IPO reform to help sustain stock market boom

China’s benchmark Shanghai stock index has soared by more than 20 percent in a month, reminding us of the catchphrase “irrational exuberance” by former Federal Reserve Board chairman, Alan Greenspan. The rising index has led to bold forecasts that a new market boom will push the index to 5,000 from less than 3,000 now.

It is hard to know whether their predictions will turn out to be the case, but indeed, there have been some crucial new changes to China’s stock market that would re-shape the market in the coming years and deserve the attention of long-term investors.

From a macroeconomic perspective, the Chinese economy is yet to step out of the current difficulties and the corporate sector is in dire need of capital to steer through the cold winter. Normally, the stock market should not have risen so strongly against the weakening economy.

Analysts said that investors are expecting more stimulus policies and therefore take a long view of the market. It may be reasonable in the short term, but in a longer run, the recent boom is possibly attributable to the reform initiatives that the authorities have recently taken to liberalize the market. Among the reforms, the morale-boosting IPO reform is especially significant.

At an executive meeting on November 19, the State Council urged to lower the threshold for small and innovative companies to get listed on the stock market by eliminating the existing requirement that companies must register continuous years of profits if they want to issue shares.

The call is expected to accelerate the reform of the IPO system from approval-based to a registration-based one. It will prove to be a landmark move because it will help inject fresh blood into the capital-thirsty corporate sector.