Comprehensive Share Registration Reforms Expected to Unleash China’s Capital Market Potential

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The China Securities Regulatory Commission (CSRC) has announced the official launch of comprehensive reforms of China’s share issuance registration system, in a move which domestic observers say will unleash the potential of the domestic capital market.

On February 1 CSRC said comprehensive reforms of China’s share issuance had officially commenced, with the release of draft versions of key regulations including the “Administrative Measures for the Registration of Initial Public Offerings of Shares” (首次公开发行股票注册管理办法) (上市公司证券发行注册管理办法) and the “Administrative Measures for the Registration of Securities Issuance of Listed Companies” for the solicitation of opinions for the public.

CSRC said that the release of the new regulations was for the purpose of “comprehensive implementation of registration system reform”, as well as “achieving an orderly transition of administrative licensing matters such as the initial public offering of shares on main boards, refinancing, and mergers and acquisitions

In an opinion piece published on Sina, leading Chinese economist Ren Zeping (任泽平) hailed the likely impact of the reforms on China’s capital markets.

“From a macro-perspective, it will be conducive to increasing the share of direct financing and boosting the confidence of capital markets,” Ren wrote.

“From the medium perspective, it will be conducive to industrial upgrade and the reform of state-owned enterprise ownership. Emerging tech industries – as embodied by fields including clean energy and information technology, will derive benefit from the comprehensive registration system.

“From a micro perspective, it is conducive to the development of the investment banking operations of investment banks and venture capital companies, but it also make higher requirements for risk control.”

Registration reforms expect to spur share issuance by Chinese private enterprise

Ren highlighted four “bright spots” of the comprehensive share issuance registration reforms, including:

  1. With regard to the mainboards of China’s bourses, the focus will be on “large-cap blue chips” and overlapping development with other sectors.
  2. With regard of issuance standards, the reform will optimise listing standards and procedures for main boards, and add market capitalization indices, leading to an increase in the number of listed companies in the future.
  3. With regard to trading mechanisms, there will be restrictions on price movements during the first 5 trading days of listing, while a temporary trading suspension system has been added. New shares can be included in the target of margin financing and securities lending on the first day of listing, which is more market-oriented and convenient.
  4. With regard to regulatory mechanisms, the reforms will accelerate the formation of a normalized delisting mechanism and ensure the veracity, accuracy and completeness of information disclosure, and have zero tolerance for cases of violations of laws and regulations in the capital market.

Ren highlighted four broader impacts for China’s share markets in future including:

  1. Capital markets forming completely new conditions and spurring the development of private enterprises.
  2. The comprehensive registration system will force companies to standardize their operations, while the information disclosure system will also continue to improve.
  3. Under the registration system, thresholds for entry fall, processes will accelerate, and the focus of supervision will shift backwards. Legislative authorities will further increase penalties for listed companies that engage in illegal activities such as fraudulent issuance and false statements.
  4. The implementation of the comprehensive registration system and the increase in listed companies will bring new challenges to short-term stock selection for investors, as well as their allocation capabilities and medium and long-term strategic vision. This will lead to marked trend of investor differentiation.

CSRC stresses need to introduce more long-term funds into the market

On 2 February, the day after the official launch of share registration reforms, CSRC held its 2023 Systemic Work Conference, where it stated that “guiding more medium and long-term funds into the market” would be one of its key work goals for 2023. Members of industry say that the share registration reforms will play a critical role in fulfilling this work goal.

“When medium and long-term funds play a leading role in the capital market, the advantages of the registration system can be fully utilized,” said Zhang Keliang (张可亮) from Bohai Securities to Securities Daily.

“Reform of the comprehensive registration system means means giving the power of choice to markets, and it is hoped that markets can select companies that are in line with China’s economic transformation and upgrade, as well as have long-term development potential for financing via listing.

“Medium and long-term funds pursue medium and long-term returns, pay more attention to the growth and innovation of enterprises, and can play the role of ‘stabilizer’ and ‘ballast stone’ in the market.”

“With comprehensive registration reforms, the diversified investment and finance demand of listed companies will increase,” said Sun Jinju (孙金钜), vice president of Kaiyuan Securities. “The introduction of medium and long-term funds is helps to exercise their specialise pricing ability and aid the high-quality development of listed companies”

“At the same time, more outstanding companies will be listed in the future, providing better investment targets for medium and long-term funds. Guiding more medium and long-term funds to enter the capital market will effectively promote a positive interaction between capital markets, long-term funds and the real economy.”

Official launch of share registration reforms arrives after four years of pilot schemes

CSRC’s announcement of the official launch of comprehensive share issuance registration reforms arrives following four years of trial implementation by the secondary boards of the Shanghai and Shenzhen bourses.

In 2019, Shanghai’s Sci-Tech Innovation Board (STAR Board) took the lead in launching trials of the registration system. On November 5, 2018, President Xi Jinping announced the establishment of the STAR Board as well as plans to implement pilot registration system.

The STAR Board opened on July 22, 2019, with the listing of the first cohort of 25 companies. Compared with the pre-existing approval system, the STAR Board’s registration system featured more market-oriented issuance and underwriting procedures, with an average review period of under 3 months. As of February 1, 2023, the number of listings on the STAR Board has expanded to 504, with a total market value of 6.44 trillion yuan.

In August 2020, Shenzhen’s ChiNext Board began to promote the new registration system. 95% of the listed companies on the ChiNext Board are private enterprises, with regulators highlighting a focus on growth-oriented innovative and entrepreneurial enterprises, reducing the threshold for equity financing, and alleviating the challenges of financing being difficult and expensive for private enterprises.

In 2021, the Beijing Stock Exchange commenced operation, also featuring implementation of the share registration system on a trial basis. The new exchange is intended to serve the capital market financing needs of China’s innovative small and medium-sized enterprises. Compared with the other two secondary boards, the listing threshold of the Beijing Stock Exchange is as low as 200 million yuan, the review time is only 2 months, and the restriction on price movement is set at 30%.

On August 8, 2022, CSRC announced that “the conditions for the full implementation of the share issuance registration system have basically been met,” portending China’s imminent shift from a share issuance approval system to the new registration system.