Dec 15, 2011 05:41 PM

Fresh Breeze for China's Securities Regulator


After years of sputtering and stalls, China's securities reform engine got a swift kick-start within weeks of Guo Shuqing's appointment as China's top securities regulator in late October.

A slew of proposed policy adjustments, ranging from growth-board delisting rules to a green light for small bank stock flotations, were rolled out during the first month of Guo's tenure as chairman of the China Securities Regulatory Commission (CSRC).

The proposals raised analyst expectations for what could be radical change for the market regulation landscape under Guo's direction.

Shortly after Guo replaced Shang Fulin, several CSRC department chiefs called separate media briefings to explain their future reforms and answer questions about policy direction.

The commission also ended a years-long delay by opening a public comment period for proposed delisting rules for companies that trade on the Shenzhen exchange-linked ChiNext growth board. And CSRC's securities departments announced crackdowns on a number of insider trading cases.

Guo personally shared his thoughts on securities reform at a December 1 conference in Shenzhen. He cited specific concerns about market structures, investment and financing tools, business ethics, law enforcement and risk prevention.

The new chairman proposed speeding up formation of a multi-level capital market system, and improving markets in ways that support differentiated financial services. He proposed continued support for eligible companies that want to list on China's main boards, encouraging the ChiNext trading niche, and developing a board for small- and medium-sized enterprises. Guo also called for initiatives that encourage municipalities to raise funds through bond sales.

Investor Support

In a clear signal that the stalled reform engine was coming to life, new dividend and delisting policies were announced shortly after Guo took office. The market read the directive on listed-company shareholder dividends as an order for "mandatory" dividends, while CSRC's new delisting proposal for ChiNext was dubbed a "soft delisting" strategy.

Guo's assistant Zhu Congjiu said,  CSRC will order all listed companies to improve dividend-payout and decision mechanisms, as well as enhance the transparency of dividend distributions, and use caution whenever adjusting company dividend policies.

Through dividend controls, regulators hope to boost investor income, promote honesty among listed company executives and encourage long-term investing.

CSRC's dividend decisions have not won universal support. Some market players, for example, said the net gain for shareholders could be zero or worse if a dividend payout triggers a decline in a company's share price. 

Neither will mandatory dividends necessarily improve corporate governance or spur long-term investments, other critics argue. On the contrary, they say, such requirements could weaken corporate governance mechanisms.

"Mandatory dividends actually turn stocks into bonds," said Fang Xinghai, director of the Shanghai government's finance office. "That's not as good as letting listed companies issue bonds."

Ding Wei, president of the China branch of Singapore's sovereign wealth fund Temasek Holdings, said regulators should not try to over-regulate, since no one is smarter than the market.

"Market participants themselves should be allowed to rumble and tumble," said Ding. "Only then can there be growth."

But Guo said CSRC should support a diversity in the investor community.

"While strengthening services to numerous small and mid-sized investors," Guo said, the commission "must also encourage and guide the coordinated development of securities investment funds, pension funds, social security funds, insurance funds and other institutional investors."

CSRC's decision to open an investor protection and education agency in December points to the agency's new focus on small-investor support. Meanwhile, according to VisionGain Capital Ltd. Managing Director Ye Xiang, policymakers are emphasizing the importance of professional life insurance and pension fund investing for long-term financing.

In Shenzhen, Guo said although "authoritative research institutions at home and abroad agree that China's stock market bears rare potential for growth, low-income people and people living on pensions may not be suitable participants. We should suggest they consider low-risk investments and savings instruments."

Those words broke more new ground: Never before has a CSRC chairman shown interest in steering small, retail investors toward safe havens.

Delisting, Bonds

Of all the plans rolled out after Guo took office, perhaps none came as more of a surprise than the decision to launch a long-postponed ChiNext delisting system. A public comment period started November 28, after the Plan Concerning Improving the ChiNext Delisting System was posted on the Shenzhen Stock Exchange website.

One industry source said the proposed plan "is still very poor." Zombie companies unable to delist, despite years of losses, might be left on the main board, he said, and a proposed "delisting adjustment board" might become a magnet for speculators.

But unlike the board's current system, which critics say exists in name only, the new plan spells out how and why delistings might be conducted. For example, companies that receive "three consecutive censures from the stock exchange" and those whose "stock prices trade for less than face value for 20 consecutive days" would be on the chopping block.

A buffer would be created that lets ChiNext companies delist after lingering for awhile on a so-called delisting adjustment board.

On another front, the Guo-led CSRC is pushing for a stronger local government and corporate bond market. The chairman has been calling for bond financing since at least 2001, while he was served as a deputy central bank governor and director of the State Administration of Foreign Exchange.

"Development of China's stock market has been relatively fast," Guo wrote a decade ago. "But the bond market has become a 'short leg'" for the nation's financial system.

"The corporate bond market is very weak, and the municipal bond market or agency bond market have not yet started," he wrote.

Speaking with Caixin last May, Guo again called for vigorous development of the bond market.

Guo repeated the theme in Shenzhen, urging support for "the State Council's demand concerning active and reliable development of the bond market, encouraging companies to meet conditions to raise funds by issuing corporate bonds." He said the government should "research and promote innovation in fixed-income financial products such as local bonds, agency bonds, municipal bonds and high-return bonds."

Guo likewise urged connection between different bond markets. But so far, according to one CSRC official, the bond sector has been stymied by a lack of interaction between banks and other bond buyers, and potential bond issuers such as city governments and companies. Bond transactions to date have been small, and neither companies nor investors have shown much interest.

But coordination between the central bank and CSRC is likely to improve, a bank source told Caixin. CSRC paved the way recently by simplifying and accelerating the process for approving corporate bond issuances.

Other reforms expected to appear on the Guo-led CSRC agenda include:

-- Speeding up the process of launching a Zhongguancun Science Park over-the-counter securities market for IT-related companies based in Beijing. Sources said the market could open next year, with limited boundaries for participants.

-- Allowing city-level commercial banks to launch initial public offerings. More than 10 of these banks are currently waiting for a regulatory go-ahead.

-- Easing a stock-listing approval system that critics call too strict. CSRC has been pushing for technical reforms but has yet to commit to switching the IPO mechanism to a registration-based system – a switch that some say may test Guo's ability to manage the agency's long list of reform proposals.

"Saying the right words is easy," said a source close to CSRC. "But to do the right thing – fundamentally correcting the capital market – the new CSRC chairman will need to be careful and avoid the pitfalls."

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