With the publication of new IPO guidelines over the weekend, the reforms are now complete and regulators are just about ready to end the freeze. Was the wait worth it?
At first glance the reforms are only incremental. The regulator will remain in the driver's seat of the IPO process: it will still wield a veto on which companies can list, it has established new rules to control the pricing of share issues, and it has threatened harsh punishment of issuers and underwriters who violate them.
But industry insiders say the gradualist nature of the reforms should not mask their bigger significance. Just two decades old, China's stock market is still a long distance from developed markets, but it is growing up, and the regulator is giving underwriters, issuers and investors more freedom than ever to manage their own affairs.
"This is going to be a sea-change. This is probably the most important change to the IPO system of the past decade," says Li Kefei, head of China equity capital markets at UBS Securities. "Previously, the IPO offering process and the resulting allocation were rigorously defined so the bookrunners had no control. In this reform they are giving underwriters more flexibility."
Gone is the requirement that underwriters must file the pricing and planned share allocation for IPOs to the securities regulator for approval. Gone is a fixed IPO date, also approved by the regulator. And gone is the regulator's role as gatekeeper for the market in deciding which companies are good and worthy of raising money.
At the same time, the China Securities Regulatory Commission was at pains to stress that it is not about to cut itself out of the process entirely. "This cannot be understood as meaning that the regulator will have no oversight," the CSRC said when announcing the reforms on Saturday. "It does not mean that we won't supervise IPOs or that junk stocks can now be easily issued. Rather, it means that the supervision system will be reformed."
Shen Minggao, head of China research with Citi, says the crucial point is that the CSRC had changed the nature of its reviews. "It will focus more on compliance-related issues instead of approving for pricing and timing, all those details for which the market should have a better idea," he says.
The ultimate objective of China's reforms is to move from its existing approval-based IPO system to a registration system. Under an approval system, only companies receiving the go-ahead from regulators can float shares. Under a registration system, the norm in developed economies, those crucial decisions are all left to the market, with regulators relegated to a policing function.
"It is a transitional period and China is now a step closer to a registration system," Mr Shen says.
Giving the market one month to digest the reforms, the regulator said IPOs would be ready to resume in January. With a backlog of some 760 companies waiting to list, the immediate concern for investors is the risk that the market will be swamped by new share issues.
ChiNext, China's growth board for start-up companies, fell 8.6 per cent, its biggest daily fall ever. But price-to-earnings ratios on ChiNext have topped 50, making it ripe for a correction for months. The reaction of investors in bigger companies, where average PE multiples are nearer 11, was much calmer. The Shanghai Composite, the country's main index, finished down just 0.6 per cent.
"The reforms don't mean that all the waiting companies can just come and list. The regulator is still going to control the pace," says Ethan Qi, chief strategist with CEBM, a Shanghai-based advisory firm. Some 50 companies are expected to be cleared for IPOs in January, with the others to follow over the rest of the year.
While relinquishing control over the pricing of individual IPOs, the regulator established stringent parameters that will go a long way toward determining pricing in general. A recurring problem in the Chinese equity market has been share sales at unreasonably high valuations, after which the issuers cash out.
To prevent that, the regulator ordered that controlling shareholders will face a two-year lock-up during which they will not be able sell shares below their IPO price. Moreover, if disclosures are found to be misleading, issuers will need to buy back shares.
"I don't think we have similar requirements in any established exchanges," says Paul Lau, a capital markets partner with KPMG China. "They will provide disincentives for controlling shareholders to go out with extremely high valuations."
But he adds that he expect them just to be interim measures - some of the training wheels still in place as China's stock market continues to grow up.
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