China’s IPO Drought Features 35 Exhausted Regulators

(Bloomberg Opinion) -- A stock market devoid of IPOs is a stagnant pool.

China is in another listing drought, two years after the IPO floodgates were reopened. So far this year, just 80 companies got the nod from the securities regulator, raising a paltry 15 billion yuan ($2.2 billion).

Wary that new listings may drain liquidity, the China Securities Regulatory Commission tends to close the IPO pipeline whenever there's a rout. The A-share market is one of the world's worst this year, with the benchmark Shanghai Shenzhen CSI 300 Index down more than 20 percent. 

Even if China were having a bull run, though, there weren't enough newcomers. Last year, 250 companies went public, a fraction of the 3,556 accounting for A shares' 45 trillion-yuan pool.

The main problem? The securities regulator is short of good people and its staff are exhausted.

A company going public in China must not only fulfill a variety of financial criteria, but also demonstrate to the CSRC that it's a viable business in a promising industry. In the U.S., the world's best listing venue, firms just need to meet disclosure requirements, then the Securities and Exchange Commission lets the invisible hand decide if they're any good. 

Spotting solid companies in China isn't easy. To weed out part-time members of its listing committee who are too busy to bother, the CSRC recently proposed reducing the body to 35 members from the current 66, of whom one-third are part-timers. 

Each IPO application involves seven members of the listing committee. Assuming each of the seven reads the full prospectus — a time-consuming affair, as any equity analyst knows — the 35 staffers can process only five applications simultaneously.

They have a huge pipeline to work through. More than 200 firms are still waiting for CSRC approval.

It's clear these staffers are professionals who take pains to apply management consulting frameworks such as Porter's Five Forces and the SWOT analysis to their cases. 

Take a look at the grilling the CSRC gave successful IPO applicants:

YouYou Foods Co. is a stable cash cow, generating more than 100 million yuan of net profit on 494 million yuan of sales in the first half of 2017. But the regulator wondered if its product line was too concentrated, with more than 70 percent of sales coming from pickled chicken feet.

Or take Jiangsu Apon Medical Technology Co., whose two sales channels generate very different gross margins. How much bargaining power does it really have? 

Suzhou Longjie Special Fiber Co. sources too much of its raw materials from its top five suppliers, the regulator mused. Is its procurement stable? What if a supplier decides to forward-integrate? 

Would the solar-energy equipment maker RoboTechnic Intelligent Technology be affected by the escalating trade war with the U.S. just as China scales back solar subsidies?

The questions aimed at companies that weren't approved were more pointed and longer, as you might expect. 

They're all good questions, but the process is labor-intensive. The U.S. way is easier. 

Speaking at the China International Import Expo on Monday, President Xi Jinping promised Shanghai a new stock-trading venue. Sufficiently high-tech companies will be able just to list, with a simpler registration-based system.

The CSRC's exhausted staff should thank Xi for small mercies. 

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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