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Developing Distinctively Chinese Modern Capital Markets

By Yi Huiman Source: English Edition of Qiushi Journal Updated: 2022-10-28

Finance lies at the core of a modern economy, and capital markets affect overall financial operations. It is vital that we leverage better the functions of capital markets to achieve high-quality economic development in the course of China's modernization drive. China has entered a new development stage of building a modern socialist country in all respects and realizing the Second Centenary Goal, in which we must uphold and strengthen the leading role of the CPC, fully and faithfully implement the new development philosophy, and strive to develop distinctively Chinese modern capital markets, in order to achieve high-quality economic development.

I. Profound structural changes in the new era

Since the 18th National Congress of the Communist Party of China (CPC) in 2012, the CPC Central Committee with Xi Jinping at its core has given great attention to work related to capital markets. It has strengthened centralized and unified leadership over them, issued important decisions and plans, and proposed deeper reforms to create standardized, transparent, open, dynamic, and resilient capital markets. Since the National Conference on Financial Work in 2017, in particular, under the CPC Central Committee's strong leadership, China has adhered to supply-side structural reform of the financial sector and kept taking the concepts and methods of reform to overcome institutional obstacles in capital markets. It has promoted deeper reform and greater structural changes in capital markets to help achieve both quantitative and qualitative improvements in economic development.

Equity and debt financing have grown steadily. 

Between 2017 and 2021, initial public offerings (IPOs) and refinancing raised 5.2 trillion yuan, and exchange bond markets issued 33.9 trillion yuan worth of bonds. In 2021 alone, IPOs and refinancing raised 1.5 trillion yuan, and financing from the stock and bond markets exceeded 10 trillion yuan, both of which were record highs.

The market structure has improved visibly.

By the end of June 2022, there were more than 2,200 A-share listed companies in strategic emerging industries, and the market value of new-generation information technology, biomedicine, and other high-tech industries had increased from around 20% of total market value in early 2017 to around 37%. With the R&D investment of listed companies accounting for more than half of Chinese enterprises' R&D spending, the role of listed companies as the foundation of the real economy and pioneers of transformation and development has become more profound. The composition of investors has also improved, with the proportion of circulated market value of Chinese institutional investors and foreign investors rising from 15.8% in early 2017 to 23.5%.

The multi-layer market system has undergone constant improvements.

Successful pilots of registration-based IPO system for the STAR and ChiNext have made capital markets more appealing to high-quality enterprises. The deeper reform of the New Third Board (also known as the National Equities Exchange and Quotations) with the establishment of the Beijing Stock Exchange is a key step in expanding the capital market for innovative SMEs. The Futures and Derivatives Law of the People's Republic of China has been adopted, which has effectively filled a major gap in our legal system pertaining to these financial instruments. At the end of June 2022, there were 94 futures options covering the principal areas of the national economy and people's livelihood. Given the sharp rise in international commodity prices since 2021, the prices and price increases of major futures, such as thermal coal and iron ore, in China were below those of the spot and overseas markets, which has contributed positively to ensuring supply and stabilizing prices. 

Progress has been made in optimizing the resource allocation.

The adaptability and inclusiveness of capital markets has significantly improved, and market-based incentive and restraint mechanisms have continuously improved. The role of capital markets as the main conduit for mergers and acquisitions (M&A) has been strengthened, with the value of M&A transactions in the past five years rising to around 10 trillion yuan, which has helped to vitalize market entities. The delisting system has been refined, with 42 companies forced to delist so far this year. A market environment featuring orderly listing and delisting and in which the fittest survive is taking shape at pace.

A high level of openness at the institutional level is steadily being achieved.

We are balancing opening up with security concerns as we promote greater openness in all aspects of markets, products, and institutions. Restrictions on proportions of foreign ownership of securities, funds, and futures companies have been fully lifted. Connectivity is continuously increasing with the optimization of the Stock Connect system between the Shanghai, Shenzhen, and Hong Kong bourses and their agreement to include ETFs as tradable securities, as well as the expansion of the Shanghai-London Stock Connect scheme to include Shenzhen-listed companies and capital markets in Germany and Switzerland. China A-shares are listed on internationally renowned indices, and their share of those indices continues to increase. A-share index futures are also now traded in Hong Kong. China has seen net inflows of foreign capital for many consecutive years, significantly enhancing the international appeal and competitiveness of China's capital markets.

