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The pace of IPOs in China mainland seems set to slow down. The country’s regulatory authority, the China Securities Regulatory Commission (CSRC) announced a selective clampdown on new listings with an aim of bringing in stability. Experts believe that large listings in China resulted in selling pressure on the stock market as investors liquidate their holdings to buy stocks of large initial public offerings (IPOs).
China’s latest move is likely to be gradual and not act as a blanket ban on IPOs. The CSRC said it will begin a restriction phase on IPOs but did not specify how long. Beijing has also cut the stamp duty on stock trades from 0.1% to 0.05% to attract investors to secondary markets instead of initial public offerings. This announcement on restricting the pace of new listings could come as a hindrance to many companies seeking access to capital. Louis Lau, a partner in the capital markets group at KPMG China said, “There are more than 1,000 IPO candidates in the pipeline, which is a fairly high level compared to the historical range of 700 to 1,100.” These include agri-tech firms, power generation, and renewables companies.
This move is a sharp contrast to the IPO reform that the country adopted earlier this year. In February, Beijing switched to a registration-based system to allow the market to choose the companies that would be listed on the Shanghai and Shenzhen exchanges, eliminating any approval requirement by the CSRC. The system was established to ensure more listings with increased transparency.
However, analysts believe that authorities would still exercise a great deal of discretion. China has banned offshore IPOs which could pose a threat to China’s national security. The ruling has even made it difficult for companies to pursue IPOs in the US. At the same time, many opine that only the companies that support China’s quest for high-end economic development will get the go-ahead. These include strategic sectors like industrials, semiconductors, information technologies, and electric vehicles.
China’s IPO market gives mixed signals
China has been one of the best performers in otherwise tepid IPO markets so far this year. With the US grappling with high interest rates and economic slowdown, Shanghai and Shenzhen emerged as the favourite IPO destinations. Moreover, the Chinese government’s friendly policies towards startups have been another factor in boosting IPOs. Most of the funds raised in China in January-June 2023 were from the startup-focussed STAR Market in Shanghai, and also from the tech startup-heavy, ChiNext board in Shenzhen. This is a clear shift of interest from state-owned companies and oil giants that dominate Shenzhen.
Despite its appeal in the IPO market, China saw a drop in listings and deal value as compared to the last year period. A report by EY reveals that Shanghai raised $17.3 bn through 62 IPOs for the first half of 2023. While this was the highest in the world, the amount still indicates a 47% year-over-year decline amid the challenging macroeconomic environment in China. During the same period, the Shenzhen Stock Exchange saw 70 IPOs raising $12.6 bn.
New rules to restrict fundraising options
Due to regulatory uncertainties at home as well as geopolitical conflicts, especially with the US, Chinese companies are also looking for other ways to raise capital.
In 2022, nine Chinese companies debuted on the Swiss stock exchange through Global Depository Receipts (GDRs). However, this year, reports indicate that up to six companies have scrapped their plans to get listed in Zurich. While low liquidity in the Swiss exchange is one of the reasons, experts see it as a decline in the global appeal for Chinese equities.
The recent move to now curb IPOs in China has further limited the ability of Chinese companies to raise capital and has caused negative reactions in the market. Most analysts believe that cutting off funding access to companies at a time when the economy needs a push, is not the ideal move.
