Now it's time to phase in market-oriented, law-based, internationalized oversight system to guide China's stock market growth: scholar
Published: Feb 25, 2024 07:33 PM
A view of Lujiazui financial hub in Shanghai File photo: VCG

A view of Lujiazui financial hub in Shanghai File photo: VCG

Editor's note:

On the first working day after the Spring Festival, China Securities Regulatory Commission held more than 10 back-to-back meetings with a wide range of market participants to solicit suggestions on equity market regulation, risk prevention and high-quality development. Tian Xuan, vice president of the Tsinghua University PBC School of Finance, attended the discussions. He said participants interacted enthusiastically at the panels.

Tian Xuan Photo: Courtesy of Tian Xuan

Tian Xuan Photo: Courtesy of Tian Xuan

There is a consensus among Chinese regulators over the need to ratchet up the confidence of market participants to draw further investment to the equities market.

Obviously, the new chairman of the China Securities Regulatory Commission (CSRC) and the whole team there have strengthened communications with all the market participants, while wasting no time in implementing market reforms, which has sent a positive signal in making continuous efforts to stabilize the market.

The implementation of an across-the-board registration-based IPO system has triggered the reshaping of China's capital market. By taking advantage of the window opportunity of low market valuation and low adjustment costs, authorities should conduct a series of reforms targeting the underlying systems of the capital market in line with the "market-oriented, law-based and internationalized" standard, in a bid to build the foundation for a healthy investment environment in China in the long run.

From the perspective of investor concerns, enhancing the quality of listed companies and investment returns is one major task. Meanwhile, the authorities should promote a "survival of the fittest" approach in delisting and severely punish illegal behavior including fraud, in line with both the country's Criminal Law and Securities Law.

The core of ensuring stable and healthy development of China's capital market lies in reviving broad market expectations, for which, improving market environment to make medium and long-term capital "willing to come" and "willing to stay" is of great significance.

In this regard, the CSRC has vowed to enhance institutional arrangements covering fund product registration and enriching the supply of broad-based exchange traded funds and other options, which will attract more medium and long-term capital to the A-share market.

Whole-process regulation

At the meeting chaired by the new CSRC chairman Wu Qing on February 18, it was proposed that the regulator should come up with stricter rules governing IPOs to attract technology and high-growth companies to the market, and that more efforts are needed to strengthen whole-process regulation on listed companies and adopt "survival of the fittest" approach in delisting companies.

It is a good thing that the authorities are promoting the "stocks delisting" reform, with over 50 A-share companies being ousted from market trading in 2023 after dozens were delisted in 2022.

However, there is a gap between China's capital market and more mature ones in this aspect. The regulator should continue to enrich the standards of mandatory delisting, optimize delisting procedure and the supporting mechanism, and strengthen regulation on delisting.

In the long term, efforts are needed to improve the oversight and supervision mechanism of the governance of all listed companies, for example, further optimizing the mechanism of listed companies' independent director selection and appointment, and reducing unnecessary intervention to activate external supervision function of market acquisitions.

More importantly, the authorities need to step up punishment and deterrence for violations of laws and regulations in the market.

Although the new Securities Law has significantly increased the ceiling of penalty for financial frauds, there is still room for intensified penalty considering the ultra-high yields brought by illegal activities such as financial fraud, IPO fraud and insider trading.

It does not make sense that an individual who steals or fraudulently obtains 5,000 yuan ($703.59) would be put in jail, whereas a person involved in financial fraud of 50 million yuan could move freely, unpunished. A devastating crackdown is needed to punish such severe illegal activities.

Increasing punishment on severe crimes is important for the healthy development of A-share market, as an investor will be unwilling to invest in the market if major stakeholders cash out their stock holdings. Severe punishments will better protect investor interest and strengthen smaller investors' confidence.

In terms of trading mechanism reform, I, as a deputy to the National People's Congress (NPC), made the advice to the "two sessions" last year that A-share market should implement T+0 settlement in order to make it fairer for individual investors. I will continue to make the same advice this year.

Stable economic recovery

In addition to undertaking the comprehensive and in-depth reform to the capital market, efforts are needed to raise investors' confidence in China's economic fundamentals in a bid to improve the performance of domestic capital market.

Over the past four years, China's average annual GDP growth rate was around 4 percent, reflecting a gap with potential GDP growth rate. However, the gap also means huge potential in China's economic growth in the long run.

China's potential yearly GDP growth rate remains at around 5-5.5 percent. The economy has created a miracle of nearly 10-percent annual GDP growth rate over the past 30 years' reform and opening up, coupled with some years of double-digit growth rates. According to economic norms, given that China's economy has grown to 126 trillion yuan, it is unlikely that it will continue to soar at over 8 percent or even double-digit growth.

China still boasts many advantages to maintain a medium-to-high growth rate, for example, the mass market, the largest industrial system in the world with the most complete categories as well as high quality but relatively cheaper labor force. Most important of all, the Chinese people are a great people that are diligent and always aspire to live a better life.

From the perspective of macro policies, China has sufficient policy room and tools in reserve to ensure a stable recovery.

The central government announced in October the issuance of 1 trillion yuan in additional government bonds, widening the country's 2023 budget deficit ratio to around 3.8 percent from 3 percent of its GDP. In addition, market expected that the US Federal Reserve will cut interest rates this year, leaving more room for monetary policy easing in China.

However, as the scarring effect from the pandemic persists, China's macro-policies in the medium to long run should follow the general principle proposed at the Central Economic Work Conference, namely "seeking progress while maintaining stability, promoting stability through progress, and establishing the new before abolishing the old."

The author is vice president of the Tsinghua University PBC School of Finance.