Reform of the Capital Market to Support Transformation of the Pattern of Economic Development

From: English Edition of Qiushi Journal Updated: 2011-09-20 11:15
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 The capital market, as an important platform for ensuring optimal allocation of resources that can effectively promote the formation, accumulation and flow of capital, is of great significance for efforts to accelerate transformation of the pattern of economic development and promote long-term, steady and rapid economic development. We must take advantage of the important strategic opportunities presented by economic transformation and industrial restructuring to deepen reform of the capital market to support efforts to transform the pattern of economic development. 

 I. The ability of the capital market to serve the national economy is growing

 China has been working especially hard in recent years to develop a fundamental market system, resolutely working to carry out reforms and make innovations in the capital market, strengthening efforts to ensure regulation in accordance with the law and actively and carefully working to resolve deep-rooted issues and structural problems. These efforts have produced major breakthroughs in enlarging the scale of the market, building institutions and system structures, and safeguarding order, increasing the ability of the capital market and improving conditions in the capital market to better support the national economy.

  August 20, 2008, investors follow share prices at a stock exchange business hall in Shanghai. The Shanghai Stock Exchange was launched to the strike of a gong at Shanghai’s Astor House Hotel on December 19, 1990. At the time, the Shanghai Stock Exchange had just 8 listed companies, 25 members, 30,000 investors, and a market value of only 1.234 billion yuan. Since then, the Shanghai Stock Exchange has witnessed the development of China’s capital market over the past 20 years. As of November 30, 2010, China had 2,026 listed companies, 2,112 listed stocks, and a market value of 26.43 trillion yuan, making it the third largest stock market in the world. Currently, a total of 151 million A-share securities accounts have been opened with the Shanghai and Shenzhen Stock Exchanges . / Photo by Xinhua

  One, we deepened reform of the system for issuing new shares to support development of the real economy. We carried out reform of the system in a step-by-step manner by stages, gradually improving reform measures, to make the system more responsive to market forces. The focus of reforms was on improving the mechanism of restraints for book-building, subscriptions and placement of new shares to help ensure that issuers, investors and underwriters fulfill all their obligations. Since the institution of this reform, we have gradually introduced a mechanism to restrain setting of the price of new shares by market forces and the mechanism has basically been meeting expectations. Preliminary statistics indicate that a total of 877.38 billion yuan was raised through domestic financing in the first 11 months of 2010, up 90.3% from the figure for the whole year of 2009, with the number of IPOs putting China in the front ranks of the world. Deepening reform to develop a new share issuance system has expanded market capacity and effectively raised the proportion of direct financing. We increased support for small and medium-sized enterprises by increasing financing available to them. As a result, of the 260 enterprises listed in the first three quarters of 2010, 243 or 93% were listed on the Small and Medium-sized Enterprise (SME) board and Growth Enterprise Market (GEM). 

 Two, we improved merger, acquisition and restructuring functions to promote industrial restructuring and upgrading. We strongly promoted mergers, acquisitions and restructuring that complied with national industrial policy. Specific measures were formulated to encourage listed companies to explore innovative ways of engaging in mergers, acquisitions and restructuring, to promote the full listing of enterprises that went public following partial corporate restructuring, and to regulate the practice of back-door listing. The capital market has become the main vehicle for corporate restructuring and industrial consolidation following innovations and standardization of institutions. The total value of merger, acquisition and restructuring transactions of listed companies totaled 806.2 billion yuan for the period from 2008 to the end of November 2010. 

 Three, we guided and standardized the development of the GEM to support the national strategy for independent innovation. The GEM has been stable overall since it was set up in October 2009 and participation is active and orderly. As of the end of November 2010, 141 companies were listed on the GEM, with a total market capitalization of 710.396 billion yuan. The development of the GEM meets the internal requirements for accelerating transformation of the pattern of economic development and has accelerated application of scientific and technological advances in actual production, playing an important role in implementing the national strategy for independent innovation, promoting closer ties between industry and financial institutions and driving innovation and businesses startups.

