At the just-concluded annual sessions of the Twelfth National People’s Congress（NPC） and the Twelfth Chinese Political Consultative Conference （CPPCC）， the reform to introduce the registration-based system into the stock issuance regime was undoubtedly the mostdiscussed topic about the country’s capital market.
According to the report on the government’s work deliv- ered on March 5， 2015， China’s Premier Li Keqiang first made it clear that the task for the capital market is to implement the stock issuance regime reform， meaning that the stock issuance reform was finally put on an exact sched-ule after the 16-month-long waiting.
The concept of stock issuance registration system was put forward for the first time at the Third Plenary Session of the Eighteenth CPC National Congress held on November 25， 2013. Since then， the system has been mentioned for many times by China’s decision makers in major conferences.
At this year’s dual sessions， Xiao Gang， chairman of the China Securities Regulatory Commission， pointed out that as the market has been relatively ripe for the implementation of the stock issuance registration system， once the revised version of the Securities Law takes into effect， the registration system will be fully implemented.
On March 3， Wu Xiaoling， deputy director of the Financial and Economic Committee under the National People’s Congress， said that the Securities Law would go through its first reading in late April， second reading in August and third in October at the earliest. In a word， the stock issuance registration system will come into effect in October this year at the soonest.
According to Lin， introducing the registration-based system into the stock issuance regime will bring in full disclosure of transparent information and rules for market pricing， as well as a genuine delisting system.
By striking a balance between supply and demand， the stock issuance registration system will help eliminate the phenomenon of high IPO prices， high P/E ratios and over-fundraising.
Besides， the introduction of the system will reduce the approval process and achieve deadministration， which will help improve the stock issuance efficiency and reduce opportunities of the power rent-seeking. The stock issuance registration system will have a profound influence on the capital market and the macro economy. For the capital market， it will lead to a fundamental change in the structure of the securities market.
It is foreseeable that the ChiNext market and the new tertiary board， which is known as the Chinese NASDAQ， will see an explosive growth， while private equity markets will play a more important role in the promotion of entrepreneurship and innovation. Simply put， China’s capital market will see an im- provement both in competitiveness and appeal， thanks to the registration system.
From the perspective of the whole macroscopic economy， with the introduction of registration system， China is expected to step out of the currency era and march into the capital era， which is featured with a throughout change in the structure of social financing， a lower corporate debt ratio and a more active growth momentum of small and medium-sized enterprises.
However， Lin also pointed out that it is a gradual movement towards the registration system.“As the tertiary board has adopted the registration system， the reform will gradually shift its focus from the tertiary board towards the ChiNext board and SME board and eventually towards the main board.”
In response to growing concerns about the prospect that a flood of new stock issuance would pump money out of other sectors， Lin explained that as the registration system needs to go through approval and the issuance of new stocks will see a stable and gradual growth； there is no need to worry about a sudden surfeit of issuance.
What Will Registration System Bring to Capital Market？
It is widely-known that China’s capital market currently has adopted an authorizing system for the new stock issuance so far since 2004.
Moreover， in addition to conducting an examination as to substance to IPO applicants， regulatory institutions have the right to veto the issuance application under the current system.
By contrast， as a stock issuance system generally adopted in mature stock markets， the registration system， in an absolute sense， just requires an examination as to form rather than as to substance， said Lin. According to the chief economist， the authorizing system brings a series of drawbacks， one of which is so-called “overpackaging”. It gives an excuse for enterprises that are eager to go through the approval to whitewash their financial data and overblow the value of tobe-listed assets， leading to assets valuation deviation.
As the scale and approval process of new stock issuance still under the control of regulatory institutions， it may take two or three years for enterprises to get approval for IPO.
On backdrop of a tough road to IPO， those enterprises waiting for regulatory approval are exerting all their strength to raise money， causing a prevailing phenomenon of over-fundraising and excessively-high prices of shares in the primary market.
Under a regime controlled and endorsed by regulatory institutions， investors tend to underestimate the market risks， easily accepting the high prices deliberately ramped up by listed enterprises and brokers when supply falls short of demand.
Besides， the power rent-seeking also makes its way under the regime， as the authorizing system makes the IPO qualification become a scarce resource.
To solve above-mentioned problems， Chinese stock issuance market has to replace the authorizing system with the registration system， Lin said.
It needs to point out that to the implement of registration system is not to eliminate the approval process. According to Lin， the CSRC will review the completeness of information disclosure delivered by listed companies， while the bourses will check their standards for IPOs. All of them will be not allowed to put forward substantive opinions over the profit prospects and raised funds.
Besides， the registration system will bring market pricing rules. “Any IPO price is acceptable and fair as long as the trading is based on the voluntary principle and transparent infor- mation，” said Lin. “Under the principle， the government will not intervene in the P/E ratio of market prices.”
