Backgrounder: Major innovations in improving China's capital market

16:07, March 10, 2010      

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The Chinese Premier Wen Jiabao said China should work hard to develop its financial market and press ahead with financial innovations, in his government work report delivered during the opening ceremony of the 11th National People's Congress last week.

He also called for more efforts to boost direct financing, develop a multi-tier capital market system and expand the volume of equity and securities financing in a bid to meet diversified demands for investment and financing.

The Chinese authorities have achieved some major innovations and reforms in improving China's capital markets.

Growth Enterprise Market (GEM)

GEM, also known as the second board market, refers to a Nasdaq-style stock exchange market engaged in providing financing channels for the medium, small and start-up enterprises, especially high-tech ones.

Key dates on ChiNext's route to launch

In August 1999, China's State Council, the cabinet, proposed setting up a Nasdaq-style second board for high-tech start-ups.

In May 2004, the State Council agreed in principle to set up the board and base it in Shenzhen.

In March 2009, the China Securities Regulatory Commission (CSRC) published provisional rules for second board IPOs.

In September 2009, the CSRC approved seven firms for second board listing and the Shenzhen Stock Exchange officially named the second board ChiNext.

On Oct. 23, ChiNext was launched and shares of 28 firms started trading on it from Oct. 30.

Significance of the launching

This is a key step towards setting up a multi-tier capital market and giving a boost to small and medium-sized firms.

Premier Wen said in the government work report that the launching of ChiNext had provided new financing channels for innovation-oriented growth enterprises. It is also significant to the development of China's capital market and the country's drive to shift its economy away from traditional manufacturing towards innovative, higher-value industries.

Stock index futures

Stock index futures are an agreement to buy or sell an index at a preset value on an agreed date. Index futures would give investors a mechanism to profit from declines in stock prices, allowing them to hedge risks and helping ease fluctuations in market.

Key dates on index futures' route to launch

On Sep. 8, 2006, the China Financial Futures Exchange, where the stock index futures would be traded, was inaugurated in Shanghai.

In April 2007, administration rules for futures trade was promulgated,laying a legal basis for the introduction of stock index futures.

The CSRC approved the launch of stock index futures, along with margin trading, on Jan. 8, 2010, and launched the trading accounts on Feb. 22.

Shang Fulin, China's top securities regulator, said last week that the country's first ever stock index futures trade was expected to begin in mid-April.

Policies giving overseas investors access to China's stock index futures trading are in the making and would be publicized soon, said Zhu Yuchen, general manager of China Financial Futures Exchange, last week.

Significance of launching

A lack of sophisticated tools to manage risks in China's stock exchanges has been a major shortcoming in the volatile market. The launching of stock index futures would provide China's financial markets with hedging tools while improving liquidity. With such hedging tools, investors are equipped with more options to cut their losses in a falling market other than to sell shares.

Margin trading and short selling

Margin trading allows investors to borrow money from financial institutions to buy shares or other securities that they expect to rise. If the share price goes up, they can easily pay back the borrowed money. If the price goes down, investors must still pay back the full amount borrowed.

Short-selling is a similar operation, in which investors sell borrowed shares, expecting the price to decline. If the price does fall, they can buy the shares at the lower price and return them to the lender.

Key dates on the route to launch

In June 2006, the CSRC promulgated the measures for administration of pilot margin trading and short selling business of securities companies, heralding the opening up of the market.

The State Council gave the green light on Jan. 8, 2010 for the pilot program.

On Jan. 22, 2010, the CSRC announced detailed guidelines for a planned trial period for margin trading and short selling of stock, bringing the long-awaited market reforms a key step closer to implementation.

Shang Fulin, China's top securities regulator, said last week that a pilot program for margin trading and short selling of shares would precede the launching of the stock index futures which was due to begin in mid-April.

Significance of margin trading and short selling

The launching of margin trading and short selling in China is an important step in the reform and development of China's capital market which would help boost efficiency of the markets. Both financial operations are expected to provide investors with hedging tools, improve market liquidity and spur the development of new products.

China has also made efforts to reform its IPO mechanism, nurture a over-the-counter market, improve financing for SMEs and provide better financing services for rural development.

Source: Xinhua
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