IPO reform to help sustain stock market boom

Although China has cut interest rates and released many policies to help small enterprises to obtain access to bank loans, they remain thirsty for capital since banks do not want to lend to them for fear of high default risks. The registration-based IPO reform will help small but competitive firms to directly finance themselves from the stock market for their expansion. Ultimately, the fast growth of those innovative and competitive firms will help bolster and revitalize the Chinese economy.

By solving the prolonged problem of small enterprises’ lack of access to traditional capital sources (mainly bank loans), the reform will fundamentally re-shape the corporate landscape. For stock investors, the possibility is high that the move will churn out a good number of fast-growing, highly competitive companies for them to benefit from.

For companies that have great growth potential but cannot meet the profit-making requirements in the existing approval-based IPO system, they have to list in overseas markets, depriving domestic investors of the opportunity to gain from their growth. In September, e-commerce giant Alibaba made a record-breaking IPO of $25 billion on the New York Stock Exchange, showcasing the necessity to accelerate domestic IPO reform.

Admittedly, there would be some risks, such as cheating in IPO, to be borne in the registration-based share-issuing system. But that should be solved by strengthening information disclosure and post-listing punishments so that cheaters will pay a price that is more than what they can gain.

Back to the recent boom of the market. The stock index fluctuated fiercely on Friday, reflecting investors divided over the prospects of the market. Indeed, the recent rises could just be a flash of hope followed by drastic corrections, but in the longer term, the possibility is high that the market will beat general market expectations and go farther given the liberalization policies the authorities will implement soon.