What’s behind Chinese regulators’ backpedaling on new IPO system?

What’s behind Chinese regulators’ backpedaling on new IPO system?

Fear of speculative frenzy prompts deeper scrutiny of public wannabes

If you think about how much time Chinese policymakers put into creating a system that gives the market a bigger say in initial public offerings, you might wonder why regulators are suddenly taking a more hands-on approach to new listings.

The registration-based IPO system, which policymakers began promoting at least as far back as November 2013, was adopted by Shanghai’s STAR Market in mid-2019, and by Shenzhen’s ChiNext board earlier this year. The goal of the new system is to make the listing process more transparent and market-oriented than it is under the older approval-based IPO system. Under the latter, which is still used outside the STAR Market and ChiNext, companies are strictly screened. For example, they are required to show sustained profitability before they qualify for regulatory approval to go public. Under the new system, companies are allowed to list their shares as long as they disclose certain information about their businesses to investors

However, in the wake of Ant Group’s shocking IPO suspension, regulators have imposed several new conditions on companies going through the registration-based process. The ChiNext board has been giving window guidance — a kind of informal arm twisting — to a number of investment banks, requiring that IPO applicants must have reported a net profit of at least 50 million yuan ($7.6 million) in the most recent year, Caixin reported recently.