China's securities regulator has rolled out new rules to fast-track issuances of stocks and bonds by companies registered in impoverished regions. The rules will allow such companies to skip to the front to the mainland's long IPO queue. The change has led to concerns about the quality of potential beneficiaries and sparked criticism that the securities regulator has slanted the playing field for companies looking to go public. Yet, experts pointed out that skipping to the front of the IPO line doesn't mean companies can bypass the review process. They still have to meet the same listing standards, and due to the limited number of qualified companies, the new rules won't have much of an impact on the market, experts said.
China's capital market appears to have a growing list of duties to meet the regulator's political obligations.
On top of supporting State-owned enterprise (SOE) reform and easing the financing difficulties of small and medium-sized enterprises, the country's securities regulator recently added a new goal: alleviating poverty.
On September 9, the China Securities Regulatory Commission (CSRC) issued new rules to fast-track public issuances of stocks and bonds by companies registered in impoverished regions, with the aim of supporting the local industrial development.
The most striking part of the new policy is that some companies will be able to jump to the front to the IPO pipeline, provided that they have operated and paid income taxes in an impoverished area for three years, or if registered in those areas, they have paid at least 20 million yuan ($3 million) in taxes to the local government over the past year and will not change their place of registration for three years after listing, according to a document released by the CSRC on its website on September 9.
The impoverished regions in question refer to a list of 592 impoverished counties issued by the State Council's leading group on poverty alleviation in 2012, the CSRC said.
Although the policy seems justified given the expanding wealth gap between the affluent coastal regions and the impoverished inland areas, it has sparked criticism that the CSRC has failed to maintain a level playing field for companies looking to list.
Yet, experts pointed out that bypassing the IPO queue doesn't mean companies can escape the regulatory review. They still must meet the CSRC's listing standards, just like before. Furthermore, experts don't see the new policy as leading to a flood of new stock issuances, so it won't have an adverse effect on stock prices.
Risky businesses
The new rules weren't well received by the market. Chinese mainland stocks fell all three days last week, capping their worst week in four months. The benchmark Shanghai Composite Index closed at 3,002.85 points on Wednesday, down 2.47 percent from the close on September 9. The mainland markets were closed Thursday and Friday for the Mid-Autumn Festival holidays.
"Several factors contributed to the weekly loss, such as the pre-holiday sell-offs, monetary policy uncertainty and declines in global equity markets," said a Shanghai-based securities analyst surnamed Li, who preferred only to give his surname.
"To a certain extent, the CSRC's poverty alleviation rules had a negative impact on market sentiment, especially on September 12, when the Shanghai index fell 1.85 percent," Li told the Global Times on Wednesday.
Jing Yiping, a retail investor, did not like how the CSRC had linked investor interest to reducing poverty. "After all, the stock market is not a charity," Jing told the Global Times on Wednesday.
Jing's remarks highlighted concerns about the potential risks of investing in companies operating in poor areas. There are grounds for such concerns. The most recent case of IPO fraud involved a company located in a remote area. Earlier this year, Dandong Xintai Electric Co, in Dandong, Northeast China's Liaoning Province, became the first company to delist for IPO fraud, according to a CSRC decision in July. The CSRC determined that Xintai, which went public on the Shenzhen Stock Exchange in January 2014, had falsified its financial records from 2011 to 2013.
Dandong is not an impoverished county on the official list, it was still a risky investment. Companies in underdeveloped regions are usually more risky to invest in. Due to the lack of transparency, it is usually hard to verify their figures through other channels, Li said.
Quality assurance
Nevertheless, jumping to the front of the IPO queue doesn't mean companies in impoverished counties will get a pass on listing standards, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and technology.
"As long as the listing standards remain the same, then they should guarantee that any company that gets listed is of the same basic quality," Dong told the Global Times on September 12.
Even seeking a listing on ChiNext, the country's NASDAQ-style board for high-tech and emerging start-ups, requires a company to have been profitable for the previous two straight years, with accumulated profits of no less than 10 million yuan and ongoing growth, or to have been profitable in the most recent year with net profits of no less than 5 million yuan and revenue of no less than 50 million yuan, according to Shenzhen Stock Exchange rules.
"While I don't have any idea how many companies will go public under the fast-track rules, I don't think there will be many qualified ones," Dong said.
As of the end of August, there were more than 800 companies in the IPO pipeline, but only six were registered in impoverished counties, financial news portal eastmoney.com reported on September 11.
The figure illustrates how brokerages, investment banks and private equity firms have long neglected impoverished areas in favor of coastal regions, Dong noted. Consequently, the richer provinces get more access to capital, which in turn makes them even wealthier, while the poor areas receive less funding, making them even poorer.
Shell game
Given the lengthy line for companies waiting for IPO approval, it is possible that some companies may relocate or buy shell companies in impoverished counties to take advantage of the fast-track policy, Dong said.
"Relocation will provide greater tax revenue for local governments, and purchasing local shell companies will lead to capital inflows, which will do local economies a lot of good. But the cost will be very high for companies in terms of both time and money," Dong said.
Li said that companies should proceed cautiously with such plans.
In December 2015, the central government announced that the IPO system will change from the current approval-based scheme to a registration-based one over the next two years.
"What if it takes two years for a company to finally relocate or buy a shell and the system changes to a registration-based one? Will there be new poverty alleviation policy at that time? No one knows," Li said.
