A third regulatory official involved in China’s initial public offerings has been arrested, throwing the highly politicised system for IPOs under further scrutiny.
The government’s tight grip over IPOs has long created incentives for corruption, as the fate of stock sales worth billions of dollars rests with low-paid civil servants. More than 600 companies are waiting for permission to debut on the Shanghai or Shenzhen stock exchanges, and wait times of more than a year are common.
At least three officials involved in IPO approvals have been detained this year. Financial website Caixin reported late on Wednesday that Xi Longsheng, chief inspection officer at the China Securities Regulatory Commission, had been escorted from his office by investigators in recent days. He had previously served as section chief in the agency’s issuance department.
“There are so many good reasons why companies and shareholders would bribe to make sure a listing went through. That seems to have been accepted practice with minimal clampdown,” said Fraser Howie, co-author of two books on China’s financial system.
“That will continue as long as you have this approval process. This is a clear example where the process is ultimately leading to the malfeasance.”
While at the issuance department, Mr Xi reported to Yao Gang, the department’s director, who was also an agency vice-chairman. Mr Yao was arrested last Friday, becoming the most senior financial regulatory official to be targeted in the anti-corruption probe. Another official from the issuance department, section chief Li Zhiling, was arrested in June.
The securities regulator this month ended a freeze on IPO approvals implemented during the Chinese stock market’s dramatic tumble in July. The agency also said it would make changes to the approval process to give investors a greater say in which companies can sell shares, when and at what price.
Chinese premier Li Keqiang said last year that China would move towards a registration system for IPOs while phasing out the approval requirement. The CSRC said a year ago that draft rules for the new system were already complete, but the new system has not been implemented.
In addition to relaxing the CSRC’s grip on the flow of new IPOs, the new system is also expected to relax restrictions on pricing.
Currently, the agency imposes an unofficial cap on new share prices at 22 times historic earnings, sharply below current trading levels. That guarantees first-day pops for IPO shares, delivering risk-free profits to investors able to win allocations.
New shares sold in the first half of 2015 rose by an average of 2.5 times in the first 20 trading days after IPO, according to Credit Suisse.
Liu Xiaodan, president of Huatai United Securities, said in a speech that “distorting” prices in order to deliver profits to IPO investors was “like giving opium to a crying baby. There’s a lot of harm and hardly any benefit.”
The CSRC did not respond to an email seeking comment. Mr Xi could not be reached for comment.
Additional reporting by Ma Nan
华泰联合证券(Huatai United Securities)总裁刘晓丹在一次演讲中表示，以“扭曲价格”的方式让利给IPO投资者，好比“给哭闹的小孩吃鸦片，有百害而无一利”。