China to tweak IPO system to curb market volatility

China will from Saturday drop its requirement for initial public offering (IPO) subscriptions to be paid in advance, regulators said on Thursday, in a move to curb stock market volatility. Under the current IPO regime, the China Securities Regulatory Commission (CSRC) decides which companies offer stocks and when, as well as setting guidelines for the number of shares and their price - all of which are determined by the market in other countries. 

The rules systematically undervalue companies coming to the market, offering near-guaranteed profits to those lucky enough to secure new shares. As a result, the advance payment requirement heightens stock market volatility as investors sell existing holdings to raise funds for applications, drying up liquidity. IPOs were suspended in July as part of moves to end a rout that wiped trillions from Chinese market capitalisations, but resumed last month. The change “manifests a market-oriented reform direction”, the CSRC said in a statement.