Stabilizing Capital Markets: A Multi-Dimensional Approach
Recently, under the constant stimulation of favorable policies and news, the stock market has finally emerged from a prolonged period of sluggishness. Notably, the regulatory authorities have been consistently releasing beneficial "combined policy" measures, the government work report has explicitly called for "enhancing the intrinsic stability of the capital market," and localities are actively promoting the development of new productive forces. This has increased investor confidence, and the capital market is expected to continue its warming trend.
While capital markets generally see both rises and falls, certain abnormal phenomena can distort market functions and even hinder its ability to serve the economy. Essentially, the stock market is a platform for financing and investment, functioning as a reservoir that harmonizes the circulation between the virtual economy and the real economy, automatically regulating flow and adjustment. This reservoir facilitates the expansion of real industries but also generates a leverage effect from various financial derivatives, exaggerating price deviations and often distancing prices from their fundamental value equilibrium, leading to inflated or deflated valuations, thus diminishing the stock market's financing and investment functions, as well as the mutual support between the virtual and actual economies. Therefore, to maintain the normal operation of the capital market and enable fruitful interaction between the virtual and real economies, it is essential to continually enhance the market's intrinsic stability and protect investor interests.
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At present, China aims to "enhance the intrinsic stability of the capital market," and the stock market needs to improve the following policies to establish a coordinated "combined policy" approach.
First, the pace of new stock issuance must be strictly controlled. Currently, only two new stocks were issued in February, which has allowed investors to feel the regulatory authorities' care for the capital market. The issuance of new stocks is a normal phenomenon for market expansion, but it requires a certain rhythm. Over the past period, excessive issuance and large fund collection, coupled with high issuance prices and serious reductions by controlling shareholders, have placed significant pressure on the capital market, damaging investor confidence. Mechanically, new stock issuances usually attract investor attention while existing shareholders may sell their holdings, creating fluctuations in stock prices. Additionally, rampant speculation on new stocks draws in considerable funds, increasing the pressure on market liquidity. Some equity investment institutions cash out immediately upon removal of restrictions, negatively impacting stock prices and putting pressure on market liquidity, thereby harming secondary investors' interests. While cashing out from investments is a normal behavior, this concentrated approach can easily stress the secondary market and affect investor expectations. The stock market crash in October 1929, which evolved into the Great Depression, was partly caused by excessive speculation, large-scale new stock issuance, and leverage phenomena. According to spatial economic theory, the opposing forces of capital aggregation and dispersal need rhythm and balance; breaking this balance leads to market volatility, ultimately harming many investors. Therefore, to avoid speculative behavior centered on new stocks, it is crucial to prevent the rapid expansion of the stock market and achieve a balance in financing and investment.
Second, strict adherence to prohibiting the provision of margin trading to investors who engage in day trading using margin securities (a form of T+0 trading) is necessary. This quasi-T+0 trading allows short sellers to execute trades on specific stocks within the day for immediate profit realization, significantly contributing to price volatility. Certain short-selling forces automatically generate trading instructions and sell large volumes of stocks in a short period, leading many stocks to hit new lows repeatedly. The prevalent short-selling dynamics have caused excessive "blood loss" in the capital market, with the stock index frequently breaching bottom lines, resulting in sluggish market performance. Fortunately, there have been notable improvements in this situation.
Third, the margin requirement for short-selling index futures should be increased, limiting malicious short-selling activities by certain forces. In October 2023, the China Securities Regulatory Commission (CSRC) introduced new rules, raising the margin ratio of ordinary margin trading from 50% to 80%, and implementing a differentiated increase for private equity institutions' margin trading from 50% to 100%. This rule significantly restricts the scale of short-selling funds and positively contributes to market stabilization through counter-cyclical adjustments.
Fourth, efforts to severely punish major shareholders for fraudulent behavior and insider trading must be continued, ensuring strict penalties for relevant parties according to laws and regulations. This will help eliminate regulatory blind spots and safeguard the ecological health of the capital market. The high-quality development of listed companies is fundamental to the value of their stocks; any fraudulent issuance or falsification of financial data misleads investors or manipulates the market, causing drastic price fluctuations and harming investor interests, ultimately distorting the entire capital market. In fact, the CSRC has recently intensified its crackdown on fraudulent issuances, financial falsification, and the inappropriate appropriation of funds by major shareholders, effectively protecting the interests of numerous retail investors and playing a vital role in the stability of the capital market. Listed companies must enhance their corporate governance standards to achieve high-quality development, thereby promoting the smooth and healthy development of the capital market.
