Regulatory easing to bolster asset quality

Listed technology firms ‘would be the biggest beneficiaries’ of revised rules

China’s top securities regulator has relaxed financing rules for listed companies, a move that will help to broaden companies’ funding channels and address their financing difficulties amid slower economic growth, analysts said.

While the new measures are likely to drain market liquidity and cause stock prices to decline in the short term, the relaxed rules will make it easier for companies to obtain capital and improve their long-term asset quality and profitability, they said.

The China Securities Regulatory Commission announced on Friday a number of draft revisions on the refinancing rules for companies listed on the main boards in Shanghai and Shenzhen as well as the startup board ChiNext and the science and technology innovation board, which is also known as the STAR Market.

The CSRC lowered the minimum price requirement for listed companies to sell shares through private placement and shortened the lock-up period, making their share sales more attractive to investors. The regulator also scrapped the requirement of being profitable for two consecutive years and having a debt-to-asset ratio higher than 45 percent for ChiNext-listed companies to sell shares to the public.

The relaxed refinancing rules for listed companies came as China’s economy faces growing headwinds. The country’s outstanding total social financing contracted by 73 percent in October to 618.9 billion yuan ($88.4 billion) from 2.27 trillion yuan in September.

“The relaxed rules will encourage listed companies to seek financing in the stock market. From a longterm perspective, this will help improve their debt-to-asset ratio and balance sheets, which will enhance their performance and profitability,” said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.

“In the short term, the expansion of listed firms’ refinancing will diverge liquidity in the stock market but the impact is likely to be minor,” Dong said.

Chinese mainland’s stock market made a comeback on Tuesday with the benchmark Shanghai Composite Index managing to recover early losses by rising 0.7 percent to close at 2914.82 points. The index once slumped below the psychologically important level of 2900 points in intraday trading as investors worried about a liquidity drain as a result of the relaxed financing rules.

Analysts said that listed technology companies would be the biggest beneficiaries from the revised rules as the country’s regulators intend to lower their financing barriers and encourage them to tap into the capital market for additional funding.

“ChiNext-listed companies are going to benefit the most from the new rules. According to a rough estimate, the removal of the profitability requirement will make at least 125 ChiNext-listed companies eligible for refinancing and the removal of the debt-to-asset ratio requirement will make 535 of them qualified for share sales,” Ma Tingting, an analyst from Guosheng Securities, said in a research note.

The relaxed rules will also help boost the investment banking business of the securities companies, which will likely see more commission earnings from the refinancing business of listed companies, Ma said.

China Merchants Securities said that lowering the minimum price requirement will draw more investors into the market as they could buy shares at a lower price and make bigger profits, which will stimulate their enthusiasm to participate in the private placement of listed companies.

The revised rules will allow the capital market to play a better role of serving the Chinese economy and help channel more funds into the high-tech, innovative and emerging industries, it said in a research note.

The relaxed rules will encourage listed companies to seek financing in the stock market. From a long-term perspective, this will help improve their debtto-asset ratio and balance sheets, which will enhance their performance and profitability.”

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.