In addition， the registration system will bring in a genuine de-listing regime to the market. Though the de-listing regime has come into effect for a long time， there are few companies delisted from the market.
According to Lin， the biggest obstacle to give a full play to the delisting system in China’s securities market is the absence of registration system. With the introduction of the system， listed companies will no longer be in short supply for investors. Companied by Information Disclosure System
According to Lin， the stock issuance registration system will solve the problems of high IPO prices， high P/E ratios and overfundraising through striking a balance between supply and demand， which are the results of regulatory control over the scale and quota of the new stock issuance.
In a word， the registration system creates an environment for the balance between supply and demand. Besides， the introduction of the system will reduce the approval process and achieve de-administration to improve the stock issuance efficiency and reduce opportunities of the power rent-seeking.
Lin said that the registration system does not work alone， needing an environment supported policies and laws. One of support factors is information disclosure system.
In the future， listed companies will face a much stricter punishment for false information. With regulatory institutions withdrawing the issuance market， all investors become regulators.
If a listed company is found to have false information or violate the interests of the investors by one of them， all investors will obtain compensate after winning the suit against the company.
Under the regime， it is very costly for the companies to make information or violate the interests of the investors， thus inhibiting such behaviors.
According to financial commentator Pi Haizhou， China’s decision makers scheduled the implementation of the registration system to follow the completion of amendments to the Securities Law， reflecting their strong awareness of governing the market pursuant to the law.
However， the schedule does not mean that the completion and implementation of the revised Securities Law will pave a smooth way for the registration reform， which still calls for a series of supporting reforms and measures.
Far-reaching Influence
According to several insiders， it is evident that the reform to introduce the registration system to the stock issuance market will have a far-reaching influence both on the capital market and the macro economy.
For the capital market， the reform will lead to a fundamental change in the structure of the securities market， boosting the expansion of the ChiNext market and the new tertiary board.
According to data provided by Lin， in the United States， OTC companies reached 180，000， nearly ten times the number of main board companies. By contrast， in China， the main board companies outnumbered all others. By far， the number of new tertiary board companies has added up to over 4，000， indicating that the securities market is building a pyramid structure consisted of the main board， the new tertiary board and the OTC board.
Meanwhile， private equity markets will see a big improvement in its ability to promote entrepreneurship and innovation.
Due to the implementation of registration system and the ensuing fundamental change in the structure of the securities market， equity funds have the opportunity to directly invest the entities， which will in turn enhance the professionalism in risk investment and reduce speculative investment.
With the registration system soon coming into the issuance market， China’s capital market’s competitiveness and appeal are highly improved. Previously， many companies that failed to list on the domestic bourses are seeking IPO opportunities outside China， which is a result of current defects existing in China’s current system in some sense. The registration system will bring in an improvement in the system competitiveness.
On the macroeconomic level， with the introduction of registration system， China is expected to say goodbye to the currency era and usher in the capital era.
“If the explosive growth of China’s economy in the past twenty years was propped by the credit expansion， the next two decades’ boom will depend on a spanersified capital market，” said Lin.
Consequently， the structure of social financing will change， with a sharply decline in the credit financing’s proportion in social financing.
It is noteworthy that the registration system will not only make its way into the stock issuance market， but also come into the corporate bond market， boosting the rapid growth of the whole capital market. As a result， the corporate bond registration system and filing system for various asset-backed securities products will be available in succession.
Moreover， the equity and bond financing will reduce companies’ debt ratio， releasing the growth potential of small and medium-sized companies.
A Gradual Mode
However， as mentioned above， the implement of registration system still needs a steady environment supported policies and laws. Therefore， the reform to a registration-based capital market will be a gradual process.
“It took mainland China two decades to move from the approval system to the authoriz- ing system， and then to the registration system， while Taiwan took 23 years to achieve the registration system in a genuine sense， although it adopted the registration system and authoring system since 1983，” said Lin. It won’t take such a long time to achieve the registration system in the mainland China. However， the process of the registration system reform is till gradual， with the focus shifting from the tertiary board towards the ChiNext board and SME board and eventually towards the main board.
On the other hand， there are growing concerns that the registration system also brings socalled effect of blood drawing to the stock market. Lin pointed out that as the market is not fully opened， there is no need to worry about a sudden surfeit of new stock issuance.
“There is no way to achieve the registration system overnight. Under the current regime of discretion， the rent-seeking will also not be eliminated immediately”， said Lin. “However， in anyway， the registration system is better than authorizing system.”
The registration system may not lead to a bull market， but it will eventually bring a historical turning point to the whole capital market， according to Lin.