Introduction

Targeted government interventions aimed at altering the sectoral composition of an economy have moved from a once-taboo topic to a central pillar of development strategy globally. While advanced economies have launched high-profile initiatives such as the US CHIPS Act, emerging markets continue to expand state-led strategies. In China, the state explicitly guides development through its Five-Year Plans (FYPs). While previous literature has focused on traditional tools like fiscal subsidies and directed credit, this research examines a novel form of intervention: initial public offering (IPO) based industrial policy. The study shows that China’s IPO regulatory regime channels private capital toward favoured industries and firms aligned with national development priorities without eroding fiscal capacity. Although IPO proceeds are small relative to bank credit, their strategic weight is significant, as a listing unlocks access to seasoned equity, cheaper credit, and bond markets, while helping firms attract talent and providing exit routes for venture capital.

Institutional background and data

In China’s IPO market, the state exercises substantial control over firm access to public equity through substantive regulatory review and administrative approval. The China Securities Regulatory Commission (CSRC) retains significant discretion over IPO approvals, taking into account market conditions and strategic priorities. This approval-based regime has historically resulted in long review periods, with the average interval between application and listing exceeding 400 days. Beginning in 2019, China transitioned to a registration-based IPO system, first on the STAR Market. However, this did not eliminate substantive oversight; the CSRC explicitly requires that issuers’ business operations comply with national industrial policies. The authors constructed measures of policy favour by analysing the text of FYP documents, identifying industries designated as key strategic priorities.

Empirical results: industrial policy and IPO activity

The research find that policy-favoured status strongly predicts IPO activity in China. Between 2002 and 2022, favoured industries accounted for 64% of IPOs and 53% of IPO proceeds, despite representing only approximately 31% of industry GDP. Estimates imply that favoured industries had 287% more expected IPOs and 148% higher expected proceeds than comparable non-favoured industries. Crucially, industry valuation (Tobin’s Q) does not predict IPO activity in China, which stands in stark contrast to the United States, where Q is a strong predictor and domestic industrial policy is not. A placebo test on Chinese firms listing in the US shows the policy advantage disappears, confirming the effect is specific to the domestic regulatory environment where Beijing controls listing access.

Policy, firm fundamentals, and IPO outcomes

A framework is developed to interpret these findings, distinguishing between the government’s policy force (G) and firms’ underlying fundamentals (F). The results suggest that the extensive margin (the number of listings) is governed exclusively by G. However, both F and G jointly shape the intensive margin (proceeds per listing) and pricing. Industrial policy is found to be priced by the market; favoured firms trade at a 14.4% higher Tobin’s Q on their first trading day than comparable non-favoured issuers. This premium does not fade over time, reaching 15.4% after one year and 20.0% after three years. The market therefore treats policy alignment as a durable fundamental rather than transient sentiment. This premium is concentrated among large firms where prices most accurately reflect operating fundamentals.

How the gate works: applications and approvals

The higher IPO activity in favoured industries originates upstream in the applicant pool rather than at the approval stage. Favoured industries file approximately 414% more expected applications, yet their realised approval rate is essentially identical to that of non-favoured industries (69.5% versus 69.4%). This suggests that firms anticipate the advantages of listing in a policy-favoured sector and apply accordingly. Inside the ‘gate’, market forces are fully at work; among applicants, larger, faster-growing, and more profitable firms are those that successfully complete a listing. Thus, policy sets the width of the gate for an industry, while fundamentals determine which specific firms pass through it.

Additional evidence and discussion

The influence of IPO-based industrial policy extends beyond the main board. In the National Equities Exchange and Quotations (NEEQ) market for smaller firms, favoured industries obtain approximately 313% more expected listings. The study suggests that using IPO regulation as an industrial policy tool has several advantages. It preserves state fiscal capacity by steering private capital instead of using public funds. It also unlocks capital and talent beyond the offering, as public listing creates liquid equity for stock-based compensation and serves as collateral for bank loans. Furthermore, it may mitigate the ‘soft budget constraint’ problem by subjecting firms to ongoing disclosure requirements and market monitoring, combining state direction with decentralised market discipline.