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Commentary: Raising the bar for listings
( 2003-09-23 01:15) (China Daily)

Higher listing requirements are crucial to the advancement of the overall quality of listed companies, but they are not enough to put the development of the domestic stock market back on track.

The China Securities Regulatory Commission (CSRC) issued a circular at the weekend, which comes into effect as of next year, to raise the criterion for companies' initial public offers (IPOs).

According to the new regulation, the securities authority will be more strict with the companies looking to list on the market in terms of their accounting methods, independence and the amount of money they want to raise through the IPOs.

This new regulatory effort is definitely a needed boost to investors' confidence on the domestic stock market, which has been bogged in a quagmire for more than two years.

Since the market turned bearish in mid-2001, a combination of outrageous corporate frauds, exposed one after another, and lingering threats to sell once non-tradable State shares at unfairly high prices has chilled most investors' hopes.

Nevertheless, despite the stock market's hemorrhaging, a number of listed companies still put every iron in the fire to pool funds from the market.

The poor performance of newly listed companies, which are supposed to outrun the market at least in their first year, is alarming.

It is reported that the profits of 41 newly listed companies at the end of August plummeted by 97 per cent over the same period last year.

Equally, if not more, worrying is that the transfer of non-tradable State shares to non-State and foreign enterprises, usually at prices slightly above net asset value, have gained extra momentum in recent months.

In the absence of any substantial official attempt to take suggestions from the market into consideration in addressing the price difference between non-tradable State shares and tradable shares, the trend indicates that the price gap will remain and may only finally be narrowed against the interest of the majority of investors.

Under such circumstances, vast numbers of shareholders are justified to ask hard questions of the securities authority, particularly about how it will fulfill its commitment to protecting investors' interests.

After issuing a series of regulations to highlight securities brokerage firms' accountability in underwriting new shares and standardizing listed companies' capital operations and guarantees, the CSRC is now touching on one of the root causes that crippled the domestic stock market.

In this country, most parent or holding companies still regard listed companies as their golden geese.

They are inclined to beautify the IPO candidate's accounting report for listing approval because they can not only raise a handsome sum of money through an IPO, but also profit on related transactions with listed companies.

The new CSRC regulation has properly dealt with these problems.

First, it requests no major changes should take place in the candidate company's business, management and actual controller in the past three years to prevent accounting fraud.

Second, to ensure the IPO company's independence in the market, it quantitatively stipulated the ceiling of related transactions with holding companies to plug loopholes that the later could use to divert funds from listed companies.

Finally, the regulation has, for the first time, limited the amount of IPO to curb the unhealthy tendency of unchecked financing and the inefficient use of funds.

Clearly, the securities authority has heard the vast protests from investors about the drainage of capital from the market.

The regulation also gives a long-anticipated signal to the market that the authority will take tough measures to improve the quality of listed companies.

However, while applauding the new regulatory effort, it is necessary to remind the commission of the urgency to tackle other problems stunting the sound growth of the country's fledging stock market.

The sale of State shares is inevitable as it is in line with the country's strategy to withdraw State-owned enterprises from competitive sectors.

Yet, given the sensitive nature of the issue, it is important that sufficient time is given to allow the government to listen carefully to the views expressed and for the public to be fully informed.

Only when such underlying problems are resolved can the domestic stock market assume its role as a barometer of the Chinese economy as well a platform for optimizing the allocation of resources.

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