China will temporarily suspend initial public offerings until it formulates new rules to price IPOs.

The China Securities Regulatory Commission released a draft of the new IPO pricing regulation on its website late on Monday, introducing more market-driven practices and transparency in the flotation process.

It said that to ensure fairness, no additional IPOs would be allowed before the new regulation was formally enacted. But that would not affect additional share issues.

At the moment, the document is still in the consultation period. It is estimated that it might take at least several weeks to enact the regulation after necessary amendments.

The news triggered a rally of the bourses yesterday. The Shanghai composite index rose 1.72 per cent to close at 1,342.06, reversing its downward track over past sessions.

The temporary suspension of IPOs does have a generally enhancing effect on the market, since it relieves pressure on market expansion in the near term, said Dong Chen, a China Securities Co analyst.

But it is only a short-term impact, with new share issues resuming once the IPO rule is finalized and a number of enterprises still lined up to become listed.

The reform of the IPO pricing system itself is more meaningful to investors, Dong said.

According to the draft, companies launching IPOs will have to make inquiries regarding share prices among institutional investors like fund managers, qualified foreign institutional investors and securities firms.

Stock issuers and sponsors should also provide relevant reports on the evaluation of the prices to these institutions.

The final IPO price ranges will be decided on the basis of the inquiries.

In the past, such price inquiries were not required. And often times new share issues were over-priced, while secondary market investors did not have much influence to change prices.

(China Daily September 1, 2004)