Reform to further facilitate maturity of capital market

The adoption of a registration-based initial public offering mechanism throughout the A-share market will further facilitate China's innovation-driven, high-quality economic growth and the maturity of a multilevel capital market, experts said.

After introducing 14 draft rules, the China Securities Regulatory Commission began soliciting public opinion on Wednesday for the action plan for adopting the registration-based IPO mechanism in the entire A-share market.

The mechanism was first tested in the technology-heavy STAR Market in Shanghai in July 2019 and promoted to the ChiNext in Shenzhen in August 2020.

Main board companies account for about 67 percent of the total market value of the A-share market. The main board will leave all the decision-making power to the market when it comes to IPO pricing after the expansion, said Eugene Qian, chairman of UBS Securities Co. The main board market comprises a large part of companies in the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

The inclusiveness of the registration-based IPO mechanism will help to serve the real economy, especially tech companies, which need capital to seek technological breakthroughs, said analysts from Huaxi Securities.

This can be reflected by the STAR Market and ChiNext, where companies not reporting profit or those with dual-class ownership — a type of stock offering in which companies issue shares with different rights — are allowed to issue IPOs. These IPOs have helped to inject more vitality into the A-share market, said Huaxi Securities analysts.

According to professional services provider EY, the IPO proceeds at the STAR Market overtook those of the main board for the first time last year, accounting for 40 percent of IPO fundraising in the A-share market for all of 2022.

Meanwhile, ChiNext recorded 150 IPOs last year, overtaking all the other boards in the A-share market.

The expansion of registration-based reform came as the country steps up efforts to strengthen financial support for the country's economic recovery and development security.

Premier Li Keqiang recently highlighted the need to amplify the role of finance in stabilizing the macro-economy, adding that it is important to further refine the financing environment for the private sector and smaller businesses.

Investment will be more professional under the registration-based mechanism, said Peng Zhiqiang, founding partner of Peakview Capital. Investors will hold stocks for a longer period, and short-term speculation without study of industries and companies will no longer be profitable, he added.

Venture capital and private equities in China are also expected to be profoundly affected, as they will invest in startups at an earlier stage and continue their investment to ensure the rapid growth of technology companies they invest in.

The new institutional arrangement will have limited impact on the main board's market liquidity and volatility, said Yang Fan, chief policy analyst at CITIC Securities.

ChiNext can be a good reference, said Yang, noting that while it received 242 IPOs in 2020, the number rose to 416 in 2021 and decreased to 291 last year.

The daily price fluctuation limit at the ChiNext was raised from 10 percent to 20 percent in August 2020. While the board saw 3,853 instances of 10 percent increases in 2019, only 1,248 such increases were recorded in 2021, and the number further declined to 770 last year. No large-scale speculation has been detected under the new mechanism, according to Yang.

Li Feng, a professor at Shanghai Jiao Tong University's Shanghai Advanced Institute of Finance, said that the value of shell companies will be largely slashed, as the listing process is highly simplified under the registration-based IPO mechanism.

Investors will direct more capital to promising industries and companies, the performance of different stocks will be drastically diversified, and the overall A-share market quality will be improved, Li said.

Yang Delong, chief economist at First Seafront Fund, said that the new delisting rules, which took effect in late 2020, should be strictly implemented so that the registration-based IPO mechanism can truly benefit innovative companies.

Disqualified companies should be eliminated from the market immediately so that capital can be directed to quality companies with real financing demands, and a wholesome ecosystem can be built in the A-share market, he said.