GUIDELINES TO RAISE QUALITY OF TRADING
State Council document vows stronger market supervision, better protection for investors and improvement in standards of listed companies
China has issued an unprecedented set of policy guidelines to push for transparency, security, risk-management and vibrancy in the country’s US$9 trillion stock market, sketching out a view of what the world’s second-largest capital market could look like by the middle of the century as Beijing solidifies its goal of becoming a financial superpower.
A document published by the nation’s cabinet yesterday promises to promote the “high-quality” development of China’s capital market by strengthening supervision and guarding against risks.
It comes just two months after former Shanghai vice-mayor Wu Qing, dubbed the “broker butcher” for his tough approach to tackling market malpractice, was brought in to head the country’s securities regulator.
The document released by the State Council after the markets closed last night sets out nine guidelines that formulate a framework to develop the market, demanding a better mechanism for protecting investors’ interests and an improvement in the quality of listed companies over the next five years.
By 2035, the market should have achieved “a reasonable structure of investing and fundraising” in which listed companies had demonstrated a significant improvement in quality, it said.
There must also be demonstrable progress in cultivating first-class investment banks and financial institutions.
“This will boost investors’ sentiment to some extent,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai. “But it’s guidelines, and what we’ll need to see going forward is how the securities regulator will implement these changes.
“From an investor’s perspective, restricting the scale of fundraising, namely new share sales, and ramping up the delisting of unqualified listed companies is what we want to see most.”
Shortly after the State Council issued the guidelines, the China Securities Regulatory Commission (CSRC) unveiled new delisting rules that will see companies guilty of accounting frauds and inadequate internal controls kicked out. It also sought public feedback on rules governing high-frequency trading.
The push highlights the fact that state support for the stock market has entered a new stage, with some of the supportive measures proposed by the CSRC now being written into the State Council’s documents. It is rare for the cabinet to issue documents directly targeting the stock market, with the two previous such occasions in 2004 and 2014 both preceding a raging bull market.
It “reflects the great importance the Party and the State Council attach to the capital market and their high expectations,” said the CSRC’s Wu in an interview with Xinhua News Agency.
“Pushing the high-quality development of the capital market will be conducive to developing the new productive force, enriching financial products and services and creating opportunities to increase wealth for residents.”
At a high-level meeting in January, President Xi Jinping elaborated on his goal of making China a “financial superpower” – with a financing model that was “distinct from Western models”, as it focused on financing support for the real economy.
He emphasised the importance of preventing systemic financial risk, and called on financial regulators and industry authorities to clarify their responsibilities and strengthen cooperation.
“Financial regulation must have teeth,” Xi was quoted by state media outlet Xinhua as saying.
Yesterday’s guidelines complement four documents issued last month by the CSRC pledging to crack down on fraudulent listings, raise the threshold for new listings, and require publicly traded companies to return more to investors through buy-backs and dividend payouts.
According to the latest document, companies will be required to disclose their dividend payout policies when they list, and stricter rules on information disclosure and corporate governance will be implemented to restrict stake reductions by major shareholders and push listed companies to boost investment value.
The regulators would also work out standards for abnormal trading and manipulation, issue rules to strengthen the supervision of high-frequency transactions, and mete out severe punishments in cases of malicious manipulation and short-selling, it said.
The document called for the fast-track approval of exchangetraded funds, the expansion of index-based funds and a higher proportion of stock-focused funds in the mutual fund industry.
Chinese stocks have recently stabilised somewhat, with the CSI 300 Index rebounding about 9 per cent from a February low, after a flurry of state support measures ranging from direct buying by the nation’s sovereign wealth fund to restrictions on quantitative investments and short selling.
The State Council guidelines may add some impetus as this run-up shows some signs of fizzling out, with investors now shifting their focus to the economy and corporate earnings.
The CSI 300 Index slid 0.8 per cent yesterday and the Hang Seng Index tumbled 2.2 per cent for the biggest loss in five weeks after official data showed China’s exports contracted by more than expected in March. Earlier data also indicated that consumer prices rose at a slower pace last month, pointing to sluggish domestic demand.
The State Council published two similar sets of guidelines to promote the healthy and stable development of the stock market, in 2004 and 2014, when the benchmark indices had similarly fallen to multi-year lows before embarking on bull runs. The CSI 300 Index surged more than fivefold within the space of two years through October 2007 and more than doubled in the 12 months to June 2015.