Fifth, it is crucial to enhance the delisting system, making it stricter and faster, while increasing investor protection. The generation of new capital requires the shedding of old capital; in the past, the difficulty of delisting became a longstanding issue troubling the A-share market. Listing companies represent a scarce resource, benefiting from various advantages such as brand recognition and access to funds, with most of them reluctant to delist once they are established. Due to the uneven distribution of listed companies across regions, areas with fewer listings rely significantly on these companies for local economic development, making local authorities eager to retain them. However, with the comprehensive implementation of the "registration system," there has been an increased push to facilitate the delisting of low-quality companies to mitigate issues related to a stock market where "only entry exists." Consequently, the number of delisted firms has increased. In reality, new stock issuances and delistings are part of a normal market cycle, and we should adopt an objective view of the delisting behaviors of companies. Two main approaches can be employed: first, to improve compulsory delisting standards, ensuring that those who should be delisted indeed are; second, to broaden diversified delisting channels that encourage proactive delisting by some companies. Scholars such as Zheng Dengjin have found, through short-term assessments following the release of new delisting regulations on December 31, 2020, that these regulations have directed market funds away from poorer-performing companies (those with greater operational and regulatory risks and poorer information environment) towards higher-quality enterprises, indicating that the new regulations effectively guide resource allocation. Alongside improving the delisting system, it is also important to enhance investor protection post-delisting. Investors are the main participants in the capital market and the source of "fresh water" for the stock market. Strengthening investor education and outreach regarding delisting risks is crucial, ensuring that investors' legitimate rights are preserved, enhancing their risk awareness, and helping them choose truly high-quality stocks to avoid excessive speculation.
Sixth, it is advisable to encourage increased dividend payouts by listed companies, suggesting that dividend yields should exceed bank deposit rates to attract medium- to long-term funds into the market. The capital raised from secondary markets through public offerings and refinancing is crucial for corporate development, which in turn necessitates returning value to secondary market investors, thereby establishing a virtuous cycle. Cash dividends represent a return of company cash to investors and constitute a significant component of investor returns. In many mature foreign companies, cash payment policies are frequently employed to reward investors. Generally, it is believed that dividends can enhance company valuation and increase investor wealth, generating a win-win situation. Dividends are an important financial decision and serve as a key reference for investor decision-making, helping them assess the quality of company development and operational status. Investors can also analyze the motives behind dividend distributions to gauge company potential and growth value. Recently, some listed companies have increased their dividend distributions, with several proposing dividends before the Spring Festival, enhancing attractiveness in the secondary market. Encouraging listed companies to perfect their cash dividend mechanisms while pressuring those that do not offer dividends to do so can stabilize investor expectations. During the Two Sessions, CSRC Chairman Wu Qing stated at a press conference that measures will be differentiated for companies that have not issued dividends for years or those with low payout ratios, including restricting shareholder reductions and placing ST risk warnings, while encouraging eligible companies to distribute dividends multiple times a year. These new regulations signal that dividends are becoming a widespread trend, benefiting investors through substantial returns and bolstering confidence in the secondary market while enhancing the intrinsic stability of the capital market.
Of course, enhancing the intrinsic stability of the capital market requires not only continual improvement of related systems but also the formation of collective efforts from multiple parties. The capital market is a reflection of corporate fundamentals and policy landscapes; only through the high-quality development of listed companies, increased encouragement for medium- to long-term capital investment, strengthening the balance between financing and investment, maintaining continuity in macro and industry policies, and stabilizing market expectations can we continuously stabilize the capital market, thereby supporting the high-quality development of the economy. As economic recovery continues to improve, with ongoing refinements in capital market-related systems, the stock market currently remains within a relatively low valuation range. The future outlook for stability and improvement in China's capital market appears promising.
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