The workings of the IPO approval process is rarely a topic to get the pulse racing, except, perhaps, for owners of privately-held businesses who are excited by the prospect of getting very rich.
But the topic was up for discussion in the Chinese media last week, on rumours that the new boss of the stock market regulator is in the mood for serious reform.
Apparently, Guo Shuqing – who was made chairman of the CSRC (China Securities Regulatory Commission) last November – dropped a bombshell at an internal meeting recently by asking whether there even needed to be an IPO approval system in place.
Under the current arrangements the CSRC has sole responsibility for deciding which companies are allowed to list on China’s A-share market. In theory this is to ensure that companies granted the right to sell stock to investors meet suitable standards. But in practice it has tended to favour state-owned companies over successful private sector firms, leading to distortions in how capital is allocated across the domestic economy. It also gives the responsible parties at the CSRC an enormous amount of power. In the past that has sometimes been abused (for the case of Wang Yi, see WiC62).
The Economic Observer says Guo – who previously ran China Construction Bank – favours market forces over government intervention, describing him as a “courageous” reformer.
Since taking on his new role Guo has launched a series of measures to improve the delisting system, cracked down on illegal market activities and sought to develop the corporate bond market. That indicates an approach that favours “openness, fairness and impartiality,” the newspaper believes.
If Guo is able to push major changes to the IPO approval process it would be a huge step. He can expect plenty of resistance. A CSRC official told the newspaper: “Guo’s reform initiative will face an enormous amount of opposition, particularly from officials whose job it is to approve IPOs.”
But outside the CSRC, Guo’s ideas have more supporters. Market participants and academics have been airing their own views in the social media. “Can we cancel the IPO examination and approval system? Yes, of course,” insisted Wang Ran, the CEO of eCapital, on his personal weibo. “Chairman Guo proposes a very good and urgent measure.”
Liu Jipeng, a professor with the China University of Political Science and Law also wrote: “The IPO issuance committee should be cancelled and the responsibilities [for selecting the companies] should be taken by sponsors and underwriters who are paid with high salaries.”
In other words, rather than regulate who can list, the market should be left to decide.
Xiang Songzuo, a finance expert at Renmin University agrees: “A capital market where the government is trying to suppress risk can never be international or innovative.”
Xu Xiaonian, a professor at China Europe International Business School (CEIBS) also noted that changing the current set up would help to make the market fairer and more efficient, as well as strike at corruption. Xu also dismissed the idea that the current system is necessary for quality control. “From the market today, we can see that system does not guarantee the quality of listed companies. And with a lack of good listed companies, stock investors cannot make any money – instead they act only as stepping stones for the ‘insiders’ in their game of speculation.”
Xu’s colleague Liu Shengjun also reckons the current approval system is detrimental. Liu, who is vice-president at CEIBS Lujiazui International Financial Research Institute, commented: “The so-called standard set by the issuance examination committee forces large numbers of excellent companies such as Tencent to list overseas, so that domestic investors have no chance to share in their growth.”
Liu then added that if members of the committee are really so adept at picking which companies should get access to capital first, they should leave the CSRC, set up a private equity outfit and “make a fortune”.
Liu’s view: “In a healthy market any business can be listed, there is only an inappropriate price.”
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