China's IPO market reopens for business

China will resume new listings following a summer ban as the government struggled to arrest a massive stock market rout. Future IPOs will also be subject to new rules.
China's four-month ban on initial public offerings was lifted on Friday, providing further evidence that the country is putting the summer's market scares behind it as shares stabilise.
The China Securities Regulatory Commission said 28 companies that had previously been cleared to list would be first in line, according to a statement posted on its website.
It said 10 of these companies would likely go through the necessary legal procedures in the next two weeks, while the other 18 were set to float before year-end. Among the companies featured are Readers Publishing Media, Shenyang Taoli Bread, and Anji Food.
The CSRC announcement comes at a time when Chinese stock markets have rallied, reassuring the government that the worst is past after local stock indexes at one point tumbled some 40% from their mid-June peaks.

“It is good news as the government has restored the capital market’s function for financing,” Hong Hao, chief strategist at Bocom International, told FinanceAsia.

The benchmark Shanghai Composite Index has advanced about 6% this week, to its highest level since August 26. It closed the day up 1.9% on Friday, which is still about 30% down from its summer apex.

"It is a smart time to announce the resumption as the market has been up for a couple of days,” said Peter Li, a Beijing-based investment banker at China Construction Bank International.

“There are so many companies waiting in the pipeline. The government does want them to raise funds from the equity market, which is cheaper [than the banking loans]. They [authorities] cannot keep them all waiting,” he added. 

The 28 companies had agreed to “voluntarily” postpone their IPO plans during the summer's disorderly stock market rout as the authorities moved to stem the panic. Most attributed their decisions to the market volatility at the time.

But in early July the securities watchdog went a step further by suspending all IPOs to stabilise market conditions. At the time some 600 companies had applied for IPOs and were being reviewed by the CSRC.

The IPO suspension was one of several controversial state interventions that seemed to dent China's commitment to the rigours of market discipline That prompted one fund manager to link the CSRC's latest move to lift the IPO moratorium with the International Monetary Fund's pending decision on whether to include the renminbi currency in its Special Drawing Rights basket.
"If the IPOs are still suspended, then, it will look bad, as it reminds people of the measures that the government had carried out to rescue the stock market and China's capital markets are not opened-up enough," said the Beijing-based fund manager at Citic Securities.

New rules

According to another statement published on the CSRC’s website on Friday, the regulator plans to change the rules for IPO subscriptions.

Unlike in other more developed equity markets where institutional investors are the dominant players, Chinese retail investors account for the majority of A-share trading. These individual investors typically get allocated few new shares but are nonetheless keen to sell their holdings in order to participate in IPOs, a customary practice that can accentuate market volatility by sucking liquidity out of the market.

Under the new rules, investors can pay for the exact value of new shares once they are alloted by lottery. Previously, they were required to deploy much more capital because they had to pre-order new shares that they might not eventually get. That had the effect of locking up huge amounts of capital ahead of each new listing.

For instance, 25 Chinese company listings in early June together locked up Rmb5.69 trillion ($900 billion) when the amount eventually alloted amounted to just Rmb41.4 billion ($6.53 billion), according to the CSRC. 

In the first half of this year, 192 Chinese companies listed on the Shanghai and Shenzhen bourses and raised a total of about $24 billion, according to Dealogic data. In contrast, there were only 126 new stock listings through which about $13 billion was raised last year.

“Without the locked-in capital, the impact from the IPO resumption on the stock market won’t be as big as you thought,” said Hong at Bocom International. “Only 10 IPOs will be ‘released’ first, it won’t hit the market liquidity badly.”

Keith Pogson, a senior partner covering Asia-Pacific financial services at Ernst & Young, said the key thing is to keep the pace of the new listings and balance supply and demand.

“If there’s too much water in the sink flooding out, you turn the tap off. When all the water goes to the sink, you turn on the tap,” Pogson told FinanceAsia.

He added the resumption of IPOs would also prevent Chinese companies from looking for financing alternatives, such as shadow banking or market listings outside China. “If the leaders don’t open the front-door, it will happen via the back-door. I don’t think the central government is very excited about it happening via the back door.” 

This article has been updated to correct the spelling of Keith Pogson's name

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