China will eliminate approval requirements for initial public offerings within two years, as it seeks to ease the logjam that has led to multi-year equity fundraising queues.
Streamlining the IPO process is seen as crucial to improving capital allocation by allowing promising young companies to raise capital more easily. China’s bourses are still largely populated by state-owned companies whose political connections helped them to navigate the listing process.
Some 674 companies were awaiting IPO approval as of earlier this month, according to a list published by the China Securities Regulatory Commission, which handles the process.
The agency’s approval authority has also created incentives for corruption, as the fate of stock sales worth billions rests with low-paid bureaucrats. At least three CSRC officials involved in IPO approvals have been arrested this year.
“The flaws and shortcoming of the approval system have gradually revealed themselves,” the CSRC said late on Wednesday, adding that the move to a registration system would encourage the “formation of the market’s self-discipline mechanism”. But the agency also cautioned that the transition could not occur all at once and would proceed in steps.
Under the registration system, the CSRC would devolve authority to the Shanghai and Shenzhen stock exchanges, which would focus on enforcing disclosure requirements but would not interfere with pricing and timing of IPOs.
Top Communist party leaders pledged to shift to approval registration as part of a landmark reform plan approved in November 2013, but progress has been slow.
The move would eliminate an important tool that regulators have used to influence market sentiment. A complete relinquishing of government control over the flow of listings could lead to a flood of new offerings.
Chinese investors often complain that IPOs siphon demand away from existing shares.
The CSRC suspended IPOs entirely during the summer stock market rout before restarting approvals last month. A previous freeze beginning in late 2012 lasted more than a year.
Partial deregulation could come sooner than two years. The National People’s Congress, China’s legislature, must approve changes to the Securities Law submitted by the State Council, China’s cabinet. But the official Shanghai Securities News reported late on Wednesday that a version of the registration system could take effect before the legislative change is complete.
When the CSRC lifted the IPO suspension last month, the agency said 28 companies would be allowed to move ahead with their offerings before the end of 2015. Since then, 11 companies have raised Rmb4.2bn ($652m) in Shanghai and Shenzhen.