 Four, we gradually introduced two new items: stock index futures plus margin trading and securities lending to improve the operation mechanism of the market. Trading in these items is currently brisk and operations are overall stable. The steady introduction of these two items helped improve the operation mechanism of the market. They changed the one-way mode of operation that China’s securities market has employed on a long-term basis and provided the market with additional risk management tools. The stock index futures complement the commodities futures, formerly the only such product already available in China. As of the end of November 2010, trading volume in margin trading and securities lending reached 90.126 billion yuan and the total turnover of stock index futures was accomplished with 41.2842 million contracts and a total trading volume amounting to 36.67 trillion yuan.

  Five, we maintained stability in the financial sector, meeting the goal of macroeconomic regulation. We diligently implemented the macroeconomic regulatory policies of the central government and made good use of the function of capital markets in optimizing resource allocation to ensure sound development of the financial sector and the economy as a whole. We temporarily suspended granting approval to the reorganization applications of companies engaged in real estate development as part of government regulatory policy on the real estate industry. In addition, we have strictly limited the ability of industries and enterprises with surplus production capacity to obtain financing to prevent bloated expansion. The public listing of the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications improved the overall quality of China’s financial industry as well as strengthened its resistance to risk.

  II. Strategic tasks facing China’s capital market

  China’s capital market has become an important platform for promoting strategic restructuring of the economy and accelerating transformation of the pattern of economic development. We need to accurately assess the strategic tasks confronting China’s capital market in order to ensure long-term, stable and rapid economic development.

  One, we need to significantly expand direct financing to ensure continued long-term, stable and rapid economic development. Direct financing in the capital market has developed rapidly in recent years, but the overall level of direct financing is still very low, with bank loans supplying a high proportion of corporate financing. This financing structure, from a macroeconomic perspective, has resulted in a concentration of potential risk in the banking sector, and from a microeconomic perspective, makes it difficult for enterprises to maintain a good asset to liability ratio, thereby limiting the ability of enterprises to develop to a certain degree as well as threatening the drive and vitality of economic development. We must expand the scope of the capital market in order to resolve these issues. In addition to developing equity financing, we should also place emphasis on debt financing, thereby increasing the proportion of direct financing.

  Two, we need to improve the layered structure of the capital market to accelerate transformation of the pattern of economic development. Structural shifts in the world’s economy have accelerated in the wake of the international financial crisis. The structure of the Chinese economy, dominated by the traditional processing and manufacturing industry, is plagued by resource and environmental issues and hardly sustainable. Using the function of capital market in resource accumulation and allocation will allow the rapid accumulation of substantial funds and the concentration of individual savings into long-term capital to provide financing channels for transforming the pattern of economic development and carrying out economic restructuring. In addition, it can help redistribute existing resources and direct investment to areas where investment is encouraged by national industrial policies to accelerate transformation of the pattern of economic development and economic restructuring. 

  Three, we need to develop multiple channels for financial assets management to promote growth in personal incomes and develop social security. Between 1990 and 2009, the per capita disposable income for urban and rural residents grew 10-fold. There are now 130 million active personal accounts and 600,000 active institutional accounts in China’s stock market. China’s stock market has evolved into an important platform for individual and institutional wealth management. With the establishment and gradual improvement of basic old-age insurance, enterprise annuities, social security funds and other forms of welfare, a more diverse range of asset management channels is needed from the capital market to ensure the effective management of public wealth and the sound development of social security.

  Four, we need to constantly improve the performance of the capital market to better serve the real economy. The capital market provides the institutions and mechanisms for optimizing resource allocation, promoting innovation, encouraging business startups and making good companies thrive and bad companies fail. The capital market is governed by strict and transparent rules and regulations on standards for business license, information disclosure, mergers and acquisitions, and delisting of companies. These help to ensure that the capital market can satisfy the diversified needs of the economy and society for investment and financing. We need to raise the efficiency of the pricing mechanism of the capital market to direct more resources to industries that have a competitive edge and development potential, thereby effectively making the capital market more resilient and improving its performance.

