Evolution of Pricing Efficiency for Chinese IPOs with Regulatory Reforms

We review the evolution of Chinese IPO markets with a special focus on the ChiNext board that is mainly for the “entrepreneurial” type of ventures in China, such as hi-tech and fast-growing firms to raise capital. Since its inception in 2009, ChiNext IPOs are priced by the “Chinese-style” bookbuilding mechanism with unique online and offline share allocations. The board has gone through two regulatory regimes, from an approval system to a registration one. In addition, there are numerous sets of listing day trading restrictions, from trading curbs and suspensions to hard return caps, and finally to no restrictions at all over the first 5 trading days. The evaluation aims to increase IPO market efficiency. From a mainly value-driven pricing under an approval regime to a largely demand-driven pricing under a registration regime, ChiNext has been evolving from an immature IPO market with erratic trading and manipulations towards a more transparent, efficient, market-oriented, and investor-protecting IPO market. Reviewing the history of ChiNext board and related lessons sheds valuable insights for other emerging IPO markets worldwide that attempt to duplicate the success of NASDAQ board in the US.