China's securities regulator Sunday said that it hopes the big banks choose to use their profits to replenish their capital base first.

"The big banks should use their profits first for refinancing," Zhu Congjiu, assistant to chairman of the China Securities Regulatory Commission (CSRC) said at a news conference in Beijing.

"If that still doesn't meet the need for refinancing, the banks could then raise capital in the market through a rights offering and issuing of subordinated and convertible corporate bonds."

The big banks have been facing pressure from the securities regulator and the China Banking Regulatory Commission to replenish their capital base after a lending spree last year. Bank of Communications (BoCom), the country's fourth largest lender by market value, is likely to raise up to 30 billion yuan through a rights offering in Hong Kong and Shanghai this year.

At yesterday's conference, Zhu also said that the securities regulator would further strengthen the market discipline mechanism for initial public offerings (IPO) in an effort to make the IPO pricing and underwriting process more market-driven.

"The regulator is not in the position to judge whether the price is high or low and it should be decided by market players, the issuers and the investors," he said, adding the IPO pricing process was very complicated and the risk was high for investors because the price would not have been tested by the market.

The regulator will also strengthen supervision of IPO underwriters and sponsors and prevent irresponsible price offerings by institutional investors during the inquiry process, Zhu said.

The securities regular no longer used the so-called window guidance to cap the price for new stocks when it considered the offering to have been priced too high after it revised the IPO pricing system and resumed IPO approval in June 2009.

The Chinese stock market has seen a wave of new shares dropping below their offer price in recent months. XD Electric Co, the country's biggest maker of electricity transmission and distribution equipment, became the first mainland company since 2006 to drop below its offer price on its trading debut in February.

To rein in high IPO valuations, the regulator also set out rules that restrict the use of the extra cash raised through the offering. The CSRC reiterated that listed companies should use the additional proceeds from their IPOs to fund their main businesses and not for high-risk investments such as securities, derivatives or venture capital.

Zhu also said at yesterday's conference that the regulator was planning to change the procedure for real estate companies to raise capital through IPOs. The CSRC is in discussions with the Ministry of Land and Resources to revise the rules.

(China Daily March 8, 2010)