What is the way out for China's A-share market?

By Yi Xianrong Source:Globaltimes.cn Published: 2019/2/3 13:04:29

The biggest news for the mainland stock market before the Chinese New Year is probably that Yi Huiman was appointed as the new chairman of the China Securities Regulatory Commission (CSRC). It is widely hoped that the new head of China's securities regulator could lead the country's stock market onto a healthy development path and to play its role in supporting the domestic financing needs.

It can be seen that Liu Shiyu, who took over the leadership of CSRC on February 20, 2016 and left the position on January 26, was not the first that failed to serve the full tenure in the post. During his three-year tenure, Liu indeed did a lot of work in market development, especially in the development of some basic market systems.

However, in October 2018, the benchmark Shanghai Composite Index plunged from a level above 2,800 to about 2,450 within three weeks. Statistics also showed that the A-share markets delivered sluggish performance during Liu's tenure, which saw the Shanghai Composite Index and the Shenzhen Component Index lose 9 percent and 25 percent, respectively. Some market observers believe that the bad market performance is an important reason behind Liu's departure. Yet, a qualified CSRC chairman needs to care about more than just stock index performance and market trends.

In fact, decades of development experience in China's stock markets showed that copying the system of modern Western securities' markets would potentially put the whole market on shaky foundations. When the mainland securities market planned to launch the ChiNext board, a NASDAQ-style board for domestic start-ups, I pointed out that if there was no institutional preparation and no impersonal credit system established in the Chinese market, then it would be impossible to copy the successful experience of the NASDAQ market in China. It is true that Liu made a lot of efforts in building up basic systems for the mainland stock market during his tenure, but the establishment of the impersonal credit system requires more than just the efforts of the securities regulator and it could not be accomplished overnight.

When it comes to how China's stock market should develop, a serious reflection is essential with regard to questions, such as: What are the core issues facing the Chinese stock market? Where should we get started to address them? Why can't the market experience a smooth and prosperous development? If we fail to seriously reflect on the stock market to identify the core problems, simply playing by the book can hardly ensure the mainland stock market will achieve a prosperous development. That is because the development of a market is not based on personal will, but rather on the rules and logic of the market itself.

Yi, the new CSRC chairman, is known to be highly experienced in the banking industry, and has profound insight in banking and financial development. However, Chinese state-owned banks, no matter how big they are, are generally under the direct support of government resources and policies. In recent years, Chinese banks have always been one of the most profitable sectors. But it is not easy to do the regulatory job of the Chinese stock market based on the experience in managing state-owned banks, considering the fundamental differences between the two markets and the two industries.

In this sense, Yi may also be expected to face a series of problems, including the launch of the innovative technology board in Shanghai, the pilot of the registration-based listing system, the enhanced opening-up of capital markets to overseas investors, and the risk prevention for stock pledges, bond defaults and private equity funds. In particular, for Yi, who has a good understanding of commercial banks and financial markets, but limited regulatory experience, the challenge and pressure of the new position will not be small. Nevertheless, fundamentally speaking, the core issue of China's securities market remains whether it can embark on a new marketization path, with less administrative intervention. 

The author is a professor with the School of Economics at Qingdao University. bizopinion@globaltimes.com.cn


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