Paternalistic regulation won’t benefit A-share market

By Li Qiaoyi Source:Global Times Published: 2018/6/4 22:23:40

Illustration: Luo Xuan/GT

Since its inception nearly 28 years ago, the Chinese mainland's stock market has passed a milestone on its journey to the global stage, with a selection of mainland stocks officially joining MSCI's widely tracked emerging markets benchmark at the close of trading on Thursday.

There is a clear consensus that the index inclusion will help channel overseas institutional investors into the A-share market and reduce volatility in the market, where herds of retail investors chase quick gains.

Nonetheless, the inclusion that initially inducted 226 large-cap stocks into the New York-based index compiler's benchmark will by no means catapult A shares, which include more than 3,000 stocks, into the major leagues of global investment overnight.

Paternalistic, mercurial regulation persists in the mainland stock market and keeps the market's development level low. In turn, retail investors don't become more sophisticated. The regulatory regime also weighs on foreign investment decisions.

Mainland shares' journey to the MSCI inclusion has been bumpy, with arbitrary stock trading suspensions acting as a major roadblock. To address investor discontent about listed companies' long, arbitrary trading suspensions, the securities regulator and the bourses in Shanghai and Shenzhen have over the past two years tightened rules on voluntary trading suspensions.

One major move came in the form of rules announced by the exchanges in late May 2016, which set time limits on suspensions - three months for companies undertaking a major asset restructuring and one month for those raising money through private placements.

These moves placated foreign investors, paving the way for the MSCI  inclusion. But long, unreasonable trading halts persist.

In a sign of lingering concern, some shares were dropped from the list of 234 index constituents announced in mid-May in MSCI's quarterly review, due to trading suspensions.

This move apparently indicated a discrepancy between trading suspension rules applied in the A-share market and those that MSCI adopts. Any A-share company halting trade for more than 50 days will be removed from the MSCI Emerging Markets Index, and it won't be eligible to return to the index for a further 12 months.

The discrepancy also revealed that the crackdown on trading halts has not been fully effective. More worryingly, it indicated a paternalistic mindset that relies on administrative measures to rein in the market rather than getting to the root of problems.

In the case of voluntary trading halts, unjustified or excessively lengthy suspensions of some shares seem to indicate that some companies are immune to the rules - a sign of discretionary regulatory efforts. More strikingly, there are growing signs that forced trading halts are getting more common. Mainland stocks that have soared by the 10 percent daily limit for a few consecutive days or have risen 20 percent in three trading days are likely to announce suspensions.

The summer 2015 stock market slump was fueled by margin lending, which enabled investors to borrow from brokerages to buy shares. That led to a persistent belief that wild rallies could signal sharp corrections.

Special trading halts, which have over the past month been frequently issued, are understandably aimed at preventing speculative rallies and the risks of subsequent plunges.

But these suspensions have proven to be issued in a rather discretionary and mercurial manner. Investors have been left to search for clues as to the circumstances under which a special trading halt will be activated.

The rules were previously understood to restrict Shanghai-listed stocks to a rally of the 10 percent daily limit for four days in a row, and Shenzhen-listed shares to a maximum of six days.

The rules were recently tweaked, with a Shenzhen-listed stock forced to halt trading after rising by the daily limit for no more than four trading days in a row.

Retail investors seem baffled by such discretionary decisions, which make it hard for them to understand the A-share market rules. That's a drawback, even if such efforts are taken to stabilize the market at large.

Protecting retail investors in this way won't help them learn to accept market-oriented mechanisms and the rule of law. And it certainly won't convince foreign investors of China's broad-based efforts to let the market play a decisive role. 

Regulators urgently need to improve the A-share market's legal and supervisory framework.

The author is a reporter with the Global Times.

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