Authorities signal market reforms to continue despite COVID-19 situation

ChiNext, China's innovative startup-heavy stock market, may see its first initial public offering under the registration-based system later this year, an indication that reforms are on track despite the ongoing novel coronavirus outbreak, experts said.

The latest signals from top authorities have indicated a resolute yet prudent stance in carrying out the market-oriented, registration-based IPO system on ChiNext, which was listed among the top leadership's annual task list, they said.

The General Office of the State Council, China's Cabinet, released a circular on Saturday that called for piloting the registration-based IPO system on ChiNext, as a critical step of implementing the revised Securities Law, which took effect on Sunday.

"There should still be some time before the ChiNext, and especially the main board, implement the registration-based system", the China Securities Regulatory Commission, the top securities regulator, said earlier last month.

The statements showed regulators' determination in implementing the new system on ChiNext by the end of the year as scheduled, while flexibly fine-tuning the agenda based on actual market conditions, said Hong Rong, founder of the Shanghai-based investor education institution Hongda Education.

If the market was pressured by pessimistic expectations, regulators could consider postponing the reform for a while as the same could magnify market declines in the short term by sparking concerns that more IPOs may strain market liquidity, said Hong.

The benchmark Shanghai Composite Index closed 0.74 percent higher at 2992.90 points on Tuesday after the previous session's jump of 3.15 percent, recouping all the loss recorded on Friday when fears surrounding a global outbreak of the virus weighed on the market.

"Flexibility in this year's specific timing and pace of rolling out the reform can be expected, given the lingering uncertainty of the virus," said Liu Wenqiang, a researcher with Shenzhen-based Great Wall Securities.

Recent policy signals have indicated that regulators are prepared to strike a balance between facilitating more market-oriented IPOs under the reform and maintaining ample liquidity of existing stocks, Liu said.

"It is very likely that draft rules regarding ChiNext's registration-based system will be rolled out in the second quarter of the year," said an investment banker with a foreign-invested brokerage who declined to be named.

"Our projects related to the reform are being advanced smoothly," he said, adding that the first batch of listed firms under the registration-based system may debut on the ChiNext in the fourth quarter.

China first introduced the registration-based system on Shanghai's sci-tech innovation board, or the STAR Market, in July last year.

Shenzhen's ChiNext was chosen as the next test field, with the tone-setting annual Central Economic Work Conference held in December calling for steady advancement of the ChiNext reforms.

Wang Jiyue, an independent analyst and an investment banking veteran, said the ChiNext's registration-based reform will profoundly influence the A-share market, as it is a key move to elevate market efficiency and support economic upgrading.

Different from the STAR Market as a new submarket, the ChiNext is a 10-year-old board with about 800 listed firms, Wang said. It is critical to safeguard the interests of existing listed firms and investors on the board when pushing ahead with reforms, he said.

For instance, as the new system enables more fast-growing firms to get listed, older listed firms that have lost growth potential could face threats of lower valuation and even delisting as investors turn to the new gazelle companies. This could in turn hurt interests in the delisted firms, experts said. Gazelle companies are those with fast sales growth, rather than their absolute size. They can range in size from small companies to very large enterprises.

Hong said the relaxed refinancing regulations, which took effect on Feb 14, will help shield such risks and boost the quality of listed firms, as older ChiNext-listed firms can get refinancing much easier than before to buy quality assets and retain high growth speed.

The ChiNext index rose 20.87 percent to 2173.35 points this year as of Tuesday.

To minimize liquidity pressure on the whole market, the ChiNext's registration-based reform can learn from the STAR Market in terms of attracting funds for IPOs that are different from those investing in existing stocks, said Liu Yu-Jane, a professor of finance with Peking University's Guanghua School of Management.