(Yicai Global) Jan. 14 -- China should cancel its 44 percent limit up on initial public offering debuts and open the market further to spur stock trading, according to the vice chairman of the China Securities Regulatory Commission.

There is little trading going on during the first few days after companies go public, and with such a lack of volume the price is merely an "illusion," Fang Xinghai told Yicai Global at the China Capital Market Forum in Beijing on Jan. 12. To make pricing more appropriate, China will employ more long-short trading tools so buyers of futures and stocks can have more options, he added, saying the regulator has "very few tools available now."

"A general approach to making IPO pricing more reasonable is to lift the 23 percent price-earnings ratio cap to achieve market-based issue prices, which is quite difficult," added a senior investment banker. He also believes scrapping up- and down limits on IPO debut trading would help the market set prices that are more suitable.

Fang also wants to see more trades taking place, and the CSRC plans to take action to increase trading volume, he said. "For a while, China's capital market was very active in terms of trading in the stock and futures market. So much so that the CSRC brought in policies to restrict trading," he added, saying the opposite is true now.

"We're not worried about the markets being too active to control, we want to revitalize trading," Fang said. One of the ways he hopes to do that is via stock index futures -- he believes measures made previously to ease restrictions were insufficient.

One of the goals laid out by the Central Economic Work Conference, an annual closed-door meeting where top officials determine China's national agenda, was to "create a standard, transparent, open, dynamic and resilient capital market," Fang said. A new stage of opening up will see tremendous changes and be a big stride forward for businesses and the stock, bond and futures market, he believes.

"It's a brand new goal, planning to achieve a dynamic and resilient market," Fang said, adding that there are three factors that make such a market: engaged investors, active trading and reasonable prices.

Enticing Foreign Funds

Fang oversees international business at the CSRC, and plans to "do [his] utmost to continue to introduce a great many international medium- and long-term funds into China's stock and futures markets."

This is key to getting fully engaged market players, he said. Foreign ownership in a joint venture can now be as high as 51 percent, and that will rise to 100 percent in three years, he continued. Some CNY300 billion (USD44.4 billion) foreign money made its way into mainland stock markets last year, and that is forecast to double this year based on the Chinese shares increased weight in the MSCI, FTSE and Dow Jones indexes.

Chinese investors check their gains from investments every year and do not want to buy while the market is down, but foreigners think more long term -- like three to five years or even longer, Fang said, adding that investors from overseas are optimistic about the Chinese economy in the long run and see the market there are as underpriced, so are keen to buy in.

The capital market reform will be a key part of China's financial reform, so equity investments that absorb more risk are necessary to bring about high-quality innovation and development to further economic growth, he continued.

Officials at the Central Economic Work Conference want to see a science and technology innovation board come to the Shanghai Stock Exchange as soon as possible, Fang said, adding that the CSRC is liaising with the bourse to sort out a registration system for the new board as soon as possible.

Editor: James Boynton