China Is Changing the Way it Does IPOs

December 27, 2015, 2:20 PM UTC
Shanghai Composite Index Drops Nearly 4%
HANGZHOU, CHINA - NOVEMBER 27: (CHINA OUT) A investor observes stock market at an exchange hall on November 27, 2015 in Hangzhou, China. The Shanghai Composite Index has dropped nearly 4 percent before the close of stock trading Friday afternoon and it seemed that it would tumble below 3,500 points. (Photo by ChinaFotoPress/ChinaFotoPress via Getty Images)
Photograph by ChinaFotoPress via Getty Images

China’s top legislature on Sunday approved a proposal to revamp the country’s initial public offering (IPO) system, authorizing the government to implement changes to the system that could be in place as early as March, the official Xinhua news agency said.

The State Council, or cabinet, had been awaiting approval on its plans to shift to a U.S.-style registration system for stock market flotations.

In the latest reform aimed at developing China’s financial market, the changes are expected to help companies raise money more efficiently and reduce the involvement of regulators in the capital market.

The widely expected approval by the National People’s Congress, announced on Sunday, paves the way for regulators to draft detailed rules that will be implemented after seeking public feedback. Xinhua reported the approval on its official microblog.

The next step for the State Council is to come up with specific details of the new IPO system. The cabinet could do so and implement a new IPO mechanism as early as on March 1 next year, Xinhua reported. However, the state council has two years from March to do so.

The State Council said earlier this month it expects the new system to be implemented within two years.

The China Securities Regulatory Commission (CSRC) began speaking of moving away from its current approval-based system – seen as distorting the IPO market and encouraging official corruption – to a registration system, where the market decides who gets to list and for how much, in early 2014.

But the stock market crash that began in mid-June, blamed in part on an IPO glut hitting the market, put that process on hold as the CSRC froze new listings to stabilize a market that lost as much as 40 percent in just a few weeks.

After a pause of more than three months beginning in July, IPOs were finally allowed to resume over the past several weeks.

Although most market observers welcome the reforms as a needed step towards a fairer and more transparent listing process, investors have also raised concerns that a more streamlined process could result in a flood of new listings, pushing down stocks once again.

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