China is preparing to introduce market-oriented reforms to the approval process of initial public offerings (IPOs) as part of its efforts to revive the economy and restore investor confidence following a tumultuous transition from a zero-Covid strategy.
Once implemented, these reforms will mark the culmination of a decade-long endeavor by China to liberalize its stock market, valued at nearly $12 trillion, potentially facilitating easier capital raising for domestic companies.
According to the China Securities Regulatory Commission (CSRC), the new IPO system will adopt a registration-based approach modeled after the United States and will be applicable to all domestic stock exchanges, including Shanghai and Shenzhen. The CSRC announced this development on Wednesday and has invited public feedback on the proposal until February 16, although opposition is not expected to be significant.
Under the new system, regulatory authorities will no longer vet planned share sales by companies; instead, stock exchanges will assume primary responsibility. This streamlined review process is anticipated to grant companies and investors greater control over the pricing and timing of IPOs.
The concept was initially introduced by the government in 2013, followed by a pilot scheme on the STAR Market in Shanghai in 2019. Subsequently, it was adopted by the ChiNext start-up board in Shenzhen and the Beijing Stock Exchange.
Presently, listings on the main boards of the Shanghai and Shenzhen stock exchanges necessitate regulatory approval before launching.
“The essence of this reform is to allow the market to decide,” stated the CSRC.
The new system will not impose administrative restrictions on the pricing and scale of new share sales, leading to significant improvements in the “efficiency” and “transparency” of listing reviews, according to the CSRC.
“This represents a crucial step in capital market reform. The government will grant the market a greater role in resource allocation,” remarked Zhiwei Zhang, President and Chief Economist at Pinpoint Asset Management.
He further added that this development signifies progress after years of discussions and finds it “encouraging” to witness tangible changes finally taking place.
Economic Reset:
China’s economy has experienced a significant slowdown, with growth rates reaching their lowest point in nearly 50 years. Despite an economic recovery after three years of stringent pandemic controls, financial strain has intensified.
In the aftermath of a chaotic departure from its zero-Covid strategy, Beijing is aiming to reset the economy and rebuild investor and business trust. Chinese leader Xi Jinping reiterated his plans on Tuesday to rejuvenate domestic consumption, stimulate private investments in emerging industries, and achieve long-term technological self-reliance.
The CSRC’s announcement, which exceeded market expectations, was primarily driven by an urgent need to assist companies in raising funds outside traditional bank lending channels. Analysts from Citi stated that many banks are grappling with deteriorating balance sheets due to mounting bad debts from struggling local government financing platforms and property developers.
Furthermore, positive market sentiment in China, following policy shifts regarding zero-Covid measures and the property sector, has led to a significant stock market rally. Consequently, capital market financing is now perceived as a viable tool by regulators.
Source Link: https://www.cnn.com/2023/02/02/economy/china-ipo-reform-reset-the-economy-intl-hnk/index.html