II. Modern capital markets enabling high-quality economic development

As China's economy moves into the stage of high-quality development, new and greater demands are being made of our financial system, including those to provide efficient financial support to strategic emerging industries as well as micro, small, and medium-sized enterprises, to promote risk diversification across time, industries, and groups of people, and to cater to people's growing wealth management needs. Capital markets play a unique and indispensable role in allocating resources, mitigating risks, transmitting policies, and managing expectations. They are the key to furthering supply-side structural reform of the financial sector and can be utilized further to help achieve China's objective of high-quality development.

We must stimulate vitality for innovation of market entities to consolidate micro-foundations for high-quality economic development.

Innovation is the primary driving force of high-quality development, and cultivating a group of innovative enterprises with core competitiveness is a requisite micro-foundation for high-quality economic development. The risk and benefit sharing mechanisms of capital markets not only provide access to financing but also play a significant role in improving corporate governance and stimulating entrepreneurship. Surveying the history of economic and financial development, we can see that technological innovation, protection of property rights, market expansion, and financial support are all key forces driving continuous "creative destruction," and the positive role of capital markets in this is increasingly prominent. The development of stock exchanges has further facilitated the circulation of company shares, made financing and pricing more efficient, and facilitated the implementation of innovations such as equity incentives. Without the ongoing development of capital markets, such rapid corporate innovation and technological progress would have been impossible.


A securities registration certificate is presented during the listing ceremony for the first batch of enterprises going public under the reform of the ChiNext Board and the pilot registration-based IPO system at the Shenzhen Stock Exchange in Shenzhen, Guangdong Province, August 24, 2020. PHOTO BY XINHUA REPORTER MAO SIQIAN

We must encourage positive interplay between industry and finance to ensure unimpeded economic flows.

Economic activity is a dynamic cyclical process; the key is to achieve a virtuous cycle of savings and investment. In the past, China's savings have predominantly been converted into investments in the form of credit, mostly through indirect financing. As China's industrialization and urbanization reached a certain level, both overcapacity in traditional industries and under-investment in emerging industries were apparent, manifesting as a decline in returns on corporate investment at the microscale and depressed demand for effective investment at the macroscale. In recent years, China has maintained sufficient liquidity, market interest rates have largely declined, and growth in aggregate financing has kept pace with nominal GDP growth. On the whole, China does not lack funds; it lacks capital. In particular, it lacks innovation-oriented capital, and this structural issue is exacerbated by increasing downward pressure on investment growth in traditional industries. Through capital markets, savings can be channeled toward innovative industries by means of decentralized decision-making and risk acceptance. At this important juncture in our economic restructuring, to ensure that inputs produce higher-quality outputs with greater efficiency and that an optimal dynamic equilibrium is achieved in our economy, it is essential that we leverage the role of capital markets, coordinate the development of direct and indirect financing, and guide more savings toward emerging industries while also encouraging the transformation and upgrading of traditional industries.

We must improve macroeconomic governance and ensure smooth economic operations.

In this phase of slowing economic growth, we also face considerable financial risks, so maintaining macroeconomic stability is essential for a successful shift to high-quality development. Some economies have shown that being highly leveraged creates systemic risks, and once economic growth slows, financial risks, and particularly debt risks, are rapidly exposed, the economy will undergo a challenging process of passive deleveraging. China's macro leverage ratio is relatively high currently. By expanding equity financing and diversifying risk management tools through capital markets, we can alleviate risks associated with high leverage ratios and refine the transmission of monetary policy, which has a significant bearing on improving the stability of our economic operations in the near term. 


A display of the logos of the first 81 companies to debut on the Beijing Stock Exchange. When it began trading on November 15, 2021, the exchange provided yet another boost to the ability of China's capital markets to serve the innovation and development of small and medium-sized enterprises. PHOTO BY XINHUA REPORTER LI XIN 

We must ensure that the people share more of the fruits of economic development.

