After a four-year pilot program, China has accelerated reform of the registration-based IPO system. Authorities including the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) sought public comments on 39 regulations concerning the system’s implementation. Rich reform programs have been proposed, including a plan to introduce the system to the main boards of the SSE and SZSE, which has drawn the most attention.
The reform undoubtedly marks an important milestone for the development of China’s capital market. It will not end here, as the system needs continuous improvement. However, the existing results can provide experience for deepening overall reform. On the right track, reform could advance in due order. And every little bit helps. At the critical point, the country should cleave through the waves to achieve breakthroughs.
The implementation of the registration-based IPO system has been beset by setbacks and obstacles. For three decades, the IPO system — the basic institutional arrangement of China’s capital market — has been reformed from a review-based system to an approval-based system to a registration-based system. Before 2000, the review-based system was employed for strict controls over all aspects of a listing, such as the issuer, issue volume and pricing. The 1999 Securities Law identified the legal status of the approval-based system. Two years later, CSRC announced that the review-based system had been abolished. The approval-based system was much better, but was still a long way from marketization. At its third plenary session in 2013, the 18th Central Committee of the Communist Party of China made arrangements for the reform of the registration-based IPO system. After 2019, the registration-based system was piloted on the sci-tech innovation board, the GEM board and on the Beijing Stock Exchange. The reform has been time and labor consuming because of restrictions from the capital market, existing regulatory systems and the overall reform and opening up of China.
To date, the reform has achieved remarkable phased objectives and should continue. In the future, the registration-based system should be fully leveraged and improved to push capital market reform.
The registration-based system represents the remodeling of the relationship between the government and the market. Changes in essential factors like the authority and methods to review and approve listings will create more favorable conditions for securities issuance, but that does not mean deregulation. In a registration-based system, stock exchanges will review enterprises from their issuance, listing and information disclosure requirements and provide review opinions, based upon which the CSRC will deal with the registration according to the law. In a bid to get qualified, many enterprises have whitewashed and even counterfeited their financial statements. That’s because the approval-based system was less strict in supervision, so that they took a chance to seek higher benefits at lower risks. To judge the result of a reform, an important metric is whether it can turn the top-heavy situation around and make enterprise behavior subject to the market and the law. In a sense, the regulatory responsibility becomes heavier.
The registration-based system is pillared by the information disclosure mechanism. Company valuations depend on the market. This is the significance of making information disclosure the core of the registration system. The CSRC said that the system only retains the necessary qualifications and compliance conditions for the public offerings of enterprises, and it will try its best to convert the substantive threshold under the approval system into information disclosure requirements. The quality and transparency of information disclosure is crucial. At present, information disclosure presents as a major factor that affects the effectiveness of the registration system. Both the listing process and post-listing information disclosure cannot meet the requirements of the capital market. For example, a poor-quality prospectus, unspecified norms, unclear supervisory authorities, weakened responsibility assessment and inadequate punishment would directly erode the achievements of the reform. Regrettably, however, information disclosure has not been given due attention in recent comments regarding the system. It should be noted that lacking a registration system backed by complete information disclosure is like losing a magic stone.
The link of issuance examination used to see a high incidence of corruption. How to prevent and combat corruption is thus still a serious challenge for us under the registration system. The system aims to supervise and restrict and balance the operation of public power by establishing an internal control mechanism with graded checks and collective decision making, preventing the excessive concentration of power and requiring the quality control departments of exchanges to strengthen the follow-up supervision and check and balance in decision making. But it still remains to be seen how far these measures can go in preventing corruption. In fact, whichever issuance model we choose, we must clarify the responsibilities and obligations of regulators, exchanges, intermediaries and enterprises to ensure a clean process of issuance. If we focus only on authorities while ignoring responsibilities, or there is no clear and transparent division of responsibilities and obligations or external supervision, the issuance link will likely be exploited by corrupt actors and illegal businesses, and the registration system will be harmed.
Information disclosure will help to build an open, just and fair capital market, so we must take it as the key link and pay attention accordingly. In addition, the information disclosure-centered registration system also brings changes to the capital market. A long-standing problem — purposeful buying of new stocks and poor quality stocks — is being fixed gradually. Reasonable institutional arrangements are the best education for investors.
The reform will provide useful reference for other areas. Early at the turn of the century, the head of CSRC clearly identified the orientation of the market-oriented reform and established a securities regulatory system with outstanding professional competence and broad vision. Nevertheless, China’s IPO system reform has still undergone great difficulty and hardship, which suffices to show that any reform effort involving benefits is not easy. That being said, as long as we face the real problems squarely, we must make advances steadily to finally secure victory in major reforms and also make breakthroughs by seizing opportunities at the right time. Of course, in an area brimming with risks and crises, no reluctance is allowed.
For this part of the registration system reform, CSRC released dozens of documents, which are somewhat like the package of finance and taxation, banking and foreign trade reforms in early 1994, though they are not comparable in reform intensity, significance and impact. Reform allows for slow progress but no standstill or step backward. It requires perseverance. That is the most important lesson we learn from the overall registration system reform.
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