CSRC's Xiao Gang on major reforms to deepen capital markets in China

China Securities Regulatory Commission chairman Xiao Gang speaks about efforts to comprehensively reform the operation of China's capital markets

What are the specific tasks and measures with respect to comprehensively deepening the reform of the capital markets?

The reform of the capital markets has involved four aspects. The first is to further develop the multi-level stock market, including the main boards, small cap boards, the Growth Enterprise Market (GEM) and the New Third Board - a national share transfer system for small and medium-sized enterprises (SMEs). The State Council has made the decision to extend the scope of the New Third Board nationwide. The second aspect is to further deepen the reform of the bond market. Third is to further develop futures and derivatives markets and fourth is to vigorously develop the private market. In the past few decades, we mainly took measures in the public offering market, while now we need to vigorously develop the private market with regard to the improvement of a multi-level capital market system.

How should you balance the need for reform and stock market volatility that may emerge in reaction to the reform process?

Stock market volatility occurs not only in emerging markets but also in developed countries. China's capital markets are still not very deep, so we need to advance reforms to assist market, legal and international development. Along the way, it is essential to control or balance the reforms at a manageable level for the market, which is a challenge for the China Securities Regulatory Commission (CSRC). We should always pay attention to this balance when we research the measures to propel reform. The Third Plenary Session agreed to promote a registration system to reform the offering of stock, so we need to follow the spirit of this gradually to propel the reform. I believe that through constant market-orientated reform, our markets will become increasingly mature. But even in mature markets, fluctuations are inevitable.

Is there any reform regarding securities margin trading?

The financing business has developed rapidly over the past two years. When dealing with margin trading business, some securities companies have violated laws or rules. So we have conducted on-site inspections of two groups and dealt with the violations by certain companies. During the two inspections, we corrected the irregularities, but also heeded the voices of market participants, such as customers and securities companies, with respect to margin trading business. Now we are revising the regulations for margin trading business.

While some areas may be relaxed, others will need to be tightened with the aim of promoting the development of margin trading businesses while guarding against systemic risk.

What is the role and task of the capital markets in the future?

This is a period of historic opportunities for enhancing the proportion of direct financing and for developing the capital market. The economy has entered the ‘new normal', but the proportion of direct financing remains low and the financing costs of society as a whole are high.

The solution to these problems and the adaptation to the ‘new normal' will depend on a well-developed capital market. Some have argued the proportion of direct financing in China remains low because financing mainly falls on the banks. This problem refers to the imperfections in the reform and the system of our capital market. There are underlying reasons why direct financing develops fast in China while indirect financing develops slowly. The development of direct financing also needs to be supported by an improved legal environment, culture and credit system.

What about the changes to listing rules in China?
We are working on the registration system reform of stock offerings, and there is no obstacle to the amendment at present. All parties in the market have been engaged in discussion about how the registration system should work.

The main view is that the verification of registration system should be devolved to stock exchanges, but the final decision needs a legal basis. In terms of the CSRC's preparation, we have been working on registration system reform for more than a year, and are confident that after two years of preparation, we will conduct a sound reform of the registration system once the revised Securities Law is passed.

Superficially, the registration system reform is the shake-up of the initial public offering (IPO) system. However, it actually involves all aspects of the capital market, as it will push market entities into playing their respective roles. Therefore, the reform involves all aspects of the capital market.

Can you explain the impact for the IPO process?
Prior to the launch of the registration system, the quota of stock offerings in 2015 was distributed equally each month, and increased where appropriate.

The specific verification schedule depends on the progress of the Issuance Examination Committee, and we will not artificially set a specific quota. According to current forecasts, the total number is expected to exceed that of last year.

Does this include IPOs of enterprises that are not yet profitable?

This is also one of the items in the revised Securities Law. Companies that are not yet profitable often belong to emerging industries, so we must pay attention to their characteristics and corporate governance, such as management options and staff incentive schemes. At the same time, we should set appropriate requirements for investors operating at different levels in the market.

According to the revised draft of the Securities Law, which is going to be published soon, we should call off the profitability requirements of businesses that are still waiting to be listed. That means listed companies may not necessarily be profitable, but it does not mean that junk stocks can be listed. Firms that are not yet profitable may have a promising future, which should be determined by the market. And we should further specify the requirements of information disclosure, including firms' business models, revenues, customer base, research and development, equity incentive mechanisms and corporate governance, to let the investors make decisions.

What is the transfer board mechanism?

The transfer board mechanism in a multi-level market is complex. Currently, a pilot project will start in the second half for a transfer board mechanism between the New Third Board and the GEM. The formulation of the transfer board plan is one of the important tasks in the reform process. Currently, we are conducting research about the regional equity markets. As the regional markets are complex and different, we are still formulating plans for the adoption of common standards in regional markets.

And the Shenzhen-Hong Kong Stock Connect programme?

The preparation for the programme is under way. Once conditions permit, the CSRC and the Hong Kong Securities and Futures Commission will conduct a joint examination and issue an announcement. The Shenzhen-Hong Kong Stock Connect programme is likely to be authorised in the first half of the year, with technical preparations made following the announcement. However, the preparation period is relatively short, so the scheme is expected to operate formally in the second half of the year.

The investment quota may be determined based on the formula used for the Shanghai-Hong Kong Stock Connect programme. At present, we do not intend to emulate the experience of the Shanghai-Hong Kong Stock Connect scheme by conducting similar co-operation in markets of other countries or regions.

Since A shares will become accessible, will they be included in the MSCI Index?

Work to ensure A shares are included in the MSCI Index is ongoing, and we are likely to see results within a year. Once included, the A share market will be open to investors worldwide. Therefore, the main obstacle to the realisation of A shares being included in the MSCI Index lies in whether renminbi can achieve free convertibility under the capital account and the corresponding quota. But it is expected that crude oil futures trading will be officially launched this year.

Since it is the first time that foreign traders and brokers can directly be involved in the internationalised crude oil futures market, the relevant authorities have been trying to standardise rules and regulations.

The CSRC has drawn up its Interim measures for the administration of futures trading of overseas traders and brokers involving domestic specific varieties (draft). The solicitation of public opinion has ended, and the draft will be released officially after being modified and submitted to the State Council.

How will enforcement change?
The CSRC intends to shorten the cycle of law enforcement, and the preliminary plan is that a case should be closed within 12 months after it is placed on file. At present, among the cases being investigated, only a few of them have not passed the investigation phase. For the cases that were placed on file recently, we should complete the investigation within 12 months and come to a timely conclusion.

What about the development of equity-based crowdfunding?
At present, the revised draft of the Securities Law leaves room for equity-based crowdfunding for the public offering of shares but there is no specification in the law.

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