To achieve high-quality development, we must adhere to our people-centered development philosophy. Capital markets are important tools for people to increase property income and meet their growing demand for wealth management. They also offer important support for improving the old-age insurance system with its multiple tiers and pillars. In recent years, the China Securities Regulatory Commission (CSRC) has striven to continue investment-side reform, bolster various medium and long-term investment approaches, promote the introduction of policies on the investment of personal pensions in public funds, vigorously advocate professional investment, value investment, and long-term investment, and encourage listed companies to increase investors' returns through cash dividends and share buybacks. Furthermore, we have continued to optimize the capital market environment, enforced a zero-tolerance approach to securities violations, and introduced the litigation system of representative actions for securities disputes, in order to better protect the legitimate rights and interests of investors, especially small and medium investors. Between 2017 and 2021, the cash dividends of listed companies in China exceeded 6 trillion yuan, the annualized returns of equity-oriented funds were 11.7%, and public funds entrusted to manage various types of pensions were worth 4 trillion yuan, all of which represent good returns. The next step in reform of the capital markets is to further strengthen the ability of listed companies to create value, boost the professional capabilities of institutions within the industry, and achieve positive mutual promotion between development of the real economy, improvement of the quality of listed companies, and growth of investors' returns.

III. Charting the course to develop distinctively Chinese modern capital markets

After more than 30 years of reform and development, especially since the 18th CPC National Congress, China has entered a new stage of developing distinctively Chinese modern capital markets. To achieve this, we must fully and faithfully apply the new development philosophy on all fronts, continuously deepen our understanding and practical grasp of the principles governing modern capital markets, and strive to create standardized, transparent, open, dynamic, and resilient capital markets.

We will uphold the CPC's overall leadership over capital markets to ensure that our development remains on track.

Our Party's leadership is the most essential element of socialism with Chinese characteristics and a fundamental guarantee for China to develop distinctively Chinese modern capital markets. We must better combine the political and organizational advantages of the Party's leadership with the general principles governing the development of capital markets and stand firmly with the people regarding capital market supervision. We must also adhere to and strengthen the Party's leading role to achieve practical results in serving the real economy, preventing and containing financial risks, and deepening financial reform, as well as to facilitate high-level sci-tech, capital, and industry flows. We need to create an atmosphere in which the CSRC can systematically enforce rigorous Party self-governance and ensure officials dare not, cannot, and will not engage in corruption. We should comprehensively strengthen full-process oversight of and checks on the exercise of public power, tighten the supervision of integrity in the industry, and create clean and healthy capital markets.

We will uphold the principle of seeking truth from facts and commit to developing distinctively Chinese capital markets.

During several centuries, Western countries have gained a wealth of experience in developing capital markets, from which China should learn in an open-minded and pragmatic manner. We should not forget, however, that China is seeking to develop capital markets under a socialist market economy, so the development path and functions must be compatible with the basic socialist system and take into consideration the current state of China's market foundations, investor structure, and legal and ethical environment. In recent years, the CSRC has adhered to the three principles of respecting the registration-based IPO system, learning from the best practices abroad, and embodying Chinese characteristics and the features of China's development stage. We have successively piloted the registration-based IPO system in the STAR Market, ChiNext, and the Beijing Stock Exchange. While adhering to common international practices, such as prioritizing information disclosure, increasing the responsibilities of intermediaries, and promoting market-based pricing, we have made unique institutional arrangements to balance primary and secondary markets, realize complementary development between capital markets, and protect investors. We must always adhere to the principle of seeking truth from facts and explore boldly but settle on solutions carefully. Viewing the reform of the registration-based IPO system as an opportunity, we will continue to reform the capital markets in an all-round manner and strive to find a development path for capital markets that suits China's national conditions.

We will remain market-oriented and law-based to create a stable, transparent, and predictable development environment.

Capital markets have extremely exacting standards and requirements, and we need to uphold the overarching plan of "system building, nonintervention, and zero tolerance." We need to abide by market laws, respect the spirit of contract, and deepen reforms to streamline administration and delegate power, improve regulation, and upgrade services. We also need to utilize the market's decisive role in resource allocation and make better use of the role of government. It is particularly necessary that we grasp the features and behavioral principles of capital to achieve its well-regulated and healthy development. We must understand the political and people-oriented aspects of capital market supervision, manage access to capital markets, and work with relevant parties to establish sound institutional mechanisms to prevent the disorderly expansion of capital in order to create a market environment that enables fair competition. Strengthening supervision of securities and the financial industry requires us to set out clearly practices that are acceptable and unacceptable, reaffirm our commitment to the development of both the public and non-public sectors of the economy, and promote the development of business entities under all forms of ownership. It also requires us to protect property rights and intellectual property rights in accordance with the law, stimulate entrepreneurship and market innovation and creativity, and better guide capital to serve the socialist market economy.

