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With China Now the Top Market for Initial Public Offerings, One Economist Fears for Ordinary Investors

China's stock market had one of its biggest crashes in 2015. Image from state-owned Xinhua.

China has overtaken Hong Kong as the top initial public offering (IPO) market. The number of listings in China's stock exchanges has surged 303 percent, with 246 companies raising up to US$18 billion in the first half of 2017.

Good news? Not according to Han Zhiguo, a renowned Chinese economist, who wrote a long post on popular social media platform Weibo slamming China Securities Regulatory Commission (CSRC) for its poor regulation of the market. Small investors, he warned, will be the ones to suffer the consequences:

【 证监会在IPO问题上已经走火入魔 】 美国股市是注册制,一年的IPO才150家;中国股市是核准制,一年的IPO却高达500家。美国股市是开放型市场,今年上半年IPO的融资额才占全球总量的23.2%而屈居世界第二;中国股市是封闭型市场,今年上半年IPO的融资额却占全球总量的28.8%而稳居世界第一。

China Securities Regulatory Commission has gone too far on IPOs: The US stock market adopts a registered system for IPOs with 150 IPO listings last year. China adopts an approval system with 500 listings in the same period. As an open market, the IPO funding from US equities account for 23.2% of the global funding in the first half of the year, the second largest, while the IPO funding from Chinese equities, a closed market, accounts for 28.8% of the global funding, climbing to number one.

The economist pointed out that in the US the stock market has a transparent monitoring system that compels companies to disclose their business information, there are harsh penalties for business fraud, it operates in a free market and that market is currently on the rise. China does not have an open and transparent monitoring system in place and the market is full of fraud. Moreover, investors’ decisions are not based on free market information but political speculation. Currently, the Chinese stock market is very fragile after a series of crashes in the past two years.

The 2015 stock crash wiped out trillions of yuan from the portfolios of small investors, who included tens of millions of ordinary workers, farmers, housewives and pensioners. At that time, price-to-earnings (PE) ratios for Chinese stocks averaged an astonishing 70, against a worldwide average of 18.5, and the value of the A-shares inside China grew to be nearly double the equivalent shares of the same companies on Hong Kong's exchange.

However, the regulators have apparently not learned their lesson. Han alerted that the IPO listing frenzy is another huge trap for small investors:

在上市公司的退市制度、财务造假的惩戒制度和投资者权益的保护制度完全缺失的情况下继续进行IPO大跃进,在市场已经垃圾成山的情况下继续扩大垃圾规模并继续制造大小非“堰塞湖”的巨大陷阱,导致市场哀鸿遍野一地鸡毛民怨沸腾。公司上市就业绩变脸,一季报亏损的新股达到34家,业绩下滑的新股比例高达25%,表明造假上市的现象已经多么严重!

The surge of IPOs without a regulatory system that punishes business fraud, de-lists the poorly performing companies and protects investors’ rights has filled the market with garbage, and expanding the garbage market would create a huge “quake lake” that eventually buries everything and crashes the market as well as the small investors. In the first quarter of 2017, 34 newly listed companies have recorded deficits in their businesses and 25% of the newly listed stocks have seen a decline in their business performance. It reflects the scale of fraud in IPOs.

The above post was shared about 9,900 times on Weibo with more than 3,400 comments.

Most of the comments echoed Han's analysis and proposal for setting up an open and transparent market monitoring system, but some were skeptical given China's current political environment. For example, two of the comments in the thread read:

想法非常好,可惜官老爷们不会同意的,不搞审核怎么拿干股? 权贵怎么赚钱? 现在股市彻底沦落为权贵们的套现提款机了

Good ideas, but it's sad officials wouldn't agree. How could they get free shares with IPOs being reviewed? How could the powerful and rich make a fortune? The stock market has degenerated into the cash machine of the powerful and rich.

说白了中国股市就是国家捞钱的工具

To be honest, the Chinese stock market has become the tool of the state to make money.

Such a poor impression of China's stock exchanges has been fed by a number of cases of business fraud and misconduct involving CSRC's management.

For example, Yabaite, a listed building material company, was exposed by Chinese state television recently for faking overseas deals and cooking its books, but the cap fine imposed by CSRC was just 600,000 yuan — compare that with its 7-billion-yuan market value.

Lv Yongxiang, the president of Yongda, a Shenzhen-listed electronic switch company, and his family members cashed out all their stocks of about 6.8 billion yuan in the bull market of 2015 and resigned from all company positions.

Feng Xiaoshu, a former member of the Public Offering Review Committee in CSRC, gained nearly 250 million yuan by investing 3 million into a company just before its listing. Feng has been under investigation since April for insider trading.

Other senior officials of the commission including Assistant Chairman Zhang Yujun and Deputy Chairman Yao Gang have been investigated amid a financial anti-graft campaign following the 2015 stock market crash.

In response to Han's criticism, four of finance newspapers — China Securities Journal, Shanghai Securities Journal, Securities Times and Securities Daily, which are designated by the CSRC for publishing its announcements and listing companies’ required disclosures — argued that CSRC should not slow down IPO listings as small- and medium-sized businesses need capital investment for further development.

Han fought back on Weibo, criticizing the papers for protecting the financial sector's interest rather than the public interest. This post was deleted soon after it appeared on highly censored Weibo. He urged his followers to copy his views and spread it via other social media outlets:

指定特殊媒体进行上市公司的信息披露,这本身就是计划经济的逻辑结果,这一陈腐的制度沿袭了20多年,既是中国股市市场化进程扭曲的表现,也是信息造假大行其道的根源。作为上市公司信息披露的载体,我们看到这四大媒体为履行信息披露的监督责任向中国证监会建言献策了吗?我们看到这四大媒体对上市公司的财务造假进行揭露了吗?我们看到这四大媒体为维护投资者利益而舍身取义了吗?一次也没有,一个也不见!

The practice of CSRC-designated media disclosing information about listing companies is the very consequence of a planned economy. Such a disclosure system has carried on for 20 years and has resulted in the distortion of the Chinese stock market and the root cost of faking business information. Have we ever seen these four media outlets criticizing CSRC's work on disclosing listed companies’ information? Have we ever seen these four media outlets exposing accounting fraud? Have we ever seen these four media outlets speaking up for small investors? Never!

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