On April 12, the Chinese Communist Party (CCP) introduced the “Nine Measures for the Nation” (Opinions of the State Council on Strengthening Supervision and Prevention of Risks to Promote High-Quality Development of the Capital Market), followed by the release of over twenty supporting documents by the China Securities Regulatory Commission and stock exchanges, gradually implementing the “1+N” policy system in the capital market.
Different from the previous two editions of the “Nine Measures for the Nation” in 2004 and 2014, this time it focuses on strengthening supervision and risk prevention. Authorities are well aware of the flaws in the Chinese stock market that have harmed investors. Without significant actions, investors would not be eager to participate, hence the proposal to strictly control the approval of initial public offerings, enhance continuous supervision of listed companies (emphasizing restrictions on reducing holdings and strengthening dividends), intensify delisting supervision, highlight investor protection, among other measures targeting the flaws in the A-shares market.
However, the deep-rooted problems in the A-shares market demand more than the current “Nine Measures for the Nation.” Fundamental institutional reform is necessary, which involves significant adjustments to the economic policies of the authorities.
Both the stock market and bond market, the main components of the capital market, have serious discrimination against private enterprises. Without addressing the issue of substantive equality for private enterprises, there is no way forward for the Chinese capital market.
Regarding the stock market, its essence lies in optimizing resource allocation, not lifting state-owned enterprises out of poverty. Despite the fewer numbers of state-owned (including central and local) listed companies compared to private enterprises, their market value accounts for nearly half of A-shares. However, listed state-owned enterprises are not favored in the stock market, falling into the category of “three lows” (low valuation, low stock prices, low liquidity). The valuation and trading activity of state-owned enterprises significantly lag behind the overall A-share market.
Turning to the bond market, there are over 3,200 bond-issuing enterprises, with state-owned enterprises comprising 86%. Private enterprise bond issuance peaked in 2016, but has been declining annually since then. Private enterprise bond financing has been disproportionately low compared to the overall bond market.
As of July 21, 2023, the outstanding amount of bonds issued by private enterprises accounted for only 3.94% of the total. The disparity in bond financing between different types of enterprises raises concerns about fairness and equality in the market.
On the same day the “Nine Measures for the Nation” were introduced, the three major stock exchanges planned to cease disclosing real-time data, undermining the confidence of domestic and foreign investors in the Chinese capital market.
The CCP’s purpose in implementing the “Nine Measures for the Nation” was to boost investor confidence. However, the simultaneous adjustment of real-time trading information disclosure mechanisms by the Shanghai, Shenzhen, and Hong Kong stock exchanges aimed to reduce market volatility, sparking worries about data transparency among investors. Without transparency, fair trading is compromised.
Stevan Tam, Research Director at Fulbright Securities in Hong Kong, expressed concerns about the reduced transparency regarding cross-border trading information disclosure. The secrecy surrounding this decision raises skepticism among both domestic and foreign investors.
Last year, the CCP’s Politburo emphasized the need to revitalize the capital market and restore investor confidence. Despite subsequent policy measures, the desired effects have not materialized. The “Nine Measures for the Nation” sought to address critical issues in the stock market but inadvertently triggered panic among investors due to associated policies regarding the delisting of small-cap stocks.
The release of the accompanying document on strictly implementing the delisting system led to a significant market downturn, with thousands of companies experiencing substantial declines. The ambiguity surrounding the situation failed to reassure investors.
At a time when the Chinese economy is fragile and investors are apprehensive, the CCP’s attempts to stabilize sentiment through policies like the “Nine Measures for the Nation” without addressing the root causes may prove counterproductive. The lack of genuine solutions and emphasis on superficial improvements alongside increased information control could exacerbate the current situation.
Overall, there are uncertainties looming over the efficacy of the “Nine Measures for the Nation,” raising questions about the CCP’s true intentions and its impact on market dynamics. Without concrete reforms and transparent actions, the measures risk undermining investor confidence and impeding the desired revitalization of the A-shares market.