New rules for IPOs are a cure for market dysfunction

By Dong Dengxin Source:Global Times Published: 2016/9/22 23:03:39

Illustration: Peter C. Espina/GT


Earlier this month, the China Securities Regulatory Commission (CSRC), the country's securities regulator, unveiled new guidelines that put firms based in impoverished regions of the country on the fast track for a stock listing, in a controversial effort to reduce poverty in the world's second largest economy.

It is widely acknowledged that capital's pursuit of profits not only effectively motivates the capital market but is also blamed as the root cause of market dysfunction. The Matthew effect, or accumulated advantage, seems to perfectly sum up the social phenomenon of polarization in regards to the allocation of social resources: the rich gets richer while the poor get poorer and the strong gets stronger while the weak become even weaker.

In China, its eastern regions, particularly the coastal areas, have been the biggest beneficiaries of the country's reform and opening-up over the past three decades. In the past, when market efficiency was made a priority, eastern China was the first to reap huge gains in terms of allocation of social resources. A wealth of talent and money has thus flowed into these regions, giving a significant boost to local economic and social development and catapulting them into more developed regions. On the contrary, the comparatively underdeveloped regions, the Northwest in particular, have witnessed massive human capital outflows as well as shortfalls in money and various supplies, which put considerable constraints on the economic development of these outlying poverty-stricken regions.

Per publicly available statistics, the country's 10 coastal provincial regions that include the Beijing, Tianjin and Shanghai municipalities and the Jiangsu, Zhejiang and Guangdong provinces account for 40 percent of the country's total population and contribute to 55 percent of the country's GDP, and also claim 68 percent of all mainland-listed companies. By comparison, 21 provincial regions in central and western China have 60 percent of the country's population but only contribute to 45 percent of the national GDP and only 32 percent of A-share listed companies are traced back to these less-developed regions.

Direct finance, especially equity financing, is a significant type of social resource allocation. And the distribution of listed companies epitomizes the allocation of social resources. That said, the serious imbalance between the abundant number of listed firms in the 10 coastal, eastern regions and the much smaller a pool of listed firms in the country's central and western areas is a direct reflection of capital market dysfunction.

To put the market on the right track requires necessary macroeconomic fine-tuning. Otherwise, the capital market is likely to further distort social resource allocation and consequently detract from balanced regional economic development. The invisible hand of the market is inherently flawed and should therefore be accompanied by the visible hand of the government that serves to powerfully rectify the defects. This is part of the basic understanding of economics. As such, the new policy that puts companies registered in the laggard regions on top of the waiting list for market flotation helps rectify this capital market dysfunction.

Those who have misunderstandings about the new IPO rules, should reconsider the mistaken beliefs that the new guidelines are designed to lift stock investors out of poverty, or potentially drive flocks of companies in developed regions to relocate in less-developed regions simply for a faster IPO, or possibly lead to a massive number of deals by companies in developed regions buying into shell companies in poorer areas of the country.

None of these misleading scenarios will happen, as the new IPO rules are neither a philanthropic act or a handout, or something that destroys market efficiency and fairness. Furthermore, the new rules are an institutional innovation and an important example of how the capital market serves the real economy.

The author is director of the Financial Securities Institute at Wuhan University of Science and Technology.

Posted in: Insider's Eye

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