In Depth: Why China’s Tightening Its IPO Regulation

China is intensifying its regulation of the stock market through a new set of guidelines aimed at addressing the prolonged slump in share prices, improving the quality of listed companies, and restoring investor confidence. However, market observers caution that these measures could undermine the IPO system overhaul introduced five years ago and exclude small, innovative firms in emerging industries [para. 1].

Released on April 12 by the State Council, the guidelines focus on improving regulation, covering aspects like listing standards, delisting rules, intermediary oversight, and supervision of high-frequency trading [para. 2]. Wu Qing, chairman of the China Securities Regulatory Commission (CSRC), emphasized that the guidelines aim to address weaknesses exposed by past market turbulence and to resolve long-standing issues, promoting the development of a regulated, transparent, and resilient market [para. 3][para. 4]. Following the implementation, the stock exchanges revised their business regulations to align with State Council requirements [para. 5]. Known as the National Nine Articles, these guidelines emphasize strict supervision and management, a shift from the previous focus on stable development [para. 6].

A significant change in the guidelines is the tightening of IPO criteria to improve the quality of listed companies. Key financial indicators for IPO candidates have been raised, placing more emphasis on a company's ability to generate stable returns and withstand risks. The CSRC has issued new rules and increased the random inspection rate of IPO candidates from 5% to 20% to ensure compliance [para. 8][para. 9][para. 13]. Analysts believe that these tightened regulations roll back much of the reform measures introduced in 2018 aimed at lowering barriers for up-and-coming companies to list on domestic stock markets [para. 14][para. 15].

Previously, the 2019 reform had shifted the main responsibility for IPO reviews from the CSRC to the stock exchanges, introducing a registration-based system that allowed the market more autonomy. This system was designed to be carried out with minimal regulatory intervention, with the legal groundwork laid by the updated Securities Law in 2020 [para. 15][para. 17]. However, issues quickly emerged regarding the quality of disclosures by listing candidates and their intermediaries, leading to an intervention by the CSRC [para. 20]. Analysts argue that China’s stock market might not be mature enough for such a system, necessitating a return to more stringent reviews [para. 21].

An increased threshold for IPO applications will make it harder for companies, particularly those in the high-growth, high-risk category, to list. On the STAR Market, companies specializing in science and technological innovation now face higher entry requirements, including the amount of funding for R&D and patents obtained [para. 24][para. 25]. As stricter regulations take hold, analysts forecast a sharp decline in IPO financing for the year, predicting that only around 100 companies might be able to go public, raising 102.5 billion yuan ($14.1 billion), which represents significant year-on-year declines [para. 32].

The tightening of IPO regulations could discourage companies from even applying, as the process and standards become tougher [para. 28]. A perceived over-regulation of the IPO process may further dissuade firms, reflecting a need for a balance between protecting investors and allowing market-driven principles to flourish [para. 34]. Consequently, the market anticipates continued difficulties in IPO financing, exacerbating the challenges faced by companies attempting to go public under the new guidelines [para. 32].

Despite the intention to address shortcomings in the system and improve market quality, these measures appear likely to restrict IPO opportunities and limit market growth, prompting a need for careful consideration of both regulatory rigor and market dynamics [para. 34].