Why China is tightening restrictions on IPOs

Written by Kapronasia || September 05 2023

In late August, the China Securities Regulatory Commission (CSRC) said that it would start a phased restriction on IPOs to boost "dynamic equilibrium" between investment and financing. The CSRC has not yet said how long the curbs will last, and market insiders foresee stricter IPO vetting and a longer registration process.

Exchange data show that more than 650 companies are waiting to list on the Shanghai and Shenzhen bourses, which have not accepted new applications for IPOS in two months. June 30 was the last time either exchange processed an application.

This move by the CSRC seems like an about-face given that in February, Beijing said that it would transition from regulators vetting planned share sales by companies to a model in which the stock exchanges took over that role. The new system had been expected to streamline the review process and give companies and investors more agency in the IPO process.

That transition is many years in the making as well. Beijing first proposed the idea back in 2013, and a pilot scheme was carried out on the tech-heavy Shanghai STAR Market in Shanghai in 2019. Subsequently both Shanghai’s ChiNext start-up board and the Beijing Stock Exchange adopted it.

Unfortunately for companies and investors, the Chinese economy has underperformed relative to expectations this year, adversely affecting both business and consumer confidence. The CSRC is intervening in the IPO market as part of a broader regulatory attempt to steady the economic ship. Regulators may think they can lift stock prices by controlling the pace of IPOs. In the first half of August, investors withdrew about US$3.7 billion from Chinese stocks, according to the Institute for International Finance.

While some analysts have begun speaking of an “economic crisis” in China, we are not sure that is the case. After all, consumer spending on apparel, automotive, food, furniture and appliances and luxury increased sharply in August compared to July, according to the China Beige Book.  Beijing is also taking action to prop up the sagging property sector.

However, that does not change the structural problems borne of years of debt-fueled growth and an overreliance on both investment and the property sector to power the economy. That growth model has run its course, and it is not yet clear how China plans to transition away from it.

That said, the Chinese IPO market could bounce back swiftly once these restrictions are lifted. The Chinese leadership is strongly encouraging new share sales on the mainland, taking into consideration geopolitical risk, concerns about data security and a desire to strengthen strategic industries and related supply chains. Through late August, there was US$39.7 billion raised on mainland exchanges in 2023, down from US$68.2 billion in 2022, but well ahead of the US$13.1 billion raised in the United States.