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China to remove price, turnover guidelines for IPOs, details investor participation

A man looks at an electronic board at a brokerage house in Shanghai April 6, 2011. REUTERS/Aly Song
A man looks at an electronic board at a brokerage house in Shanghai April 6, 2011. REUTERS/Aly Song

SHANGHAI (Reuters) - China's securities regulators issued fresh details on their plans for the resumption of initial public offerings (IPOs) early next year, eliminating pricing and turnover controls for IPOs while detailing how investor participation will be managed.

Beijing is moving to reinvigorate its stock markets to make them more responsive to market forces in order to help lessen Chinese firms' over dependence on bank loans for fundraising.

Chinese investors frequently deride the stock markets as hives of speculation, manipulation and insider trading.

The government must restore investor confidence in stocks as an asset class compared to other products like housing or wealth management products, and at the same time convince investors that corporate governance at listed Chinese firms is improving.

The China Securities Regulatory Commission (CSRC) has already said it will abandon its approval-based listing system in which government officials decided which companies would get to list, and adopt a U.S.-style registration system in which the market decides reception and pricing of IPOs.

Some 50 companies (out of a total queue of over 800 firms waiting to list) are expected to complete registration and auditing procedures in January, according to official statements, and will theoretically be able to list soon after.

In a statement posted on its website on Friday, the CSRC said it will stop involving itself in IPO pricing, inline with its commitment to let the market play a "decisive" role in pricing assets. While there was never a formally published cap on IPO pricing, in the past regulators intervened in the pricing and timing of new issues when they saw it necessary.

On Friday evening the Shanghai and Shenzhen stock exchanges published regulations on how investor subscriptions in IPOs will be managed, a key question for China's legions of retail investors who still dominate transaction volumes.

Previously IPOs have been highly distorted by massive triple-digit pops on the first day which paid off heavily for connected institutional investors, followed up by declines below the original IPO price, burning later investors.

In order to address this concern, the CSRC has already said it will force original stakeholder investors to buy back their shares should the price fall below the IPO price within two years of listing.

However, in their statements the two exchanges said they will also eliminate rules that froze trade in stocks on their first day of trade if turnover exceeded extraordinarily high thresholds, 80 percent in the case of Shanghai.

The new regulations also require participants in IPO subscriptions to have 10,000 yuan ($1,600) worth of shares in other companies already in their portfolio.

(Reporting by Pete Sweeney; Editing by Michael Perry)

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