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Opinion
IPO Resumptions Signal Stock Market Restoration
 NO. 47 NOVEMBER 19, 2015

The China Securities Regulatory Commission (CSRC) will resume initial public offerings (IPOs) by companies and further reform the current IPO mechanism, said Deng Ge, CSRC spokesman at a press conference on November 6.

Ten of the 28 companies that have already gained regulatory approval for new share sales will be the first to start their IPOs after November 20, and the other 18 will go public by the end of this year. The CSRC will also resume IPO approval meetings and make a proper approval schedule.

Reform measures include scrapping the requirement for full payment of shares into escrow when an investor bids to subscribe new shares and giving more priority to information disclosure instead of pre-IPO approvals. The regulator will further simplify the pricing procedures for small-cap IPOs under 20 million shares in order to lower the IPO costs for small and medium-sized companies.

The IPO resumption indicates that the self-restoration of the stock market is entering a new stage.

When China's stock market plunged in June this year, panic was aroused among investors. In order to stabilize the market, the securities regulator froze IPOs on July 4, with 28 companies that have obtained CSRC's permission postponing their IPOs.

The regulator's interventions have greatly restored the ailing stock market, and the market has since begun self-repairing. Although the restoration has come at the cost of distorted supply and demand in the stock market, after several months, investors' confidence has been boosted, and the market is recovering.

In October, the Shanghai Composite Index was up 10.8 percent and the Shenzhen Component Index grew by 15.6 percent. Moreover, in the first week of November, the Shanghai Composite Index rose by more than 6 percent, while the Shenzhen Component Index jumped by 6.3 percent.

By November 6, the benchmark Shanghai Composite Index had rallied by 20.3 percent since August 26, which was the lowest point in this year. A 20 percent stock index growth signals a potential bull market. Therefore, it is reasonable for the CSRC to announce the relaunch of IPOs at this moment.

In the Proposal Formulating the 13th Five-Year Plan (2016-20) on National Economic and Social Development, the Central Committee of the Communist Party of China vowed to accelerate the financial system's reforms. The financial sector needs to accomplish the following goals: First, they need to raise their efficiency in serving the real economy. Next, they should establish a more transparent and healthier capital market. Third, a much needed overhaul of the issuance and trading mechanism of stocks and bonds. Finally, they need to encourage direct financing and lower leverage ratios.

That means the major task for China's financial reform is to ensure the sound development of the capital market, which can provide more financing channels for the real economy, reduce corporate financing costs and diversify resident investments. If the financing functions of the stock market cannot be fully utilized, the above goals will not be met, making it imperative to resume IPOs.

The regulator must also take into consideration the real-time conditions of the stock market when resuming IPOs. If the stock market is not well restored, an IPO relaunch will bring adverse impacts to the market. To avoid this, the CSRC had also issued some new policies for the IPO mechanisms.

According to Deng, removing the requirement for full payment of shares in advance will prevent the IPOs from locking up too much capital. For instance, the 25 companies launching IPOs in early June this year locked up 5.7 trillion yuan ($896.23 billion) of subscription capital. Clearly, the new measures should greatly alleviate pressures on the market brought by IPOs, which used to drain a lot of liquidity from the stock market.

More importantly, the restoration of IPO highlights that a self-correction of the stock market is entering a new stage: The investment function of the stock market is resuming, and investors' confidence is recovering. After the financing functions are fully restored, the stock market will see a new situation of supply and demand, which should invigorate the market.

After the financing functions of the stock market recover, improving the market order and readjusting the ideas of supervision will both be crucial steps in ensuring a new round of bull markets.

The CSRC must draw lessons from the abrupt burst of the previous bubbles. In order to make the A-share market a financing market which serves the real economy and a safe market for people to make investments, the watchdog must establish surveillance of the stock market, improve the market order and define a strong regulatory position.

This is an edited excerpt of an article written by economist Yi Xianrong and published in National Business Daily

Copyedited by Bryan Michael Galvan

Comments to yushujun@bjreview.com

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