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UPDATED: December 11, 2013 NO. 50 DECEMBER 12, 2013
Changes on the Way
China unveils a series of market-oriented reforms for the stock markets
By Zhou Xiaoyan

China has decided to launch a trial for preferred stocks to meet actual demand. The preferred stock trial will lead to many positive results, such as boosting companies' direct financing activities, helping commercial banks innovate their capital products, meeting the diversified needs of investors and facilitating the mergers and acquisitions among enterprises, Deng said.

A separate document released by the CSRC put a greater emphasis on the protection of investor interests in cash dividends.

Cash dividends by listed companies are a fundamental policy in the capital market that can effectively strengthen appeal for investment. The new rule aims to protect the interests of small and medium-sized investors, according to Deng.

The proportion of listed companies that offered cash dividends has increased to 68 percent in 2012 from the 50 percent in 2010, according to data from the CSRC. The ratio of cash dividends by listed companies rose to 24 percent from 18 percent during the period.

The CSRC said it will continue to urge listed firms to standardize and improve their profit allocation, increase dividend transparency and diversify their ways of paying back to investors.

Requirements for a backdoor listing are currently lower than those for an IPO. Candidate companies and brokers have been seeking backdoor stock market listing as an easier alternative to an IPO.

To that end, the CSRC said candidates aspiring for a backdoor listing will have to meet the same requirements as for an IPO. It has also prohibited any candidates for backdoor listing from acquiring a listed shell company on ChiNext and getting listed on the board.

Deng said the new requirements will also help curb investors' speculation activities on listed companies with poor performance. It would essentially reduce incentives for insider trading and eventually help establish an effective mechanism for delisting.

Long-term benefits

Despite the fact that new policies have sent ripples through stock markets, the reform measures are believed to benefit the stock markets in the long term.

Zhao Xuejun, CEO of Harvest Fund Management, said he was impressed with the scale of the reform this time.

He believes the reform plan will strengthen the information disclosure responsibility of all market players, tighten punishment for non-compliance, and, most importantly, it will rationalize China's IPO pricing mechanism by expanding current pricing scales, Zhao told Xinhua News Agency.

Ye Tan, a financial commentator, said a reshuffle in the stock markets is necessary, referring to the massive sell-off on ChiNext after the new policies were revealed. "The growth enterprise board is now often used for market speculation, which has raised the prices of listed shell companies. The new ban on backdoor listings in the growth enterprise board will put the board back on the right track."

Liu Rui, Deputy Dean of the School of Economics at Renmin University of China, said more emphasis on cash dividends and an increase of dividend proportion will help keep long-term investors in stock markets. "The stock markets have long suffered from the problem of no dividend payment or too low proportion for dividends, which has driven long-term investors away."

Pan Dengxin, Director at the Finance and Securities Institute at Wuhan University of Science and Technology, said more needs to be done to clear out junk stocks.

"Since 2012, a lot of progress has been made in delisting. But the new delisting scheme hasn't been perfectly integrated with old policies, leaving room for market speculation. No mercy should be shown to trash stocks and delisting should have a more deterrent impact."

Email us at: zhouxiaoyan@bjreview.com

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