Profound changes, efficiency spell sustained market development

It took 10 years to build the ChiNext board in Shenzhen, Guangdong province, from scratch. The process was highly accelerated for the STAR Market in Shanghai, which spent only eight months in preparation. But the record has been refreshed by the Beijing Stock Exchange, as the newest bourse in the Chinese capital market took only 74 days to launch operations in full swing.

Undoubtedly, the shortened time has shown the maturity of the Chinese capital market. But more importantly, it indicates that the Chinese regulators are not easily content with the ostensible progress shown by figures. They want to introduce more profound changes in the market. The registration-based IPO mechanism implemented at the BSE from Day One is one solid proof.

The registration-based IPO mechanism has been a buzz phrase in the Chinese market over the past few years as an indicator of its maturity.

First experimented at the STAR Market in July 2019, the mechanism has been adopted at the ChiNext one year later. High hopes were raised by this groundbreaking mechanism, as the regulators said it shall be promoted to all the other A-share boards during the 14th Five-Year Plan period (2021-25).

The regulators have marched toward that goal by continuing the registration-based IPO mechanism at the newborn exchange.

Higher efficiency is the immediate benefit of the registration-based IPO mechanism. Theoretically, it will take companies six to eight months from the application stage to eventually going public on the BSE, while it may take up to three years on the A-share main board.

Other listing requirements aside, the shorter time on the waiting list can be easily translated into an important cost-saving method. The sooner a company gets listed, the earlier it can seek financing from the market, which is especially important for small and medium-sized enterprises.

As the BSE is responsible for reviewing IPO filings and the China Securities Regulatory Commission, the country's top securities watchdog, is responsible for companies' IPO registration, it is now more important to see whether or not companies have made faithful information disclosure than to judge their quality at the very beginning.

In other words, there is no stringent requirement on profitability. As long as the SMEs applying to float on the BSE can meet one set of requirements among multiple sets of listing provisions, they will be allowed to go public. The CSRC does not decide whether the company is good enough. Instead, the market will have the final say.

While entry into the market is smoothed, the exit regulations are as important. At the beginning of this year, the Shanghai and Shenzhen stock exchanges adopted new delisting rules, which are reputed to be the strictest in history. The "unclogging" efforts at both ends will make the capital circulate more efficiently.

Under the registration-based IPO mechanism, the role of the market will be more important in terms of issuing and pricing new stocks. Chinese retail investors may not like the results of this phenomenon, as stocks may slip below their issue price on the first day of trading.

For many years, individual investors believed that new shares will equal 100 percent profit, like winning a lottery. But that belief will soon become obsolete. In a mature market, new shares will fall below their issue price from time to time.

The market votes for companies with really good intrinsic value. Shell companies, which were highly pursued in the A-share market in the past due to the then IPO difficulties, will lose their charm under the registration-based IPO mechanism and be eliminated from the market at a faster pace.

Capital, which is indeed a scarce resource, will flow to competent companies. Therefore, companies will be motivated to focus on their own management. The idea of "survival of the fittest" will be then deeply rooted and the sustained development of the Chinese capital market can be secured.