China is set to loosen its tight grip on initial public offerings in the wild Nasdaq-like board that was at the epicenter of a massive bubble in 2015.
A meeting chaired by President Xi Jinping approved a plan for the tech-focused ChiNext board in Shenzhen to adopt so-called registration-based initial public offerings, according to a statement from the China Securities Regulatory Commission (CSRC). The change could cut the review period for listing to months from years, and would scrap limits on price moves for the first five trading days.
China’s securities regulator had been considering making such reforms to the world’s second-largest stock market since at least 2013, when it pledged to move toward a US-style IPO registration system. Last year, the country rolled out a stock board in Shanghai which was seen as a testing ground for relaxed listing and trading rules.
The news briefly sent the Shenzhen Composite Index down as much as 3.3% in yesterday’s action, with traders speculating that easier rules could trigger a rush of new stock sales. The ChiNext Index dropped as much as 2.5% before ending 0.6% higher.
“Investors worry a flood of issuance will drain market liquidity,” said Ma Cheng, chairman at Shenzhen Juze Investment Management Co. “Market conditions were already weak with subdued trading volume, so the faster-than-expected development of the ChiNext reform dampened sentiment for the broader market.” Meanwhile, China International Capital Corp surged as much as 8.1% in Hong Kong, leading a rally among brokerage stocks on hopes the reform will boost their businesses.
China Galaxy Securities Co and Citic Securities Co were about 4% higher in afternoon trading.
Launched almost a decade ago, Shenzhen’s ChiNext board has been one of the main listing venues for the country’s tech startups. It’s also been a breeding ground for speculative trading – the 6.8tn yuan ($960bn) market has yet to recover from a massive leveraged bubble in 2015 that saw the ChiNext Index of the biggest 100 firms lose 55% in three months. This year, it was the only major Chinese gauge to enter a bear market.
In a note, Morgan Stanley equity strategist Laura Wang called the proposed ChiNext IPO changes a “long-term positive for the A-share market,” making China “more attractive as an IPO destination” while discouraging speculation. The brokerage also doesn’t expect the plan to impact the new Star board in Shanghai, which Wang wrote focuses on certain industries and has higher investor qualifications.
No date was given for when the rules will take effect. The securities regulator is seeking public commentary on the plans until May 27, and will stop accepting applications for initial public offerings on the ChiNext board in the meantime.
An advertising board (left) showing a Chinese stone lion is pictured near an entrance to the headquarters of China Securities Regulatory Commission in Beijing.
