By slowing the pace of mainland initial public offerings in an attempt to boost the secondary market, China's surprise move to slow the rate of initial public offerings in an attempt to bolster the secondary market will cloud the funding plans of hundreds of companies and weigh on the economy, bankers and lawyers said.
The regulation was part of a package of measures proposed by Beijing over the weekend to revive a lagging stock market and enhance investor confidence in the world's second-largest economy, which is quickly losing its growth momentum.
China's financial sector had been one of the few bright spots this year, with geopolitical tensions and tightened regulatory limits causing domestic IPO-advisors to choose home bourses over offshore stock exchanges.
The value of IPOs so far this year has been $39.7 billion, down from $68.2 billion at the same time last year, but more than doubled the $13.1 billion raised in the United States.
The decision to slow IPOs is because bond markets are difficult and costly to tap for Chinese private firms due to the consequences of a significant property sector debt crisis.
This, accompanied by declining appetite for China investment by private equity firms, will leave fewer avenues for companies to tap for growth capital and will weigh on their near-term business plans, bankers and analysts said.
The China Securities Regulatory Commission said yesterday that it will start a phased restrictions on IPOs in a bid to promote 'dynamic equilibrium' between investment and financing. It didn't say how long the curbs would last, and bankers expect tougher IPO vetting and a longer registration process.
More than 650 companies are still waiting to list on the bourses in Shanghai and Shenzhen, according to exchange data.
The companies in the pipeline for a market debut on the mainland include robot maker JAKA Robotics Co, chip firms Shenzhen Chipsbank Technologies Co and Swiss agrichemicals and seeds company Syngenta, which is looking for a $US$9 billion IPO in the first quarter of this year.
Bankers said that the regulatory move to slow the pace of IPOs went against Beijing's IPO reforms earlier this year, which sought to remove government intervention and introduce a US-style register-based IPO mechanism.
It's going back to the old, myopic model of controlling IPOs to lift stock prices, said a Shanghai-based investment banker.
The registration-based IPO system is not genuine, he said.
Even before the decision, bankers and lawyers were already grappling with tougher-than-normal questions from stock exchanges over company fundraising plans and refinancing projects.
Why should I raise debt? What is the purpose of this? Fraser Howie, author of several books on China's financial system, said: The financial system is in a good state of affairs, he said.