OPINION

Quality Control to Reduce IPO Pressure

Since Zhejiang Shibao Co. Ltd. launched an initial public offering (IPO) in October, there have been no IPOs in the mainland's two bourses in Shanghai and Shenzhen in the past two months, and it is believed that such a vacuum may last for an extended period of time.

Nevertheless, investors are still extremely sensitive to and fearful of new share issuance, because more than 100 companies have received approval from the China Securities Regulatory Commission and another 800 companies are waiting for approval. It is believed that once IPOs are restarted, the stock market will suffer a heavy blow.

To alleviate the mounting pressure of IPOs, a variety of solutions have been proposed. Some suggest that qualified enterprises can be mobilized to get listed in overseas markets or on the New Third Board—an over-the-counter market for growth enterprises—or raise funds by issuing bonds; others even try to avoid losses by issuing put warrants.

Despite being constructive, most of these proposals are unfeasible under the current circumstances. Though restrictions have been relaxed for enterprises to seek overseas listings, strict regulations, a tough financing environment and a relatively low price-earning ratio make domestic companies lose interest in overseas markets.

Due to a limited financing scale and insufficient liquidity, companies that are qualified to get listed in the growth enterprise board, known as the ChiNext and the main board are reluctant to shift to the New Third Board.

Meanwhile, issuing bonds is also not appealing because enterprises always intend to get restructured by introducing a joint stock system.

Put warrants, in some sense, will eliminate risks for share subscribers, which violates the basic principle of "caveat emptor" and lacks feasibility in practice.

In short, all of these methods are seemingly perfect, but unable to solve deep-seated problems.

Strong profits and low costs can explain why so many enterprises vie to get listed in the Shanghai and Shenzhen stock markets. Under such conditions, concealing defects and exaggerating growth seems inevitable.

In fact, investors have been criticizing listed companies in the Shanghai and Shenzhen stock markets for a long time. In the past two decades, it was rare to see listed companies with sustainable, excellent performance. Obviously, the focus should be on excluding unqualified companies and giving a push to those which are best positioned to directly raise money in the stock markets.

In recent years, the Shanghai Composite Index has dropped from more than 6,000 points to around 2,000 points, while tradable market value has been on the increase, which indicates a limited expanding capacity of the stock markets. After all, a higher threshold for an IPO is the foundational solution to divert IPO pressure.

Of course, it's easier said than done. However, no matter how difficult it is to get over existing technical problems and disagreements, stricter regulations and higher standards should be imposed in deciding IPO qualifications.

There have been a certain number of listed companies in the Shanghai and Shenzhen stock markets. It's time to put more focus on the quality of supervision, transaction and information disclosure, so as to ensure the sustainable development of the stock markets.

This is an edited excerpt of an article by Gui Haoming, director of market research at Shanghai-based Shenyin Wanguo Research & Consulting, published in Shanghai Securities News.

THE MARKETS

Cultural SOEs Boom

Profits from state-owned enterprises (SOEs) in the culture industry hit 84.99 billion yuan ($13.52 billion) in 2011, up 21.7 percent year on year, said the Ministry of Finance in a report on December 31, 2012.

The State-owned Cultural Enterprise Development Report 2012, the first white paper on cultural SOEs, showed that there were 10,365 SOEs in the culture industry by the end of 2011, with total assets of nearly 1.6 trillion yuan ($256.64 billion), up 18.7 percent compared with 2010.

Their gross revenue grew 17.1 percent year on year to reach 797.7 billion yuan ($127.95 billion) in 2011.

About 57 percent of cultural SOEs were in the eastern part of China, pocketing nearly 72 percent in gross profits in 2011, far above the total for both the central and western regions.

IT Products Trade

China's electronic and IT imports and exports amounted to $1.07 trillion in the first 11 months of 2012, up 4.1 percent year on year, said the Ministry of Industry and Information Technology on December 31, 2012.

Exports of electronic and IT products increased 4.5 percent to $627.3 billion, accounting for 33.9 percent of the country's total exports.

Imports stood at $441.2 billion, up 3.5 percent and accounted for 26.7 percent of China's total imports.

In November alone, exports of electronic and IT products rose 9.2 percent to $67.6 billion, the highest monthly trade volume in 2012. Their imports in November totaled $48.8 billion, up 4.3 percent year on year.

NUMBERS

4.66 tln yuan

The profits of industrial enterprises above the designated size—annual sales revenue of more than 20 million yuan ($3.15 million)—from January to November, 2012, a 3-percent year-on-year increase.

30

The number of industrial sectors that witnessed higher year-on-year profits in the period of January-November, 2012.

62.9%

Year-on-year increase in profits of the power and heat generation sector in the period of January-November, 2012.

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