Bull Market Boosts Economic Outlook
Will the A-share market kick off a new bull market?
From the perspective of China's economic fundamentals, its strong resilience does not seem to align with the overall performance of the A-share market. Valuation-wise, the A-share market still possesses the foundational value for a long-term bull market. Historically, nearly every time there is a change in the China Securities Regulatory Commission (CSRC), a bull market follows. However, each bull market seems to last only 1-2 years, suggesting that one must look into the institutional roots of the A-share market to find answers.
China's capital market system is gradually becoming more refined. How will regulation evolve in the future? What issues must be resolved for a bull market in the capital markets? Here, we outline and discuss ten key institutional reforms.
1. Investor Protection System—Prioritizing Investor Interests for Reasonable Returns
Both exchanges and the management must place investor interests first. The Chinese stock market is predominantly made up of retail investors, characterized by high turnover rates and volatility. In contrast, the American stock market is mostly composed of institutional investors, with retail investors making up about 55%. In China, however, retail investors account for approximately 80% of the market, indicating that fluctuations in the stock market have a significant impact on the wealth of residents. Retail investors differ from institutional investors, as institutions often have sufficient analysts and research to make more informed decisions. Therefore, as a system, we cannot allow high-tech companies to list and raise funds at the expense of retail investor interests. Given the predominance of retail investors, we must establish mechanisms for protecting their returns while actively guiding them towards value investing through education and timely feedback on their concerns.
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Historically, the rules regarding share reductions by A-share listed companies have had significant loopholes. The CSRC has acknowledged this issue and made policy adjustments, but more steps are necessary to improve the system. For instance, strict regulations should govern the steps that major shareholders and actual controllers take when reducing holdings. Particularly, financial constraints should require listed companies to generate corresponding profits or dividends before they can reduce their stakes. At present, many listed companies generate little profit; for example, when chip companies experience significant losses and their share prices drop, major shareholders frequently sell off large portions of their holdings. Institutionally, major shareholders should not sell shares until they return all proceeds from listings to investors as dividends. Moreover, the restrictions on reducing holdings should vary by circumstance; for example, early-stage venture capital funds should not be subjected to the same regulations as major shareholders, or otherwise, the growth of the primary market investment fund sector might be hampered.
2. Optimize the Short Selling System for A-shares
In a market where the primary profit model is long positions, the A-share market has an ideal mechanism for institutional short selling. There is a significant issue in the trading rules of the A-share market. Institutional investors can perfectly execute short selling (through private placement DMA), enabling them to engage in T+0 trades with brokers and publicly-held funds, while retail investors can only passively take long positions, ultimately being cut down by institutions as they chase prices.
Why are there so many short selling mechanisms in the A-share market? Wu Xiaoqiu, former vice president of Renmin University, recently posed a thought-provoking question during a speech: "Whenever the stock market rises, some say there are major problems. Based on what?"
Professor Liu Jipeng from China University of Political Science and Law has emphasized a term in public media: volatility, which to some extent influences the market fluctuations within certain ranges. However, if market regulators respond to a rising index by furiously issuing new shares, allowing major shareholders to massively reduce holdings, and enabling public funds and brokers to engage in short selling, while the National Fund and central Huijin reduce holdings as well, then how can a market that relies entirely on retail investors taking long positions sustain a healthy bull market?
A market that only permits institutions to have short selling rights is unfair. If we allow institutions to arbitrage short positions through stock index futures, then at the very least, we should provide retail investors with micro futures for T+0 trading. For reference, in the South Korean stock market, to treat both retail and institutional investors fairly, micro stock index futures contracts of 1/10 were made available to ordinary investors. For example, if a regular stock index futures contract requires a margin of 200,000, the contract for retail investors only requires a margin of 20,000. Allowing retail investors to engage in arbitrage trading can reflect fairness in trading rules.
Without a shift in management philosophy and institutional changes, there can be no long-term bull market in the A-share market!
3.完善IPO注册制度
The issuance of stocks under a registration system requires a mature market economy and legal framework. The same shock therapy that proved successful in Bolivia failed in Russia for a fundamental reason: Bolivia had previously established a market economy, while the Soviet Union operated under a planned economy. Similarly, we must first refine the market-oriented IPO pricing and listing system.