We will strive to develop a new governance model consisting of public contributions, joint participation, and common interests.

Capital markets are environments with complex mechanisms. Only by balancing current and future concerns and overall and partial interests, as well as strengthening our functions through institutional reform, structural optimization, and market environment improvements, will they benefit the real economy. This requires us to adopt an overall perspective, which means actively strengthening coordination with fiscal, taxation, monetary, and industrial policies while regulating capital markets well, and to unleash the enthusiasm of central and local governments. We must also strengthen concerted efforts to introduce medium- and long-term funds, improve the quality of listed companies, encourage greater openness to the outside world, and crack down on securities violations to create a positive market environment.

We will find the right balance between reform, development, and stability to create stable and sustainable capital markets.

Stability is essential for capital markets to function normally, and it is the basis for advancing reform and serving the real economy. Stock markets fluctuate as a matter of course, and it is not appropriate for, nor is it the job of, government to intervene in routine fluctuations by spending to shore up index funds. Non-intervention is not laissez-faire, however. We will also be mindful of worst-case scenarios and prevent market failures causing abnormal fluctuations. This requires us to ensure that no systemic risks occur and take well-balanced approaches. We must also be aware that stability in capital markets is born out of reform, not the status quo, so we must remain committed to stimulating market vitality through reforms and bolstering market resilience and endogenous drivers of high-quality development.

IV. Better serving high-quality economic development while furthering reform

Change on a scale unseen in a century is unfolding rapidly in the world and is becoming increasingly profound. Meanwhile, China still faces strategic opportunities in its development, and China's capital markets still have bright prospects.

We will ensure capital markets operate smoothly and strengthen market functions.

Capital markets are barometers of national economies, as they reflect people's expectations and confidence. During complex and challenging times, it is especially important to maintain the stable and healthy development of capital markets. Since the start of this year, due to overlapping events, including the Ukraine crisis and repeated domestic resurgences of Covid-19, markets have fluctuated considerably. Under the strong leadership of the CPC Central Committee and efforts of relevant parties, however, markets have stabilized gradually and expectations have improved significantly. The CSRC will continue to prioritize the stability of markets, strengthen macro research and planning and work hard to stabilize expectations, listed companies, capital, and market behavior. We will strengthen monitoring and analysis of marginal changes in market capital flows, behavior of investors, and performance of listed companies, enhance endogenous stabilization mechanisms of capital markets, and improve plans for responding to risks in extreme scenarios. We will improve communication and coordination with macroeconomic management departments and competent authorities and ensure policy expectations are stable and consistent. We will help mitigate risks associated with real estate companies, promote the well-regulated and healthy development of the platform economy, and strive to achieve market and economic stability by managing people's expectations.


An advertisement for the MSCI China A50 Connect (USD) Index Futures is broadcast on the giant screens at Hong Kong Exchange Square, October 18, 2021, the day of the index's official launching. PHOTO BY CNS REPORTER ZHANG WEI

We will implement the registration-based IPO system across the board to promote optimal allocations of resources.

The registration-based IPO system is a key move in comprehensively deepening capital market reform, a key measure for developing direct financing, especially equity financing, and a major reform to improve the systems and mechanisms of the market-based allocation of production factors. The 14th Five-Year Plan, the Central Economic Work Conference in 2021, and this year's Report on the Work of the Government all set out clear plans on the full implementation of the registration-based IPO system. Following nearly three years of pilot programs, a registration-based IPO framework centered on information disclosure has withstood initial market testing, its supporting systems and relevant laws have continuously improved, and the conditions for the complete roll out of the system have largely been fulfilled. In the next stage, the CSRC will set an appropriate course of reform and methodically handle issues such as an evaluation of the registration-based IPO system, positioning of various markets, and the well-regulated and healthy development of capital. We will also lay the groundwork in areas such as regulation, business, and technology to ensure the smooth implementation of this major reform. Furthermore, we will accelerate reform of intermediaries and investment, improve the judicial system and mechanisms of law enforcement regarding securities and the investor protection system, promote key institutional innovations, and create sound institutions and environments for the healthy development of capital markets.

We will enhance the multi-layer system of capital markets to stabilize the macro-economic landscape.

