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Shenzhen exchange tightens ChiNext rules
Published on: 2010-01-07
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SHANGHAI—In a move highlighting concerns over speculation, the Shenzhen Stock Exchange tightened the rules on how companies listing on the ChiNext start-up board may use extra funds from initial public offerings, many of which raised substantially more money than targeted.

The China Securities Regulatory Commission is also considering adjustments to the IPO-pricing mechanism in order to bring down the high valuations that have characterized recent listings and could contribute to an asset bubble.

Since the Shenzhen exchange opened ChiNext in late October to cater to the funding needs of start-up firms, most of the 36 listed companies have raised more than double the amount they originally targeted for their IPOs.

The Shenzhen exchange said Tuesday that such companies shouldn't use more than 20% of the additional IPO proceeds to supplement their working capital or to repay bank loans in a single year.

It also said the companies should gain shareholders' approval if they want to invest more than 50 million yuan ($7.3 million) or more than 20% of the additional IPO proceeds in a single project.

The exchange reiterated that companies should use the additional proceeds from their IPOs to fund their main businesses and not for high-risk investments, such as securities, derivatives or venture capital.

"There will be too much liquidity in the market if the ChiNext companies use their proceeds to invest in stocks," said Simon Wang, an analyst at Guoyuan Securities.

ChiNext IPO valuations have been high. When Guangzhou Improve Medical Instruments Co. had its share offering in December, its IPO priced at 108.7 times 2008 earnings. Guangzhou Improve raised 465 million yuan from the IPO, more than four times the 108.9 million yuan it initially sought.

The phenomenon isn't exclusive to ChiNext. Nearly all of the companies that have listed in China since late June, when a nine-month IPO moratorium ended, raised ample funds from robust share offerings that had high valuations.

A person familiar with the situation said last month that the country's securities regulator is considering ways to bring down excessively high IPO valuations and may adjust the IPO-pricing mechanism this year.

The regulator already has held several meetings with investment banks, soliciting industry opinion on the issue, the person said.

China changed its rules on initial public offerings before reopening the primary market in June, weakening its role in guiding IPO price-setting and giving market forces more influence over the process.

Previously, IPOs had typically been priced at relatively low levels because of the CSRC's intervention, leading to high volatility on trading debuts, characterized by an early surge in values and then followed by heavy profit-taking.

While the latest changes have helped tame such volatility, IPO supply is still strictly controlled by the regulator, leaving investors hungry for fresh equity and pushing IPO prices to high levels.

Analysts say the CSRC will be hard-pressed to find an effective solution so long as the regulator, and not the market, determines the level of supply.

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