Capital market reform: an overview 深化改革 依法治市 從嚴監管 穩健發展
Huang Qing, Company Secretary, China Shenhua Energy Co Ltd, assesses the progress of China’s capital market reform programme.
Between June and July 2015, China’s stock market was hit by a wave of turbulence and instability. In hindsight, traders behaved irrationally and serious faults in our market system were exposed. The regulatory framework did not function well, in fact it failed to identify, prevent and mitigate material risks, but we have learned a good lesson from the market upheaval – unwavering adherence to the rule of law is key to ensuring market stability and its healthy development.
Refining our approach to market reform
As part of the country’s capital market reform, the government is pressing ahead with its IPO registration system. This reform will be introduced in a gradual manner, and the pace of implementation will depend on the development of the capital market and legal conditions.
The regulatory framework underpinning the IPO registration system is now in place, having been enacted by the National People’s Congress (NPC), but the details will still have to be clearly defined for the new system to function effectively. The China Securities Regulatory Commission (CSRC) is now working on the formulation of the detailed rules and regulations within the framework, including the disclosure rules and pro-forma information requirements.
Regulators have also announced enhancements of the existing M&A and corporate restructuring mechanisms in China’s capital market. This aims to eliminate barriers to M&A and corporate restructuring activities across industries, regions and ownership systems, and also hopes to widen listed companies’ access to capital via asset injections, the introduction of strategic investors, amalgamation and merger, the issuance of preferred shares and convertible bonds through private placement, etc. It is believed that this initiative will drive innovation in M&A and corporate restructuring activities, and cut red tape by streamlining the approval process.
Regulators are also studying ways to develop the bond market in China, in particular by finding ways to deepen the interconnection of the bond market and increase the variety of bonds, such as green bonds, renewable bonds, high-yield bonds, project revenue bonds and hybrid bonds. Regulators are also studying ways to develop corporate asset securitisation, infrastructure asset securitisation and the launch of real estate investment trusts (REITs).
After years of relying on its qualified foreign investor (the QFII and RQFII) programmes, we are seeing the first steps towards a broader opening up of the capital market to foreign investors. However, we should continue to fine-tune the existing QFII and RQFII programmes by gradually relaxing the investment quotas. On the heels of the success of the Shanghai-Hong Kong Stock Connect programme, the Shenzhen-Hong Kong Stock Connect programme is set to be introduced and regulators are looking into the feasibility of establishing a trading link with the London bourse. Whenever possible, the A-share index should be included in internationally recognised indices. Quality foreign institutional investors, such as sovereign funds and pension funds, should be given a bigger role in Chinese capital markets.
The new approach to enforcement
In 2016, the CSRC proposed to make amendments to the existing rules on the issuance of securities by listed companies in order to improve the oversight of private stock placement activities. It also proposed amendments to the existing rules on material asset restructuring by listed companies in order to introduce an approval process to significant asset restructuring activities. Other amendments have also been proposed aimed at strengthening the tentative rules on private equity funds.
The CSRC has also formulated rules against the manipulation of the futures markets and other illegal activities involving futures trading. In addition, the regulator has made amendments to the rules on protecting securities investors, and drafted a set of rules to define the eligibility of investors to participate in the futures markets. As a quick summary, these initiatives aim to fix loopholes in the current regulatory framework on listed issuers, private equity funds, futures markets, and so forth.
The CSRC has recently accepted proposals by the Investor Services Centre designed to prevent retail investors from engaging in market speculation. The proposed rules would require retail investors to hold onto stocks for a certain period, while enhancing their ability to exercise their legal rights as an ordinary shareholder. Tailor made for small investors, a trial scheme is now underway which will enable investors to buy a board lot (for example 100 A-shares) of the companies registered with the scheme. This way, the market watchdog believes, investors will be encouraged to behave rationally and will be better informed about the importance of shareholder rights.
In this pilot scheme, the Investor Services Centre is responsible for operating the voting scheme, handling the distribution of dividends and monitoring participating listed companies. Going forward, the Investor Services Centre will eventually play a more important role in investor protection.
As the market continues to develop at a rapid pace, strict enforcement of the rules must be upheld. Abnormal fluctuations in stock prices are a warning sign that indicates a need for closer supervision. Only when regulations are implemented and enforced in a consistent, open and predictable way, can the market continue to develop healthily.
Regulations must be strictly enforced – there should be no room for evasion and misinterpretation. Foresight is better than hindsight, so enforcement must be proactive and consistent and should intervene before situations deteriorate far enough to cause serious damage. The CSRC has introduced further restrictions on the sale of shares by major shareholders to prevent a major sell-off. The system for trading halts and resumption of trading has also been improved with the introduction of a new set of rules against unnecessary or arbitrary suspensions and aimed at reducing the suspension periods. Last but not least, administrative measures on all listed companies must be standardised.
The way forward
As a market-oriented resource allocation platform, capital markets play an integral part in China’s ongoing economic reform programme, providing enterprises with a variety of financing channels to fund their business activities. A healthy capital market can help improve productivity, stimulate innovation and inject a fresh dose of vibrancy to China’s economic growth.
Looking ahead, institutional investors such as pension funds can play a more important role in the capital markets. With the right regulatory framework, they could also directly invest in companies or their assets or income-producing projects to generate long-term, stable returns on investment for the benefit of pension fund holders. Moreover, while we continue to explore and open up new financing channels for listed companies, investor protection must not be compromised. As such, establishing a regulatory structure on the basis of transparency, fairness and consistency is of utmost importance to the healthy development of Chinese capital markets.
HKICS Affiliated Person
China Shenhua Energy Co Ltd
深化改革 依法治市 從嚴監管 穩健發展
發展綠色債券、可續期債券、高收益債券和項目收益債券， 增加債券品種，發展可轉換債、可交換債等股債結合品種。發展企業資產證券化，推進基礎設施資產證券化試點，推出房地產投資信託基金 (REITs)。深化債券市場互聯互通。
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