Full rollout of IPO reform underway in China to better serve real economy

BEIJING - China unveiled draft rules last week for the rollout of the registration-based initial public offering (IPO) system across the domestic stock market, representing a major leap forward in the reform of one of the world's biggest capital markets.

The registration-based IPO system was first adopted by the tech-focused STAR Market in 2019, and was broadened to start-up board ChiNext in 2020 and the Beijing Stock Exchange in 2021. Now it will also apply to the main boards in Shanghai and Shenzhen, the homes of China's blue-chip stocks, the China Securities Regulatory Commission said in a statement.

The essence of this IPO reform is to "give the right of choice to the market," and make IPOs "more standardized, transparent and predictable," the commission said.

Unlike the approval-based system, where the listing of a company requires the approval of the commission, the new system empowers bourses to review IPO applications. The commission is mainly responsible for making sure new listings are in line with national industrial policies.

Compared with the approval-based system, the new mechanism not only changes the body of reviews, but also places emphasis on information disclosure.

"This is a major leap forward in China's capital market reform," said Dong Dengxin, a researcher with Wuhan University of Science and Technology.

Rolling out the registration-based system to all corners of China's stock market is conducive to establishing a unified market nationwide, Dong added.

The registration-based system will speed up listings. For example, it shortened the waiting time of an IPO on the ChiNext board from 520 days to about 380 days, raising efficiency by about 27 percent, according to a report from the China International Capital Corporation.

"China's economic development cannot be achieved without the support of the capital market. The full rollout of the registration-based system will increase the proportion of direct financing and strengthen the role of the capital market in serving the real economy," said Li Huiyong, general manager of the research department of Changjiang Pension Insurance Co Ltd.

The registration-based system will help new-economy companies obtain financing from the capital market, and enhance the role of the capital market in promoting high-quality development and economic structural transformation, said a research note from China Galaxy Securities Co Ltd.

Under draft rules published last week for public consideration, no daily trading limit is set for IPO shares during their first five trading days. However, stocks listed on the main boards are still subject to the 10 percent daily trading limit after the first five days.

The commission dismissed concerns that the new system will lower the quality of listed firms, pledging stringent quality control and supervision.

The commission will crack down on illegal stock market activities, and will investigate and punish acts such as the fraudulent issuance of securities and financial fraud, it said.

The commission also vowed to keep the capital market running steadily, and to encourage medium and long-term funds such as social security funds, insurance funds and enterprise annuities to increase their investment in the capital market.