IPO reforms will channel capital into real economy

By Wang Zhiming Source:Global Times Published: 2017/9/12 20:38:39

Illustration: Peter C. Espina/GT



Since the establishment of China's stock market, there has been a controversy over the IPO system. After 20 years of continuous study and research, especially since the deepening reform undertaken by the 18th National Congress of the Communist Party of China in 2012, the China Securities Regulatory Commission has announced the latest IPO system.

This latest system not only draws on the experience of the market-oriented Western IPO system, which is guided by law, but also creatively uses electronic transaction data for innovation.

The new IPO system features a Stock Issuance Examination Committee to conduct substantive reviews of proposed listings and offer opinions, in accordance with the law. In addition, limits have been put on IPOs' price-earnings ratio, and the rule that the issue price of a stock should be far less than the listed trading price has been basically formed.

The new system also stipulates that subscriptions will be decided randomly, and all actual payments will be made after the success of the subscriptions. Most importantly, the IPOs will be arranged a couple of times a week. Greater efforts will be made to eliminate the phenomenon of IPO queuing.

In this sense, China's latest IPO system has played a huge role in promoting economic and social development.

The most essential factor is to directly channel capital into the real economy. Before the formation of the new IPO system, there was a huge amount of money - about 1 trillion yuan ($153 billion) - sitting in the stock market specifically aimed at new share purchases. This money was speculative capital, and if it is driven out of the stock market, it will definitely force the owners to find a new target. This will contribute to the prosperity of the real economy.

It will reduce the cost of capital for the real economy by increasing the supply of funds in the market, thereby reducing the level of interest rates and pulling down the capital costs of the real economy. It will also increase stock market liquidity, because some of that money will be invested in the secondary market.

With the new system, the risk appetite of funds will increase. The capital that was used to purchase new shares enjoyed more than 10 percent risk-free income for a long time. Eliminating this money will destroy the risk-free, high-yield capital. The new system will raise the stock market's valuations and promote the stock market's progress.

The new system does hurt certain interests. Previously, some wealthy people repeatedly grabbed the risk-free profits of IPOs by using their financial advantages. They didn't take risks as normal secondary market investors, but they still got huge risk-free earnings. The newest IPO system returns the benefits to investors in the secondary market.

The direct financing function of the stock market has been given full play. The latest IPO system effectively boosts the number of IPOs, making a direct contribution to attracting investment, technological innovation, corporate optimization and standardized management.

The new IPO system will also eliminate excessive IPO queuing, since it makes more frequent IPOs possible. The era in which more than 800 companies were waiting for an IPO will end, and the stock market of China will be healthier and more promising.

The China Securities Regulatory Commission (CSRC), led by Chairman Liu Shiyu, conscientiously implemented the arrangements of the government and made great efforts to reform and realize the latest IPO system. This is a typical case of supply-side structural reform that should receive public recognition.

Unfortunately, this good system has not been properly understood. Some investors have attributed normal fluctuations and declines to the CSRC, regardless of its efforts in terms of strict supervision, capital market recovery and rebuilding financing functions.

Actually, it is strict supervision of IPOs and refinancing that have improved the efficiency of capital investment and prevented Ponzi schemes by some listed companies.

Although restoration of the financing functions of the capital market increased the stock supply, it also added vitality to the market, created investment opportunities, attracted more domestic and foreign funds to the market, eliminated IPO queues and brought benefits to secondary market investors.

The amount of subscription money in the past was 10 times the size of last year's, or of this year's actual IPO fundraising. This means that the stock market will not experience the damaging losses caused by IPO financing.

The author is the Deputy Director of the Suzhou Bureau of Commerce. bizopinion@globaltimes.com.cn

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