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As long as it continues with reforms, China’s capital market will see spring

By Li Daokui, Like Aobo and Mei Jinghua (Global Times)    18:09, May 24, 2019

Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), said during a recent event that the commission will attract more high-quality companies to go public and will explore ways to delist “zombie” and “empty-shell” companies. Yi’s remarks come in a timely manner, not only injecting confidence into the A-share market under the impact of the US-China trade war but also offering an olive branch to high-quality companies that haven't gone public in the A-share market, including those that have already been listed overseas. The Chinese economy has entered a stage of high-quality development, with the financial sector also undergoing supply-side structural reforms. Given the crucial role of the capital market in both high-quality development and structural reforms, enhancing the quality of listed companies is key.

Why does China’s stock market lag obviously behind the Chinese economy in terms of development? Fundamentally speaking, the quality of stock market assets fails to reflect the development level of the Chinese economy. If the strongest football players cannot get into the national team, then the national team will not perform well. In general, China’s stock market hasn’t fully reflected the new changes and new trends of the Chinese economy in terms of structure and momentum, one of the important reasons for the poor performance of the market. Comparing the top 10 listed companies in China and the US, we can find that more than half of the US-listed companies are internet technology companies represented by Apple, Microsoft, Amazon, Google and Facebook, while most of the mainland-listed companies are those from traditional industries, like the four big banks and two energy giants, which is not completely consistent with China’s economic performance over the years.

In fact, over past decades, a large number of high-quality Chinese companies with good development prospects, high profitability and strong innovation impetus have chosen to go public overseas for various reasons. They include internet technology companies like Alibaba, Tencent, and JD.com, automobile brands like Geely and Great Wall Motors, and real estate giants like Evergrande and Country Garden. Their overseas listings deprived domestic investors of opportunities to share the development dividends of China’s best companies, also objectively underlining the insufficient efficiency and capability of China’s capital market in serving the real economy. Meanwhile, there are still a large number of low-quality and low-efficiency companies in the A-share market, which have no growth value and cannot play the leading role for their industries. These companies have not only occupied resources such as funds and listing quotas but have also distorted the valuation and pricing system of the capital market, thus inhibiting the vitality and resilience of the Chinese stock market. In this sense, supply-side structural reforms are very important and necessary, even urgent, for the Chinese stock market.

Thankfully, China’s capital market has already begun the reform process, with incremental reforms like the establishment of the science and technology innovation board and the pilot registration-based listing system. Since the size of such incremental reforms will be limited in the early stage, stock reforms involving the quality improvement of the 3,600-some listed companies seem more critical.

An A-share market that is aligned with quality economic growth should allow for both listing and delisting, an indication of capital market metabolism. Firms listed in the market need to be ones that lead industry development and boast considerable benefits. An A-share market as such will be a source of running water rather than a pool of stagnant water.

For this reason, it is suggested that efforts to “vacate the cage for new birds” in the A-share market should be made at an accelerated pace. This means making institutional improvements and creating conditions for fast-growing “seedling” companies such as unicorns to be “intercepted” at the domestic market. Actions should also be in place to innovate boldly and be keen on reforms, attracting premium overseas-listed firms back to the A-share market. Meanwhile, the regulatory authorities ought to strictly eliminate low-efficiency, ineffective listed firms and improve and firmly implement the delisting rules.

Over the course of delisting firms of low quality, the authorities should push for the revitalization of shell companies, increase shell supplies, and provide support to premium firms seeking an IPO via buying shells, acquiring or merging into low-quality listed firms, among other means. Such reformist drives will force existing listed firms to always be prepared for the unexpected and to stay pressured to improve corporate governance and earnings. This, adding to newly listed premium firms in the market, will naturally result in higher quality listed firms as a whole.

An improvement in the quality of listed firms will surely help in creating a vibrant and resilient capital market, preventing and handling varied risks facing the capital market, and turning China’s stock market into a genuine barometer of the real economy.

So long as the nation preserves with reforms, its capital market, whose performance has long baffled domestic investors, will certainly embrace a beautiful spring.

Li Daokui is director of the Academic Center for the Chinese Economic Practices and Thinking (ACCEPT) at Tsinghua University, Like Aobo is deputy director of the ACCEPT, and Mei Jinghua is a research fellow with the ACCEPT. [email protected] 

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