  III. Carrying out reform and innovations in the capital market to better support strategic economic restructuring

  During the Twelfth Five-Year Plan period, the China Securities Regulatory Commission (CSRC) will continue improving basic mechanisms, focusing on fostering and improving market mechanisms, gradually developing a multi-layer market system and expanding the scope of the capital market to better support and guarantee funding for strategic economic restructuring. 

  One, we will greatly develop the bond market to increase the proportion of direct financing. The share of the bond market is smaller than that of the stock market in China’s direct financing system, a situation that threatens the stable and healthy development of the financial market. In order to accelerate development of the bond market, we need to steadily improve bond issues, the clearing and settlement system, the credit rating system and the regulatory system, improve the structure of stock exchange investors and develop a trading mechanism that promotes the development and meets the requirements of the bond market. In addition, we need to truly streamline approval procedures to expand the scale of corporate bonds. We will improve the connections between different bond markets and strengthen the role of bond markets in increasing the proportion of direct financing.

  Two, we will develop an over-the-counter market as part of the development of a multi-layer market system. We will continue to vigorously develop the main board and the SME board to help concentrate high quality resources in listed companies. We will improve the system for approval to issue shares and regulatory framework of the GEM board, work out a refinancing mechanism for companies listed on the GEM to make the GEM a basic platform for the development of strategically important emerging industries. We will set up a mechanism for transfers among different boards in the securities market and develop a mechanism for delisting companies on the GEM board to ensure the survival of the fittest.

  Three, we will steadily develop the futures market in order to strengthen the role of the market in pricing and risk management. We will steadily develop the commodities futures market, progressively introduce futures trading in important and major commodities, and gradually develop a rational and standardized mechanism for the introduction of new futures contracts. We will give full play to the price discovery, hedging and risk management functions of the futures market, and seek to develop a mode in which agricultural futures serve agriculture, rural areas and rural residents, thereby enhancing the ability of the futures market to support the real economy. We will further enhance the monitoring of the stock index futures market to prevent risks, improve the institutional regulation of inter-market activities, and ensure the stable and safe operation of the stock index futures market.

  Four, we will seek innovation in market mechanisms and promote restructuring and industrial upgrading. We will continue to improve the way that new shares are issued by focusing on the subscription, book-building and share allotment procedures, and make efforts to develop market mechanisms and enhance market restraints. We will gradually expand the scope of trials in margin trading and securities lending, and take steps to introduce supporting systems such as loans for margin transactions at a suitable time. We will take institutional measures to promote market-driven merger and acquisition activities, and enhance the efficiency, transparency and regulation of approval procedures for merger and acquisition activities. We will promote the full listing of partially restructured companies through merger and acquisition activities and private placements, which will cut the number of related transactions and reduce horizontal competition, thereby increasing the level of industry consolidation and promoting the enhancement of the industrial structure.

  Five, we will strengthen and improve market regulation to effectively safeguard openness, fairness and impartiality. We will tirelessly work to ensure good routine regulation, strengthen regulation of information disclosure, oversight to ensure compliance and regulation by category, and accelerate steps to improve the credit database and regulatory system for credit to develop a comprehensive regulatory system that combines administrative regulation, self-discipline and market restraints. We will develop a sound system to prevent insider trading and strengthen cooperation between different regulatory departments in order to truly ensure good market order and protect the interests of investors. We will strengthen efforts to develop the enforcement system, improve the monitoring and early-warning system for systematic risks and actively work to develop effective ways to integrate macro prudential supervision with micro prudential supervision in order to safeguard the security of the capital market and the country’s economy and finance.

  (Originally appeared in Qiushi Journal, Chinese edition, No.1, 2011)

Note:Author: Chairman of the China Securities Regulatory Commission


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  China Securities Regulatory Commission (CSRC)

 China Securities Regulatory Commission (CSRC)performs a unified regulatory function, according to the relevant laws and regulations, and with the authority conferred by the State Council, over the securities and futures market of China, maintains an orderly securities and futures market order, and ensures a legal operation of the capital market.

