China’s equity regulator is set to stop allowing local companies in certain sectors to list on the country’s major stock exchanges as Beijing scrambles to channel funding to strategic industries, according to two familiar capital markets bankers with the subject.
The regulator has told some bankers it has given several industries, including food and drink chains and Covid-19 testing companies, “red light” status that makes them off limits. equity financing on the main boards in Shanghai and Shenzhen.
The China Securities Regulatory Commission has also outlined a number of “yellow” sectors, such as apparel and home furnishings, where initial public offering requests could face scrutiny if their growth is heavily dependent on debt for its expansion.
Bankers and pundits said the CSRC was trying to funnel money to sectors it deemed strategically important as the country pushed for technological autonomy and economic growth.
The regulator’s move to update listing guidelines underscores Beijing’s efforts to make the country’s stock exchanges serve its national agenda, analysts said.
“The Chinese government doesn’t want a market-based stock market,” said Larry Hu, an economist at Macquarie Group in Hong Kong. “He wants one that helps the authority carry out industry policy.”
The CSRC did not immediately respond to a request for comment.
The latest IPO forecast follows a string of IPOs as Beijing eased controls on equity financing, particularly in the real estate sector, in December to boost the economy after it was severely limited by years of severe pandemic restrictions.
In contrast to languid listings in the United States last year, 428 companies raised a record Rmb587 billion ($87 billion) in the Shanghai and Shenzhen markets. The momentum is expected to continue with more than 760 groups going public, according to Wind, a financial data provider. Some of these IPOs could now fall victim to the latest guidelines.
The regulation comes even as the CSRC has pledged to advance reforms to remove regulatory barriers to registration.
A Shenzhen-based investment banker who regularly deals with the regulator said Beijing wants to channel proceeds from the IPO to industries of national interest, such as information technology and advanced manufacturing, regardless of financial performance.
To achieve this goal, the regulator has tightened listing requirements on traditional industries, as it fears their IPOs will eat up resources that might otherwise fund industries of strategic interest.
“It’s not your bottom line that matters,” the banker said, referring to enrollment standards, “but where you stand on the national political agenda.”
He added: “Everything must serve the national interest. IPOs are no exception.
Following this logic, the CSRC placed highly profitable alcohol makers on the “red light” list where IPOs are out of the question.
Bankers said the tightening was also part of an effort by the regulator to weed out financially risky companies before they cause losses to retail investors.
A Beijing-based investment banker familiar with CSRC guidelines said the regulator had put restaurant chains on a ‘red light’ list due to fears their debt-based business model could not. last as the economy slows. PCR testing companies have been discouraged from signing up after Beijing rolled back its tough pandemic measures.
Business sustainability is key [in IPO review] from the perspective of the CSRC,” the banker said.
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