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A Market Health Check
Securities regulators look to smooth out the wrinkles in the stock market
 By Deng Yaqing | NO. 5-6 FEBRUARY 4, 2016

An investor fixes his eyes on a display at a securities business hall in Hangzhou, capital of east China's Zhejiang Province on January 26. On that day, the SSE Composite Index plunged 6.42 percent. "Green" means "down" in China's stock market (XINHUA)

China's stock market was fraught with breathtaking and chaotic moments throughout the past year and a half. To assuage investors' concerns and anxieties, China's securities regulator is mulling over new reform measures.

From July 2014 to June 12, 2015, China's three major stock indexes--the SSE Composite Index, SZSE Component Index and ChiNext Index soared 152 percent, 146 percent and 178 percent, respectively. However, within a mere 17 days of trading from June 15 to July 8, 2015, the SSE plunged 32 percent, according to data from the China Securities Regulatory Commission (CSRC).

"Such sharp fluctuations reflected that China's stock market is still immature, its trading mechanism is incomplete, its market system is deficient and the supervision system is inappropriate," said Xiao Gang, Chairman of the CSRC, at the National Securities and Futures Regulatory Work Conference held by the CSRC in Beijing on January 16.

"An excessively fluctuating market is a market of speculation where only a few will gain the most benefit while most people suffer," Chinese Vice President Li Yuanchao told Bloomberg News at the World Economic Forum's annual meeting held in Davos, Switzerland, on January 20-23. "The Chinese Government is going to look after the legitimate interests of most of the investors."

"On the one hand, we need to make the stock market more dynamic, but on the other hand we also need to strengthen regulation of the stock market, and we have resolved to do that," Li said in the interview.

In the days to come, the CSRC will focus on strengthening supervision by standardizing leverage financing, conducting stricter management on program trading, strengthening the management of transactions in the futures market, and enhancing efficiency.

"Some people argue that leverage financing, program trading and going short are also financial tools, and strengthening the supervision of these activities will deprive the market of its free will. Actually, only freedom within the law can be described as freedom. Otherwise, society will be thrown into a mess. The same applies to the securities market," said Song Qinghui, a financial commentator, in an article published in the Finance and Investment   newspaper. Song believes that a prerequisite for stable market operation is the eradication of behavior that is speculative and harmful.

To underpin supervision, efforts should be made to properly handle the relations between the virtual economy and real economy, development and supervision, and innovation and standardization. All of this should be done while simultaneously learning from international experiences, as well as considering national conditions.

"The real economy is the foundation. Partaking in excessive speculation in the virtual economy will eat away the real economy from inside," said financial commentator Ye Tan in an article on National Business Daily. Ye noted that top priority should be given to the real economy and the transformation and upgrading of the manufacturing industry.

Supervision is not intervention, and shouldn't be distorted as prejudice or permissiveness toward certain segments of the market. Beyond that, China should not blindly imitate countries like the United States and Britain in pursuing financial innovation, because China and these countries are quite differentiated from each other in terms of their trading circumstances, laws and governance systems. Financial innovation in China should be reflected in risk control, accurate pricing, strict laws and high market efficiency, said Ye.

In addition, when learning from other countries, national conditions, characteristics and the rules of their domestic markets should be taken into account, claimed Ye.

The extensive use of the "circuit breaker" mechanism made us believe that it was also fit for China. However, since China's stock market is dominated by retail investors, the pressure to dump stocks became overwhelming as they panicked when the stock markets in emerging countries plunged, said Fang Xinghai, Vice Chairman of the CSRC, during the World Economic Forum's annual meeting.

"The regulator has admitted that the circuit breaker is not a suitable mechanism for China," said Fang.

Key Points From Xiao Gang's Speech

- The abnormal level volatility in the market has reflected the substantial immaturity of the Chinese market and investors, the flaws in the trading and market system, as well as the incompetence of the regulatory capability.

- To underpin supervision, efforts should be made to properly handle the relations between the financial sector and the real economy, development and supervision, innovation and standardization, as well as learning from international experiences and considering national conditions.

- The awareness of social responsibility should be reinforced. For a long time, the leaders and employees of some institutions put personal gains before social responsibility, seeking quick success and instant benefits, and were intent on nothing but profit. Amidst abnormal market volatility, some institutions failed to take their responsibility to stabilize the stock market seriously, and turned a blind eye to behaviors against related laws and regulations. The government should strengthen supervision over institutions' fulfillment of social responsibility and increase self-discipline within the sector.

- Institutional rules should be put in place with regard to the registration-based initial public offering (IPO) system. The reform will be a gradual process, and the IPO pace and pricing will not be completely deregulated all at once, as the regulator will seek to prevent a massive supply of new shares from burdening the market.

- Listed companies should conduct market value management appraisals to maintain a sustainable level of corporate value growth. Directors, supervisors and senior managers should not abuse their power to seek personal gains or make profits for others, and prevent false disclosure, market manipulation and insider dealing. Special attention should be paid to the supervision of cash bonus distribution, market value management, acquisitions and reorganizations, as well as refinancing activities.

- Efforts should be made to standardize leverage financing and manage program trading in a stricter way.

- The regulator will strengthen its supervision of public offering of fund liquidity by improving supervisory regulations and establishing a comprehensive risk prevention and control mechanism.

- It will also strive to improve the supervision of IPOs and financing activities by private equities in the Over-the-Counter market, and reinforce the investigation and punishment of illicit behaviors such as profit transfers and rat trading by acquiring over 5 percent of a listed company's shares.

- China will further broaden the channels for domestic companies to get listed and finance overseas. That is in addition to efforts made to work out a solution for the full circulation of H-shares, while gradually increasing the quota for Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII), as well as push A-shares to be included in global indices. China will encourage the creation of long-term funds including sovereign wealth funds and foreign pension funds to increase investment in China.

- The country will initiate the Shenzhen-Hong Kong Stock Connect, and will also improve the Shanghai-Hong Kong Stock Connect and study the feasibility of a Shanghai-London Stock Connect.

- Financial opening up pilot programs will be launched in free trade zones. The country will also seek to attract overseas institutional investors to the domestic bond market through QFII, RQFII, Shanghai-Hong Kong Stock Connect and free trading accounts.

Hong Kong- and Macao-funded brokerages will be allowed to establish joint ventures on the Chinese mainland; meanwhile, mainland institutions that operate securities, funds and futures will be encouraged to develop branches overseas.

- Progress will be made in propelling the mutual recognition of domestic and Hong Kong funds, and also the steady advancement of the registration of Hong Kong mutual recognition funds on the Chinese mainland, and promoting exchanges and cooperation in cross-border supervision.

(Compiled by Beijing Review )

China's Securities Market

- As of the end of 2015, a total of 2,827 companies had been listed domestically, with a gross market value of 53.13 trillion yuan ($8.08 trillion).

- The total assets of the 125 securities companies amounted to 6.42 trillion yuan ($975.84 billion), with net assets reaching 1.45 trillion yuan ($220.4 billion), up 57 percent and 58 percent year on year, respectively.

- A total of 112 licensed asset management institutions operated with funds of 8.4 trillion yuan ($1.28 trillion), up 85 percent year on year.

- The total assets of the 150 futures companies stood at 93.22 billion yuan ($14.17 billion), up 30 percent year-on-year.

- Roughly 25,000 registered private equity management institutions operated funds of 5.1 trillion yuan ($775.2 billion), up 138 percent year on year.

(Source: China Securities Regulatory Commission)

Copyedited by Bryan Michael Galvan

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