China’s Long IPO Process Hinders More than Just Stock Offerings

Chinese authorities are leashing the very elements that are needed to energize its weak stock market and moribund economy, as reported by a Wall Street Journal article on the state of IPO process in China.

Even before the summer’s stock market crash, Chinese companies coped with a very slow IPO approval system that can drag on for four to five years. This is a daunting process when in the United States companies wait only few months for listing on one of America’s exchanges. The slow bottleneck in China leaves hundreds of companies and billions of dollars of stock offerings jammed in the bureaucracy. Add to this, Chinese government brought the slow train to a complete halt in July as it shut the door on all new offerings in its attempt to contain the crash.

Although China lifted the ban on new offerings last month by saying it would allow a handful of companies that had already been approved to enter the market this year, the Journal reports that still about 675 companies are awaiting government approval to sell roughly $63 billion in stock.

The long road to a listing denies companies the capital raised from their IPO that would be invested to grow, which would create jobs and allow greater re-investments of Chinese people’s large savings pool. This environment, Chinese entrepreneurs complain, decelerates innovation and consumption, which is what is needed when Chinese economy is faltering.

China announced about two years ago that it would replace the application process for initial public offering with a registration system and allow investor demand determine pricing and eliminate a source of corruption. Bloomberg reported that China’s cabinet voted to adopt the plan to become effective in two years. The details of the plan, which has yet to be approved by China legislation, have not been disclosed.

What is sure to continue is the slow IPO process next year. This much was assured by China Securities Regulatory Commission, which said the restructuring of the IPO system would be gradual. “The move doesn’t mean the regulatory requirement becomes lower. Instead, it means a shift of emphasis in the reviewing process and the improvement of the supervision method for issuance,” the Journal article reported the agency saying recently.

This situation explains why many of China’s fastest growing companies opt for other markets to make their initial public offerings. As the Journal notes, Alibaba Group Holding Ltd. went public last year on the New York Stock Exchange, Baidu Inc. trades on the Nasdaq Stock Market, and Tencent Holdings Ltd. is on the Hong Kong stock exchange. All three rank among the world’s 10 biggest Internet companies by users.

Aptitude for initial public offerings has dampened in China. A report by consultancy.uk found that only two Chinese technology companies filed for IPO, worth $1.4 billion; down from $22.968 billion year-over-year; and way below Alibaba’s $21.8 billion.

One quick way to get into the Chinese exchanges is to merge with publicly traded companies, the Journal wrote.

What adds more to the uncertainty, however, is that the Chinese government has a record of halting the IPO process for reasons that are not always clear. Accord to FinanceAsia, the 2015 suspension was the ninth time the government made such a move. The previous suspension, in 2012, lasted 14 months, and was never fully explained.