The success of the registration system in Western markets is due to a very mature market-based pricing mechanism. In contrast, the A-share market is not entirely matured and currently reveals some issues, such as the "three highs" in new share issuances. Currently, IPO inquiry institutions often overprice; once institutions secure shares, they use their funding advantages to create a high opening price and then directly sell on the secondary market, leaving retail investors holding the bag. The stock market essentially becomes a cash machine for major shareholders.
Many believe that under a registration system, there is no need for audits for faster listings. However, this haste can backfire. In trials of ten companies, five had issues with their submissions, and one even chose to withdraw its materials voluntarily. Although this sample size is small, it reflects a significant probability in larger samples. While it may appear that the number of listed companies is continuously increasing, the actual market has not achieved the expected growth due to flawed market mechanisms that primarily serve to provide financing for publicly listed companies without an accompanying market that yields returns. The return levels in U.S. stock markets exceed fixed income returns by about six percentage points, which reflects normal risk pricing. However, domestic markets fall short of reaching such returns.
4.完善监管法律制度
The lack of legal safeguards has led to issues such as false disclosures and phantom listings among some intending-to-be-listed companies and those already listed.
Every system needs the support of legal governance. Legal adherence cannot remain theoretical; it must be implemented in the actual regulation and enforcement processes. The current securities law has raised the costs of illegal activities, but these laws need to be enforced. For instance, while the registration system underscores the importance of information disclosure, the securities law states that if the reports or disclosures from responsible parties contain false records, misleading statements, or significant omissions, they shall be ordered to correct these issues, receive a warning, and be fined between one million and ten million yuan. Here, the difference between a penalty of one million and ten million is significant. If fines are limited to one or two million yuan, it becomes difficult to deter illegal activities effectively. Thus, many system and policy adjustments are still required.
5.建立股市长期资金制度
Long-term investors in the U.S. stock market include pensions, European pensions, and sovereign wealth funds from around the world. Who constitutes China's long-term capital? It is important to note that the previous perspective of viewing public funds as long-term capital is misguided. Currently, the nearly 27 trillion yuan in public funds accounts for almost half of the circulating market value, which has bolstered institutional representation and improved market stability, yet significant declines can still occur!
The fundamental issue is that public funds are essentially still retail investors. Currently, the participants of public funds are mainly retail investors who purchase through various financial institutions, with purchase and redemption capabilities during each trading day and shortly thereafter. Therefore, how can public funds, where buying and selling power remains in the hands of retail investors, truly qualify as institutional investments? It may appear that institutions are in charge, yet the reality is that retail investors drive the market, leading to reactive buying and selling by public funds. Because it is impossible to prevent retail investors from redeeming their accounts during periods of market panic, the proportion of circulating public funds essentially still reflects retail participation!
Furthermore, the scale of long-term capital in our market is limited when compared to more mature capital markets, both in terms of transaction volume and market capitalization. The annual insurance premium revenue in our country is about 4.5 trillion yuan, the scale of social security funds and basic pensions is significant, and nationwide enterprise annuity funds total approximately 2 trillion yuan. Meanwhile, the “quality” of public funds as long-term capital is somewhat lacking, and not all of these funds are allocated to equity assets.
6.交易所市场化，公司制改革
Major exchanges in Western countries follow a corporate governance model. Drawing from the experience of Chinese football, if leagues adopt a market-oriented approach while managers are government entities held accountable solely to their superiors instead of investors, the success of a registration system becomes difficult. The IPO registration system comprises a crucial part of the market-driven reform of exchanges. Exchanges should function like savvy supermarket operators, proactively selecting high-quality products instead of passively receiving deliveries. They should control the issuance pace and select companies suited to the market's tastes; an invitation-based issuance system could be piloted. This allows exchanges to better meet investor需求 and foster healthy market development.
7.完善退市制度
The number of IPOs and delistings should maintain an overall balance; the expansion cannot be limitless. Companies with no substantive business that merely serve as "shells" should face delisting to make room for more outstanding firms. The quantity of homogenous products should be controlled; we cannot allow every real estate company from the top to the hundredth place to go public.
