Unlocking The Stock Market

By+Lan+Xinzhen

The State Council， Chinas cabinet， issued a guideline on May 9 on promoting development of the capital market， including an array of principles regarding the stock market， bond market， futures market， private equity market and further opening up the capital market. Market observers think this guideline will have a far-reaching influence on the long-term sound development of Chinas capital market.

Composed of nine clauses， this guideline has also been dubbed the “New Nine Measures” to differentiate it from the one published in 2004.

Wang Yong， an analyst with CITIC Securities Co. Ltd.， said that the “Old Nine Measures” released in 2004 focused on split share reform， while the new one aims to build up a sound market system.

“The New Nine Measures has laid a clear blueprint for the reform， opening up， development and supervision of the capital market. This is currently the most pressing task for Chinas capital market，” Wang said.

Demand for reform

Why is China releasing such a document at this time？ A press release from the China Securities Regulatory Commission （CSRC） said this guideline is designed to comprehensively deepen the reform of the capital market and has made overall planning and arrangement on the reform， opening up， development and supervision of the capital market in this new period.

Since the Old Nine Measures was issued in 2004， the basic system and institutions of Chinas capital market have been primarily established， and a multi-layer market structure is almost in place. However， the countrys capital market still cannot meet the requirement that“the market plays a decisive role in resource allocation，” as put forth by the Third Plenary Session of the 18th Central Committee of the Communist Party of China （CPC） held in November 2013. This is also a major reason why Chinas stock market has continued to fluctuate heavily in recent years.

According to the CSRC， Chinas stock market is still relatively young and has not yet fully matured， with some systematic and institutional problems still existing and fresh problems emerging. For example， the market system is not yet sound， institutions still need further improvement， and market operations are not stable. “These problems have influenced the long-term stable and healthy development of the capital market. Therefore， we must adopt effective measures to solve them，” said the CSRC press release.

According to the release， since China is in a new period of comprehensively deepening reform， promoting development of the capital market will be conducive to building up a diversified investment and financing platform corresponding to reality in China. Meanwhile， it will broaden the investment and financing channels for corporations and individuals， and better satisfy the demands of increasingly diversified investment， financing and risk management， so as to allow the market to play a decisive role in resource allocation. The plan will help further enrich the varieties of investment products in the capital market， broadening the channels for individuals to gain more property income. It will also be conducive to optimizing the structure of the financial market， increasing the proportion of direct financing， improving stability of the financial market operations and enhancing its ability to prevent risks.

The CSRC press release said that against this backdrop， the State Council has issued the new guideline， which details the overall provisions for promoting sound development of the capital market. It reflects the close attention of the Chinese leadership to the reform and development of the capital market and is of great significance to gaining a common understanding of the steps needed to advance this reform.

More open market

Sun Jianbo， a researcher with China Galaxy Securities Co. Ltd.， said Chinas capital market is less open than the countrys real economy. The new guideline requires to “promote twoway opening of the capital market and orderly increase the convertibility for cross-border capitals and financial transactions，” making clear the measures to further open the capital market.

“The New Nine Measures will first facili-tate cross-border investment and financing for both domestic and foreign companies，”Sun said.

In the stock exchanges of Shanghai and Shenzhen， the only two bourses on the Chinese mainland， shares held by qualified foreign institutional investors （QFIIs） account for less than 2 percent of the total market value. But in other stock markets worldwide， shares held by overseas investors range from 25 percent to 45 percent of total market value. Moreover， Chinas domestic institutions and individuals have no convenient channels to invest in overseas markets. To address this， the new guideline proposes to expand the scope of QFIIs and qualified domestic institutional investors（QDIIs） and to raise the quota and ceiling of their investments. China will also allow foreign individual investors to directly invest in the countrys capital market and allow domestic individual investors to directly invest in foreign capital markets in a systematic way. The country will also establish and improve systems to protect the rights and interests of individual investors in making cross-border investment and financing.

“The New Nine Measures will also allow the securities and futures industry to incrementally become more open，” said Sun.

Chinas securities and futures companies have just started international operations and they are not adequately competitive. The new guideline makes provisions to open the industry in two ways. At an appropriate time， China will expand the business scope of domestic securities and futures companies that allow foreign capital to invest in them， and encourage them to enter foreign markets and be more internationally competitive. The country will also enhance connections between domestic and foreign stock exchanges and conduct research to promote mutual recognition of investment funds and stock exchange products at home and abroad.

Sun said as the capital market becomes more open， the domestic market will become more closely connected with foreign markets， the product structure will become more complicated and the business pattern will be innovated continuously. This requires strengthening cooperation in cross-border supervision. “The new guideline proposes to improve the institutions for cooperation in cross-border supervision， strengthen efforts for cross-border law enforcement and establish cross-border supervision institutions adapted to an open capital market. It also requires strengthening cooperation with international securities and futures supervision organizations， and active participation in the formulation of international securities and futures supervision rules. These must be in place as soon as possible so that Chinas capital market can be further opened to international capital and markets，” Sun said.