IPOs: IPO Ban Needs Lifting as New Activity Resumes

Bottom line: The securities regulator should start signaling it will end its latest IPO freeze as soon as current market volatility subsides to demonstrate China’s commitment to capital market liberalization.

CSRC should signal IPO ban to end soon

Reports of 2 new listing plans by Chinese companies were in the headlines last week, showing executives hope to resume their fund-raising using capital markets once the current market volatility ends. One headline saw outdoor advertising specialist Focus Media disclose a new plan to list via a backdoor offering in Shenzhen, while the other saw media report that snack giant Liwayway Holdings was taking initial steps for a $200 million IPO in Hong Kong.

Stock market fund-raising by Chinese companies has come to a standstill over the last 2 months, after a rout that began in June frightened off investors and prompted the China Securities Regulatory Commission (CSRC) to suspend all new offerings in a bid to stabilize the situation. This resumption of offering activity is still in the very early stages, and reflects the important role that financial markets play for companies in need of capital to fund their operations.
The CSRC should recognize the importance of this role and start sending signals that it will seriously consider Focus Media’s application and resume accepting traditional IPO applications for other companies like Liwayway quickly after the current volatility ends. Failure to do so will undermine the market’s credibility, dealing a blow not only to Chinese companies in need of cash but also to China’s efforts to become a global financial center.

China’s securities regulator is no stranger to the practice of suspending initial public offerings (IPOs) as a tool to prop up the nation’s young stock markets when sentiment is weak. Most recently, the CSRC suspended all new offerings for more than a year starting in late 2012, and only fully resumed normal activity in the middle of last year.

That suspension did little to boost markets during its duration, and instead created a huge backlog of companies in need of funds that were left in limbo. The move also seriously undermined the market’s credibility, even as China was lobbying to have its stock markets included in key global indexes that track emerging markets.

Ban Reimposed

But just a year after fully lifting that suspension, the regulator once again imposed a new ban in early July, which was revealed when 28 companies preparing to list issued simultaneous statements saying they would suspend their plans indefinitely. Their announcement came after volatile period starting in mid-June that saw the main Shanghai index plunge more than 30 percent in 3 weeks, reversing a rally that had seen it more than double over the preceding 12 months.

Despite the ongoing market volatility, Focus Media made a relatively defiant move last week when it disclosed plans to make a backdoor IPO using Shenzhen-listed Hedy Holdings (Shenzhen: 002027), a maker of communications equipment. (previous post) That plan followed another backdoor listing attempt by Focus earlier this year that ultimately collapsed when the CSRC opened a securities violations investigation into Hongda New Material, the previous re-listing vehicle.

Focus was a US-listed company for nearly a decade, but privatized 2 years ago after coming under several short seller attacks. It was aiming to re-list in China in hopes of getting a better valuation, and also to recoup some of the billions of dollars investors put up for the company’s earlier privatization.

Around the same time that Focus disclosed its latest backdoor IPO plan, media reported that Liwayway, whose brands include the popular Oishi potato chips, was taking early steps for its Hong Kong IPO to raise up to $200 million. (English article) IPOs in Hong Kong have also come to a near standstill in the last 2 months due to the recent market volatility, even though the local regulator doesn’t impose China-style bans and lets market conditions dictate activity. That difference is a major factor that has led major private companies like Liwayway to choose Hong Kong for their IPOs, depriving Chinese investors of a chance to invest in some of their country’s leading private companies.

While the CSRC’s latest IPO suspension undermines China’s drive to create free capital markets, it’s also understandable in the context of past practices and the current market volatility. But that said, the regulator should start sending positive signals soon that it will resume IPOs in the near future as soon as the current volatility subsides. It could do that by quickly approving Focus’ backdoor listing plan if there are no serious problems, and by signaling that it will move ahead with plans for a more western-style IPO application system that was being considered before the recent sell-off.

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