Another Round of Capital Market Reform on Track

On May 9， the State Council， Chinas cabinet， unveiled guidelines for regulating the capital market in the coming years， which has attracted tremendous public attention.

Chinese investors have dubbed the document the New Nine Measures， after an earlier policy document released in 2004 also containing nine measures.

Since the Shanghai Stock Exchange Composite Index peaked at 6，124 points in 2007， Chinas stock market has been on the decline for seven consecutive years. To restore the prosperity brought about by the reform 10 years ago， policymakers unveiled the New Nine Measures.

To shield the economy from the shocks of the global financial crisis， China adopted a proactive fiscal policy and a loose monetary policy. However， the side effects yielded by the drastic credit expansion have begun to surface， such as high corporate debt ratios， severe overcapacity and operational risks in the financial market.

To lower corporate debt ratios while maintaining stable economic growth， one feasible approach is to replenish enterprisescapital funds. At the end of 2012， the proportion of direct financing in China was a mere 42.3 percent， much lower than developed countries like the United States， Japan and Germany， and even developing countries like India and Indonesia， indicating great development potential for the capital market.

The New Nine Measures make breakthroughs in a few respects.

The guidelines recommend public companies to establish a market value management system， promote the equity incentive system， and carry out employee stock ownership plans.

A major difference between Chinese and Western stock markets is the predominance of state ownership. The policy launched 10 years ago failed to put an equity incentive system in place. As a result， in most stateowned listed companies， board directors as well as executives are often not shareholders but appointed by the government. They only care about securing their own positions in the companies， rather than maximizing profits. At the same time， voices from individual investors cant be heard in the general meetings of stockholders and the board of directors， which has negatively affected their value assessment.

To tackle these issues， efforts should be made in promoting the market value management and equity incentive system. Board directors and executives should really care about share prices and， at the same time， should not focus too intently on them or manipulate share prices for the sake of personal gain.endprint

The guidelines require companies which exercise fraudulent behavior in initial public offerings be forced to delist from the stock exchange. As the guidelines put it， a delisting regime should be formed to defend the interests of investors， and a system of market-oriented and diversified delisting standards should be created and strictly implemented. With the prerequisite of securing investors benefits， listed companies should be encouraged to take an initiative in delisting through mergers， acquisitions and stock listing transfers.

In fact， the old nine measures released 10 years ago also mentioned the issue of improving the delisting regime and proposed to hold executives accountable for the delisting. yet， these measures were never put into practice， for companies in the red always have some historical roots， and， therefore， enforcing a delisting may incur strong opposition among individual investors.

The New Nine Measures only target newly listed companies， and delisting fraudulent companies will effectively promote honesty in the capital market.

The guidelines also suggest market access be broadened. A transparent and orderly licensing system should be established for securities and futures businesses. Studies should be made in the cross-licensing of securities brokerages， fund management companies， futures companies and securities investment consulting companies. Other qualified financial institutions should be encouraged to apply for securities and futures licenses while making sure risks have been isolated.

All these measures will create a favorable environment for mixed operations of financial institutions and promote interconnection between the capital market and the whole financial industry.

The New Nine Measures aim at not only lifting the stock market out of its current mire， but also changing the structure of the financial industry to help enterprises undergo de-leveraging. They address the crux of the problems in the stock market. If the market value management system can be adopted by state-owned listed companies in assessing their board directors or executives， it is bound to exert a far-reaching influence on Chinas stock market.

However， with the shift in Americas monetary policy and the downward pressures emerging economies are facing， the current international environment is quite different from that of 2004. At home， overcapacity and financial risks revealed by the burst of real estate bubbles may also pose great challenges to the development of Chinas stock market.endprint