China's capital market is likely to see a historic change in the issuance mechanism with the launch of a science and technology innovation board and the pilot program of the initial public offering (IPO) registration system. In the secondary market, stock prices are likely to recover because of the consolidation of market foundations.

Major breakthroughs are expected in the issuance system, a core system for the capital market. The Central Economic Work Conference in December 2018 decided to build a capital market that is well regulated, transparent, open, vigorous and resilient. Its agenda also includes improving the quality of listed companies and the transaction system and guiding more fund inputs for long-term investment. Also, the conference pledged to facilitate the establishment of a science and technology innovation board at the Shanghai Stock Exchange, where the registration-based IPO system will be tested as soon as possible.

The general trend for capital market reform is to be more market-oriented, law-based and international. Making the Chinese A-share market market-oriented has been a challenge. The current IPO standards on the Chinese mainland are not suited to China's economic development, which has been proven by the large number of Chinese companies, especially those in the Internet or other sectors of the new economy, choosing to go public in the United States or Hong Kong.

Moreover, although there are regular IPOs in the A-share market, the government, instead of the market, is still playing the dominant role in deciding IPO prices.

Establishing a science and technology innovation board and trying out the registration-based IPO system are important arrangements to improve the basic systems of the capital market and stimulate market vitality. Aiming to help the capital market better serve innovation, the board will make more reasonable profit requirements and equity structure arrangements to make the capital market friendlier to innovation-driven companies.

This demonstrates China's determination and efforts to further the reform of the capital market. It also highlights the important role of the capital market in advancing the innovation-driven strategy and promoting quality development. The year 2019 will be crucial to the reform of the capital market, especially the reform of core systems. The capital market will play a bigger role in serving the real economy, especially supporting innovation-driven companies and enabling them to better play their role in the country's economic restructuring.

In the secondary market, the A-share market is likely to see in 2019 the end of the downturn that began in 2015. The market valuation is still low, but as more funds for long-term investment enter and market supervision strengthens, the secondary market will recover.

Within the past year, long-term investment funds, especially some from overseas markets, have been investing heavily in China's A-share market. Throughout the year as a whole, overseas investors purchased 294.22 billion yuan ($43.59 billion) of Chinese stocks through the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect programs.

In addition, some foreign private equity institutions are working to expand their businesses in the Chinese market and issue new products. Many institutions believe that in terms of global asset allocation, China is becoming the market with the best investment value in the world. While most of the bubbles are squeezed out and the quality of listed companies improves, the valuation of China's A-share market is still a record low. So they believe it is of great investment value.

Market supervision is also optimizing. Liu Guoqiang, Deputy Governor of the People's Bank of China, recently said the market principle will be followed and intervention in market transactions reduced. Learning from international practices, China will nurture medium- and long-term investors and ensure well-regulated products can enter the capital market smoothly.

The securities supervising authority also said oversight of transactions will be improved, market liquidity increased and unnecessary intervention in transactions reduced so that the market can have clear expectations on supervision and investors can get fair trading opportunities.

The year 2019 will be crucial to the institutional reform of the A-share market, and a major revolution of the core systems will change the whole market. Reform dividends will consolidate the factors favorable for medium- and long-term development of the market, and investors will embrace new opportunities.

This is an edited excerpt from an article by Wu Lihua,an economic commentator, published in Economic Information Daily

Copyedited by Sudeshna Sarkar

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