 China Securities Regulatory Commission performs the following duties:

 1. Study and formulate policies and development plans for the securities and futures markets; draft the relevant laws and regulations on the securities and futures markets as well as put forward suggestions for formulation or modification of the said laws and regulations; and work out the relevant rules, regulations and measures for the securities and futures markets;

 2. Exercise a vertical administration over the domestic securities and futures regulatory institutions and conduct a unified supervision over the securities and futures markets; and perform a regulatory supervision over the managements and the managerial officials of the relevant securities companies;

 3. Supervise the issuance, listing, trading, custody and settlement of stocks, convertible bonds, bonds of securities companies, and bonds and other securities under the charge of CSRC as assigned by the State Council; supervise the securities investment bonds; approve the listing of corporate bonds; and supervise the trading of the listed treasury bonds and corporate bonds;

 4. Supervise the securities market behaviors of the listed companies and their shareholders who shall fulfill the relevant obligations according to the relevant laws and regulations;

 5. Supervise the listing, trading and settlement of domestic contract-based futures; and monitor the overseas futures businesses of the domestic institutions in accordance with the relevant regulations;

 6. Supervise the securities and futures exchanges as well as their senior managerial personnel in accordance with the relevant regulations; and supervise the securities and futures associations in the capacity of a competent authority;

 7. Supervise the securities and futures business institutions, securities investment fund management companies, securities depository and clearing corporations, futures clearing institutions, securities and futures investment consulting institutions, and securities credit rating institutions; examine and approve the qualifications of fund custodian institutions, and supervise their fund custody businesses; formulate and implement measures on the qualifications of senior management for the relevant institutions; and guide the Securities Association of China and the Futures Associations of China in the administration of the qualifications of the personnel engaged in securities and futures businesses;

 8. Supervise the direct or indirect issuance and listing of shares overseas by domestic enterprises as well as the listing of convertible bonds by the companies listed overseas; supervise the establishment of securities and futures institutions overseas by domestic securities and futures business institutions; and supervise the establishment of securities and futures institutions in China by overseas institutions for securities and futures businesses;

 9. Supervise the communication of the securities and futures information; and take charge of the management of the statistics and information resources for the securities and futures markets;

 10. Work with the relevant authorities in the examination and approval of the qualifications of the accounting firms, the asset evaluation institutions and their personnel for securities and futures intermediary businesses; and supervise the law firms, the lawyers and the eligible accounting firms, the asset appraisal institutions and their personnel in their securities and futures business activities;

 11. Investigate and penalize the activities in violation of the relevant securities and futures laws and regulations;

 12. Administer the external interactions and international cooperation affairs of the securities and futures sector in the capacity of a competent authority.

 China’s Capital Market

 The Shanghai Securities Exchange formally opened for business December 19, 1990, marking the formal establishment of China’s capital market. China’s capital market has rapidly developed over the last 20 years in the midst of reform and innovation. A comprehensive multi-level capital market system has been basically now put in place, consisting of the main board, the medium-sized and small enterprises board, GEM, bond market and futures market. A fairly sound system of investment products is now available, including securities investment funds, treasury bonds, corporate bonds, warrants and commodity futures as well as securities margin trading and stock index futures. Moreover, an institutional regulatory system and oversight system to support the stable and sound development of the capital market has been developed. The function of the capital market as a barometer for the national economy is becoming apparent and its function in serving national economic growth is getting stronger. As of January 2011 the Shanghai and Shenzhen exchanges had a total of 2,094 listed companies, with accumulated capital of over 1.02 trillion yuan and total market value of stocks reaching nearly 30 trillion yuan. China’s capital market has become the second largest in the world, exceeded only by the NYSE, and interaction with the global market is growing stronger by the day as its influence on global finance and the world economy goes from strength to strength.

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