Expert sees 'tough' capital market reform

The next wave of China's capital market reform could see "harsh punishments and tough laws" to rein in illegal activities as property giant Evergrande's recent meltdown due to debt troubles underscored the gravity of securities malpractices, said a leading financial expert and senior economist.

Reforms need to be deepened urgently to preempt rule violations and further develop an investor-oriented capital market, said Wu Xiaoqiu, former vice-president of the Renmin University of China and dean of the university's National Academy of Financial Research, in an exclusive interview with China Daily.

He said the current practice of securities refinancing in the A-share market is a "ridiculous mechanism" that overlooks many investor interests.

The plenary session of the 20th Communist Party of China Central Committee in Beijing this month is expected to outline key reform and opening-up agenda points. Financial reform is expected to be a key focus at the plenary session.

"The Evergrande incident compels us to rethink and improve the regulatory mechanism systematically," Wu said.

Wu recalled that in the Enron scandal in the United States, which has come to be regarded as one of the biggest corporate frauds in history, the company had inflated its income by about $610 million. In comparison, Evergrande's inflated income was more than 500 billion yuan ($68.79 billion).

In May, the China Securities Regulatory Commission levied a fine of 4.17 billion yuan on Evergrande Real Estate Group for fraudulent bond issuances and violations of rules related to information disclosure. Evergrande inflated its income by 214 billion yuan in 2019 and 350 billion yuan in 2020, the commission said.

The Evergrande case underscores the need to enhance the credit system, regulatory framework, and risk identification capabilities, Wu said.

China can learn from the current US regulatory system, where incidents like the Evergrande fraud would be nipped in the bud, as companies are aware they would face severe punishments resulting in "total destruction with no chance of recovery" if they engage in fraud, he said.

The CSRC said in late June that it is mulling a new round of capital market reform measures. The commission will significantly strengthen administrative, criminal, and civil accountability of illegal activities to protect legitimate rights of smaller investors.

Wu said China's capital market is undergoing a fundamental transformation, shifting its focus from serving the financing needs of listed companies to helping investors manage their wealth.

China's A-share market used to focus on helping companies obtain finance, Wu said. That made it an inherently speculative market, as the regulations and policies did not pay adequate attention to returns for investors, leaving limited room for the market's growth.

The securities refinancing mechanism is a "ridiculous" outcome of such a mindset and should be suspended, if necessary, Wu said.

Much work remains to be done, Wu said, including strengthening compensation to small investors affected by delistings, through both civil and judicial measures.

He said the evaluation of IPO applications by the capital market regulator and the bourses concerned should become "more and more stringent". The era of having about 300 to 400 companies getting listed each year has ended.

China's A-share market rallied on Monday after a downturn since late May, with the benchmark Shanghai Composite Index up 0.92 percent to 2994.73 points.