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China approved plans to reform ChiNext in Shenzhen and pilot a registration-based IPO system on the startup board that has defied a global stock gloom this year, setting the stage for the A-share market to play a bigger part in revamping a coronavirus-hit economy. 

The plans were approved during a meeting with the Central Commission for Comprehensively Deepening Reform on Monday.

The push for reforms and the pilot board represents an important arrangement to deepen capital market reform and improve market functions, according to the meeting, Xinhua reported. 

Eyeing the creation of a regulated, transparent, open, vibrant, and resilient equity market, the nation will push for wide-ranging reforms including IPO, information disclosure, trading, and delisting, the meeting said. 

The China Securities Regulatory Commission (CSRC), the nation's securities regulator, is also accepting public opinions through May 27 on a set of draft rules that institute the framework for the registration-based IPO system for Shenzhen's NASDAQ-style board. 

The board that turns 11 this year has been best performer thus far despite a COVID-19 meltdown globally, with the ChiNext index up 12.27 percent this year as of market close on Monday.

The country's top legislator approved a landmark revision to the Securities Law in late 2019. The revised law that sets the legal groundwork for registration-based IPO reform went into effect on March 1. 

Prior to that, Shanghai kickstarted its NASDAQ-style board, known as the STAR Market last July, which pioneered the pilot of a market-based registration regime for new listings. 

In a statement posted on CSRC's website, the securities regulator said that companies with special ownership structures that meet certain requirements would be allowed to float on the ChiNext board. 

This means the variable interest entity (VIE) structure prevalent among Chinese internet firms will no longer serve as a barrier for listings on the Shenzhen board. Investors in VIEs can have a controlling interest despite not having a majority of voting rights. 

Detailed rules are being considered by the stock exchange regarding special voting rights, according to the CSRC.

The regulator also addressed the issue with the Shenzhen board as Monday's announcement seems to be blurring the boundary between the ChiNext board and the STAR Market. 

The two markets are both tasked with underpinning the innovative development of the capital markets and the quality development of the economy, per the CSRC statement. 

However, the Shanghai market is designed for tech and innovation firms that focus on frontier technologies and aim for breakthroughs in core technologies, while the Shenzhen board mainly serves growth firms and startups. The STAR Market allows new listings by not-yet-profitable firms while the ChiNext board is home to profitable businesses in the initial stage of reform, the statement said.

Li Chao, vice chairman of CSRC, told a media briefing that the current IPO requirement for no uncovered losses at the end of the recently completed fiscal period will be revoked, Chinese financial site caixin.com reported on Monday.

Firms that have yet to turn a profit will be subject to a one-year transition period, meaning they can file for an IPO on the Shenzhen board one year after the reforms are implemented.

Global Times