion

Under current rules for domestic IPOs, companies go through a review and approval system, where a CSRC committee has the sole discretion to decide whether a company is fit for listing. The process can involve several rounds of reviews and take years, the official Xinhua News Agency said in a report today.

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 judgment about a company's value and the risks of buying its shares.

"We want to emphasize that the market should not see the registration system as a sign that the government won't supervise and regulate the market anymore," an unidentified CSRC official said in a question and answer statement posted on the regulator's website. "We will review and make sure the application materials carry accurate and adequate information but leave it to investors to decide whether such stocks are worth investing in."

Curb Misconduct

The new rules still impose requirements and threaten penalties on IPO advisers in an effort to curb misconduct in first-time share sales.

The CSRC has penalized at least three brokerages since May for inadequate due diligence on IPOs. It fined Ping An Securities Co. and barred the firm from underwriting for three months. Minsheng Securities Co. was given a warning and fined and Nanjing Securities Co. was censured. Some bankers at all three firms were barred from the industry for life.

Everbright Securities said in June the CSRC had begun an investigation of the company in relation to Henan Tianfon Energy-Saving Panel Science & Technology Co.'s IPO application, which the regulator said contained falsified information. The CSRC said the following month it had concluded field investigation work and passed the case to its administrative penalties commission.

Awaiting Approval

Org Packaging Co., which makes beverage cans, and Fujian Tengxin Foods Co. were the last Chinese companies to list when they started trading in Shenzhen in October 2012. Tengxin changed its name to Haixin Foods Co. on July 4.

Companies including state-owned China National Nuclear Corp. and Bank of Shanghai Co. were awaiting approval for IPOs as of Oct. 31, according to a list on the CSRC's website.

Some 83 companies have had their IPO applications cleared by the CSRC listing committee and are pending final approval, including Shaanxi Coal & Chemical Industry Group Co. and China Postal Express & Logistics Co., the regulator's website shows. The companies may raise a combined 55.8 billion yuan ($9.2 billion), according to June estimates from Ernst & Young LLP.