We need to focus on stabilizing macro leveraging and increasing micro vitality, expand the coverage and inclusiveness of capital market services, and better meet the diverse development needs of companies in various stages. We will focus on the crux of supporting innovation, develop the STAR Market for "advanced and core technology" companies, and accelerate improvements to evaluation standards for innovation and start-up enterprises on the ChiNext stock market. We will highlight the blue-chip characteristics of the main bourses, strengthen the Beijing Stock Exchange's role with regard to innovative SMEs, and strive to achieve complementary development and moderate competition between capital markets. We will use the leading and supporting roles of the Beijing Stock Exchange to our advantage and coordinate the promotion of the basic and innovation layers of the New Third Board. We will also steadily expand pilots on regional equity markets, enhance market interconnectivity mechanisms at all levels, align basic systems with the features of SMEs, and create major capital markets to serve innovation-oriented SMEs. We must leverage the strategic and fundamental role of private equity and venture capital funds in supporting innovation, improve regulatory transparency and service efficiency, and facilitate fundraising, investment, administration, and delisting. The exchange bond market is a crucial element in the multi-layer system of capital markets. At the end of June 2022, the size of this market in China exceeded 19 trillion yuan, or about 14% of the domestic bond market, with non-financial corporate bonds accounting for 43%. The CSRC will refine debt financing support mechanisms for private companies and focus on making debt financing more widely available and convenient for the private sector and SMEs. We will expand infrastructure real estate investment trusts (REITs) and relevant pilot projects, promote affordable rental housing and pilot projects involving private enterprises, and facilitate the speedy creation of a positive cycle between idle assets and new investment. Together with relevant parties, we will deepen interconnection in bond market infrastructure, make the bond default disposal mechanism more market- and law-based, and accelerate the establishment of a bond market characterized by sound systems and orderly competition as well as transparency and openness. Furthermore, we will refine the system of commodities in the futures market, encourage more businesses in the real economy to participate in the futures market, and strengthen coordinated supervision of futures and spot markets, in order to better ensure supply and stabilize prices.

We will improve the quality of listed companies and better utilize the role of capital markets as a barometer of the national economy.

Listed companies are an essential micro-foundation for high-quality development. In recent years, the CSRC has thoroughly implemented the Guidelines of the State Council on Further Improving the Quality of Listed Companies and the Implementation Plan for Refining the Delisting Mechanism for Listed Companies approved by the Central Commission for Further Reform, which have led to a steady improvement in the quality of listed companies. The CSRC will continue to view improving the quality of listed companies as essential for deepening reform of all aspects of capital markets. We will pay equal attention to overseeing entry to market and facilitating removal through a range of channels, uphold the dual market drivers of information disclosure and corporate governance, and tackle further the prominent issues of providing false information and the illegal application of funds and provision of security by major shareholders. We will also encourage listed companies to standardize governance, focus on their core business, and boost their strength and competitiveness. Moreover, we will leverage the leading role of capital markets in mergers and acquisitions, support industry-leading listed companies in driving the coordinated development of SMEs, and promote the integration of industrial and supply chains as well as economic transformation and upgrading.

We will coordinate openness with security considerations and expand high-level and two-way openness.

China's capital markets have grown in an environment of opening up, and they will undoubtedly continue to strengthen as we open further. Confronted with the current complex international environment, the CSRC will continue to implement resolutely the decisions and plans of the CPC Central Committee, balance openness with our security considerations, and resolutely promote institutional openness when it comes to markets, organizations, and products. We must accelerate the implementation of a reporting system and ensure smooth channels for overseas listing, support diverse types of companies listing overseas in accordance with laws and regulations, and make effective use of both international and domestic markets and resources. We will continue to strengthen our supervision capacity in an open environment and refine monitoring and supervision mechanisms for cross-border funds and risk response plans. In addition, we will strengthen pragmatic cooperation with capital markets in Hong Kong and the Stock Connect system between the Shanghai, Shenzhen, and Hong Kong bourses. We will encourage the Hong Kong market to list mainland enterprises, support the consolidation of Hong Kong's status as an international financial center, and promote the coordinated development of capital markets in Hong Kong and the mainland.


Yi Huiman is Chairman and Party Committee Secretary of the China Securities Regulatory Commission.

(Originally appeared in Qiushi Journal, Chinese edition, No. 15, 2022)