February 1, 2018 / 3:33 AM / 19 days ago

Breakingviews - China's IPO cleanup makes encouraging debut

HONG KONG (Reuters Breakingviews) - China’s IPO cleanup is off to an encouraging start. Regulators are rejecting more subpar applications; in January they turned down a record six applicants in a single day, including one by the country’s largest private psychiatric hospital group. Tougher issuance standards could lead to broader reforms, plus help clear a massive backlog of aspiring issuers. Empowering bureaucrats even more is an acceptable short-term trade-off.

Companies looking to IPO in China must first win approval from the China Securities Regulatory Commission. Late last year the market watchdog overhauled its examination committee and stepped up scrutiny of applicants’ financial strength and disclosures. The agency has already denied more than half of the 36 applications received so far this year, Reuters reported on Jan. 25 – roughly double October’s rejection rate. Officials are stepping up the pace of approvals as well. As of the end of December, there were 484 firms awaiting review, down from over 600 a year earlier, according to Deloitte China.

The crackdown has stung rejected applicants like Wenzhou Kangning, the hospital operator. In a detailed notice published on Jan. 23, the CSRC rejected its application and laid out questions it had for the company, including its accounting of related-party transactions and other investments. The firm responding by saying it will raise the money elsewhere, but the failure to float had knocked a fifth off its Hong Kong share price as of Jan. 30.

Forcing applicants to bolster financials and improve disclosure is a no-brainer. Doing so should shore up investor confidence in a market where minority shareholders are often abused. The question is whether this will be followed by other overdue reforms: delisting inert companies, reducing excessive IPO pops, and discouraging unreasonably long trading halts, to name a few. The CSRC has also failed to keep repeated promises to set aside the current approval-based system for a registration-based one that would let the market decide who gets to list and for how much.

A rigorous standards committee may grant CSRC bureaucrats even more latitude in the short-run, but it is a necessary first step toward more liberalisation.   

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