On November 28, Zhang Xiaojun, spokesman for the China Securities Regulatory Commission (CSRC), China's top securities regulator, said a draft plan to reform the nation's stock issuance regime had been completed and would be presented to the State Council, China's cabinet, for review before the end of November. Under the plan, China will switch to a registration-based system for new share listing from the current approval-based system.
The shift toward the registration-based new share listing system will constitute a momentous event in China's capital markets, and possibly in financial reform at large. Since China's A-share market was created in the early 1990s, the disadvantages of an approval-based IPO system have been mounting, including severely undermining the effective allocation of financial resources, hampering the flow of financial resources, reducing the efficiency of businesses' direct financing and ultimately hindering economic growth.
Against the backdrop of intense competition in the international financial world and the boom of the Internet economy, the real economy now has higher requirements with regard to the efficiency of financing. Owing to the inefficiency of indirect financing channels, there is an urgent need to make direct financing markets, such as the stock market and bond market, more available for businesses. Using the registration-based IPO system to replace the approval-based one has become an urgent task and a vital link to create a more market-oriented stock market.
Currently, companies aspiring to list on China's stock markets have to undergo a complicated application process that could take multiple rounds of reviews and several years, and the CSRC has sole discretion to decide whether a company is fit to list. In a registration-based IPO system, the CSRC will be responsible only for examining applicants' qualifications, leaving investors and the markets to make their own judgments about a company's value and the risks of buying its shares.
So what is the essence of a registration-based system? As long as information offered by newly listed candidates is real and complete, regulatory authorities in the securities sector have no right to intervene with its listing, even if the stock has no investment value at all, resulting in a totally market-based stock issuance.
Developed countries like the UK, the United States and Japan all use registration-based stock issuance regimes. Except for the focus on information disclosure, the regime doesn't set a bar for stock issuance. As long as a company fulfills information disclosure requirements, it's allowed to sell its stocks to the public. Whether the stock issuance is successful or not depends on the market—not the government—and the key to a successful stock issuance lies in whether or not the company and its business model can be recognized by the market. Regulatory authorities will solely focus on the quality of information disclosure while the market will decide other issues, such as pricing the stock. The government is not qualified to judge the value of securities and therefore shouldn't do so. As long as information offered by the issuer and risks associated with the stock are fully disclosed, the market can make its own judgment.
A stock market can only become a real marketplace after the implementation of a registration-based IPO system. By then, varied companies have access to direct finance in the market, and investors will be given full autonomy in deciding which stock to buy. Investors will gradually come to terms with the fact that with great profits come great risks. Issuers can become real fundraisers, and getting listed can mean joyous success or bitter failure.
Whether we should adopt an approval-based or a registration-based IPO system depends on the relationship between the government and the market. After the implementation of the registration-based system, the government can refrain from too much intervention, and the market will be the sole decider of whether a stock is worth buying. Investors will have to make independent decisions and will shoulder any consequences of their investments. As for the government, it only has one task—carefully vetting information offered by companies to present to share buyers.
Now is the best time to carry out stock issuance reform. China's A-share market has been on the rise since July. After the central bank cut interest rates on November 21, the A-share market has been bullish, with Shanghai Composite Index surging 10.85 percent and Shenzhen Component Index rising 9.44 percent in November, much higher than their global counterparts.
The period of time when a stock market is bullish is the best in which to implement registration-based IPO system. It's a rare opportunity that could slip away in an instant. Any hesitation could cause the country to miss out on a rare opportunity.
This is an edited excerpt from an article by Yu Fenghui, a financial commentator, published in National Business Daily