As of now, the new delisting regulations have been fully implemented for three years. We have found that the types of delistings since these regulations took effect in the A-share market predominantly focus on financial delistings and trading delistings. For example, of the 45 companies that delisted last year, 20 were financial delistings, and 20 were trading delistings, making up half of the overall delisting count. This reflects our market's current situation, which leans more towards financing rather than development. Many companies that focus too heavily on financing post-listing end up failing to earn profits, leading to stagnation.
8.谨慎推进交易制度国际接轨
The stock markets of major global countries follow a T+0 system without limits on price fluctuations. Retail investors are highly vocal about T+0 trading. Indeed, exchanges in major countries around the world operate under a T+0 trading scheme. However, if this system is implemented without complementary trading mechanisms, it should be firmly opposed by investors. From a global perspective, the simultaneous release of T+0 trading, the lifting of limit-up mechanisms, and the introduction of circuit breakers are interdependent and essential; implementing any one of these measures alone could lead to problems. Reflecting on the introduction of circuit breakers at the end of 2015, the result was a quicker market halt in early 2016. A T+0 system limited solely to blue-chip stocks would only accelerate the rate at which quantitative trading institutions "harvest" retail investors’ investments. In the U.S. stock market, over 90% of trading volume is from computer-based quantitative trading practices, which, over decades of T+0 trading, have effectively eliminated most retail investors.
I suggest we draw on the successful practices of reform and opening-up by piloting the T+0 system on a small scale, perhaps in the Sci-Tech Innovation Board or the Beijing Stock Exchange, without imposing limits on price increases or circuit breakers. If such trading system trials prove successful and retail investors find them acceptable, they could then be extended to the wider market.
9.逐步向全球投资者开放A股市场
With an inclusive spirit, great things can be achieved. The first wave of China's economic takeoff emerged from the trade prosperity brought about by open policy, rather than prior top-level design. The second wave of takeoff will inevitably stem from the financial and industrial prosperity brought by capital account liberalization! Currently, half of the top ten companies by market value in China are state-owned banks, while almost all of the top 20 companies in the A-share market are state-owned enterprises. We hold the strongest banks, insurance companies, and brokers in the world; we should not fear financial liberalization.
10.保护上市公司企业家的制度
We must recognize that competition between nations increasingly manifests as economic competition, with economic competition demonstrating itself as competition between excellent publicly listed companies, rather than primarily through face-to-face military conflicts. Outstanding entrepreneurs are a scarce resource, and their experience and decision-making are crucial for the success of their companies. Thus, the government needs to value the protection of entrepreneurs, ensuring they operate legally without undue interference.
In recent years, the Supreme People's Court and various provinces have quickly implemented documents intended to protect private entrepreneurs. The importance of protecting entrepreneurs was emphasized in 2020.
The ongoing rollout of protection policies conveys two strong messages: entrepreneurs contribute significantly to stabilizing employment, maintaining tax income, and upholding social stability. Entrepreneurs also serve as key contributors to economic development.
In conclusion, the author highlights numerous systemic issues. For the A-share market to truly thrive, it should avoid incessant turmoil in trading mechanisms and instead address deeper issues, promoting fairness and the rule of law through institutional reforms, and enhancing the quality of listed companies. This can be achieved by strengthening oversight of publicly listed companies, rigorously combating fraudulent listings and unethical practices, and ensuring that violators face substantial penalties. Only then can investors' interests be effectively safeguarded. The advancements in technology, such as Wen Sheng Videos, have garnered global attention. Following adjustments, the A-share market remains at a historically low valuation, but sentiment has improved due to anticipatory reforms in the capital market. Alongside positive performances in major markets, especially Hong Kong’s, as well as favorable holiday travel and consumption data, the A-share market has experienced consecutive surges post-Spring Festival. A healthy stock market development, alongside active investment and financing, is essential for nurturing new productive forces, supporting high-quality development, technological innovation, and other major strategies like specialized and sophisticated developments in hard tech.
With a bull market in the stock market, the entirety of China's economy comes to life!
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