Funds face challenges from new China IPO rules

Companies will soon be allowed to make initial public offerings in China, after the country's securities regulator issued draft guidelines for share subscription and pricing. But the new rules may harm funds which rely on new share subscription.

The China Securities Regulatory Commission (CSRC) on May 22 issued its Guiding Opinion Concerning Further Reform and Improvement of the System for Offering of New Shares (Draft for Comments) (关于进一步改革和完善新股发行体制的指导意见 (征求意见稿)) for public comment until June 5. One significant change in the rules says that institutional investors must use either the online or offline subscription system, but not both. The regulator is also imposing a cap on online subscriptions: the issuer and underwriter must set a subscription quota for a single online share subscription account not exceeding 0.1% of the total shares accessible through the online system.

“As some of the fund products benefit from subscribing for new shares, after the enforcement of the guidelines, performance of such fund products in the future would face challenges due to the subscription quota of the online subscription,” said Hubert Tse, managing director and head of international business at Yuan Tai PRC Attorneys in Shanghai.