The State Council has issued a document outlining nine broad-ranging capital market reform principles for the next five years.
The goal is to develop a multi-layer, fully functioning capital market to support growth. There are some big challenges. However, the endorsement from the top levels of government is highly significant.
The role of the capital market to transfer savings into long-term investments has become a national economic strategy. This should also lead to better coordination between different regulators to overcome some of the structural obstacles to the development of the capital market.
In the equity market, China will move toward a registration-based stock issuance system from the current approval-based system.
Regulatory focus will shift to improving information disclosure from assessing fair price. Issuers and intermediaries will be held accountable for the truthfulness and accuracy of disclosed information. Investors should perform financial evaluation and assume investment risks.
An expanded main board and SME board will help develop new products. Reform of the GEM board will be stepped up and the share transfer mechanism for small and medium companies will be improved.
The government will ensure wider participation in M&A activities and reduce ownership and geographical restrictions on M&A activities, as well as simplify the de-listing mechanism
In the bond market, the government will improve the mechanism for local government bond issues, allow appropriate asset-backed securities, support bond underwriting by qualified commercial banks and asset managers, strengthen credit constraint on issuers and enforce appropriate risk pricing by rating agencies.
Also, it will improve information disclosure in the market and risk awareness among investors.
The credit enhancement mechanism will be improved. The government will strengthen mandatory responsibilities of issuers and investors, improve the default monitoring and settlement mechanisms and support collective actions for the protection of debt holders, as well as promote better co-ordination between regulators.
In the private equity market, the aim is to develop bond, equities and mutual fund products, improve the regulatory framework governing information disclosure and investor selection, shift regulators’ responsibility from prior administrative approvals to risk monitoring, and support new industries and encourage venture capital support for small and medium enterprises
The futures market will develop commodity futures, remove unnecessary restrictions on risk management products and allow use of derivatives by qualified institutional investors for risk management purposes.
Also, it will promote financial derivatives such as index futures, index options, stock options and treasury futures
In the brokerage services sector, the goal is to lower the entry requirement and introduce a transparent licence management system.
Also, it will explore options for fund management firms, securities brokers and futures companies to hold multiple licenses, allow cross-holding of shares and support private sector entry into the brokerage industry.
The government will expand the professional institutional investors base such as social security funds, corporate and staff annuities, insurance funds and offshore long term funds, and allow allow qualified internet companies to enter securities and futures industries.
In cross-border investments, China will further expanded the QFII, QDII schemes, promote more channels for individual cross-border investments and raise investment limits for foreign investments in listed companies.
Financial risk reform will strengthen regulatory supervision and improve risk monitoring, develop a market stabilization mechanism and crack down on illegal activities.
The capital market environment will be strengthened to better protect minority shareholders, improve tax policies, deepen cooperation between regulators and bolster market infrastructure.
The proposed changes to the IPO system will reduce government involvement in the timing, frequency, and pricing of equity issues. The China Securities Regulatory Commission will put more emphasis on the quality of information disclosure and the functioning of the market, including exit mechanisms.
This reform has been under discussion for quite some time and will help China establish a healthier equity market. But, even given such high-level policy endorsement, it will likely take time for the market and the regulators involved to gain the necessary skills and experience in risk pricing and supervision.
Separately, promoting more M&A activities has been seen by some as a key step toward deeper SOE reform. We think it is likely to play a role in accelerating steps toward more hybrid ownership structures and broadening private sector participation in more industries.
The prospect of a local government bond market features prominently in this document. This shows that the heated discussions on how to allocate credit in an increasingly disintermediated financial system has not eluded top policymakers.
We see the development of a local bond market as the most appropriate solution to this problem.
Several policies have been announced since late last year. Further endorsement from top policymakers is undoubtedly welcome. As ever, implementation is key. Many of these goals are long-term and will take time and policy co-ordination before they can be realized.
We expect more detailed measures in the next few months.
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