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China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Bloomberg News

(Bloomberg) -- China will remove limits on initial public offering pricing and first-day gains under plans for a new tech-stock exchange aimed at avoiding losing the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to overseas markets.

The proposed rules will also let unprofitable companies go public, allow dual-class voting structures and put in place stricter delisting measures, according to statements from the securities regulator and Shanghai Stock Exchange late Wednesday.

The move is part of President Xi Jinping’s efforts to improve the nation’s capital markets and make it easier for new-economy firms to go public. A dedicated tech market may also help Shanghai wrest IPOs from Hong Kong and New York, which are home to many of China’s biggest companies, such as Tencent and Alibaba, respectively.

“This new exchange is a good supplement to the existing capital market structure, and there is the possibility that if the trial goes well, some of the measures can be expanded to other trading venues,” said Cliff Sheng, Hong Kong-based partner and co-head of financial services at Oliver Wyman.

Other key points from the draft rules for the new exchange include:

Removing restrictions that cap IPO pricing at 23 times earnings Abolishing price limits for the first five days of trading, followed by a 20 percent trading band. This compares with an existing 44 percent cap on how much a stock can gain on debut, followed by a prevailing 10 percent trading bandRequiring individual investors to have a minimum 500,000 yuan ($74,500) in their securities accounts and two years experience to trade on the new exchange A two-year lockup period for sponsoring brokerages, and three years for senior management and core technology personnel

The Shanghai Stock Exchange will seek comments on the draft rules until Feb. 20.

Other plans to open up access to capital markets have stalled. While authorities in April announced the framework for Chinese depositary receipts, which would allow foreign-listed companies to issue shares in the country, none have been issued. Meanwhile, a cross-listing program between exchanges in Shanghai and London announced in October has yet to start.

The new venue will offer the likes of Tencent and Alibaba to spin off subsidiaries and issue shares in China, said Lyndon Chao, head of equities at the Asia Securities Industry & Financial Markets Association.

“I wouldn’t be surprised if there was strong persuasion exerted on these companies to come back to the motherland,” he said.

Local brokerages, which saw their share prices pummeled last year, rallied recently in part because of the prospect of more business when the tech venue starts trading. A Bloomberg gauge of China-listed securities firms was up 1.4 percent at 10:31 a.m. local time on Thursday. The index has gained 8.6 percent this year, after falling 31 percent in 2018.

(Updates with analysts’ comments.)

--With assistance from Crystal Chui.

To contact Bloomberg News staff for this story: Lucille Liu in Beijing at xliu621@bloomberg.net;Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Evelyn Yu in Shanghai at yyu263@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Jeanette Rodrigues

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