社论 | 如何实现“建制度、不干预、零容忍” Editorial: How to Tame China’s Wild ChiNext Board (Bilingual)
The reform of the registration system of the ChiNext board has been going on for one month, and the unhealthy trend of speculating on small and badly performing stocks has drawn the attention of the securities regulators, which for their part have done their duty when it comes to legal violations in the capital market.
However, the market is also divided over individual regulatory measures, believing that they go too far. In this situation, the overarching plan of “system-building, nonintervention and zero tolerance” plays a guiding role in the development and reform of the capital market, especially for the ascendant ChiNext.
Over the past 30 years, the development of China’s capital market has taken many twists and turns. In recent years, policymakers have learned from past experience and established a market-oriented, legalized and internationalized direction for capital market reform, strengthened information disclosure and compliance supervision, and improved the delisting system, especially on the ChiNext and STAR Market boards, laying the foundation for reforming the main boards and those for small and midsize companies, where companies need the complicated approval from China Securities Regulatory Commission (CSRC), the national regulatory body, to list on the stock market.
However, various reforms have just started, or need to be deepened, or need to bite down on the “hard bones.” People’s understanding of them is also rather chaotic. On June 18, Liu He, the vice premier of the State Council, China’ cabinet, said at the Lujiazui Forum that China should follow the policy of system-building, nonintervention and zero tolerance to accelerate the development of the capital market. At a listing ceremony for approved enterprises on Aug. 24, he again emphasized this policy. Securities regulators have also repeatedly said they will implement it.
To understand this policy, what kind of system should we focus on and how should we build it? What kinds of random intervention should be prevented? What is the object of zero tolerance?
The Chinese capital market already has an overall framework, although basic systems such as information disclosure, issuance and delisting need to be improved. The main problem lies in the implementation.
On the issue of intervention, all measures proven in practice to be random intervention fundamentally violate market principles and the rule of law. Regulators should avoid taking a paternalistic approach and conduct real supervision in accordance with laws and regulations, neither deserting nor exceeding their mandates. We must believe in the market’s invisible hand and tame our instinct to interfere.
Additionally, we should currently focus on having zero tolerance for all violations of laws and regulations, and ramping up the crackdown on financial fraud. Due to the ChiNext board’s functional position and the characteristics of listed companies, speculation on small or badly performing stocks is likely to continue, at least for now. The regulator should strictly abide by laws and regulations and grasp the boundary between what is and is not legally permissible.
It should be noted that the aforementioned policy is a unified and organically connected whole with three mutually complimentary parts. Some commentators have doubts about the boundary between nonintervention and zero tolerance. But the head of the CSRC has said that nonintervention does not mean giving the board a completely free rein. We must respect the rule of law, act in accordance with regulations, and focus on predictable management. This does not contradict daily regulation, but requires us to define what constitutes daily regulation. On this, we must pay special attention to maintaining detachment toward the ups and downs of the stock index.
Building a system is the foundation of this policy. At present, the trading system of ChiNext is a hot topic. Some market participants hold that the “T+0” system should be restored as soon as possible and limits on price fluctuations should be lifted. We believe that we should unremittingly strive toward this goal, even if it cannot be achieved immediately.
The A-share market’s current “T+1” system and price limits were originally designed to reduce speculation and prevent stock prices from rising and falling sharply. But in practice, they are often counterproductive. “T+1” trading restrictions are easily broken by institutions and large investors. The price limit system often becomes the lowest-cost way for large investors to vacuum up smaller ones, a particularly prominent trend in the current speculation. Restoring the “T+0” system would enhance transaction convenience, market liquidity and market activity.
Of course, because retail investors dominate the Chinese stock market, the fairness of the A-share market is flawed compared with mature overseas exchanges. The progressive electronic trading system seems fair and efficient, but because institutional investors have better funds and information than retail investors, existing trading methods will simply amplify inequality and allow those with enough capital to plunder smaller players.
This pattern is not easy to change, and improving the investor structure of the A-share market is a long-term endeavor. However, blindly focusing on the investor structure will prevent us from seeing hope of marginal improvements. Improving and implementing basic systems like information disclosure, issuance, and delisting, as well as cracking down on legal and regulatory violations, can pave the way for the launch of “T+0.” Only a laws-based market environment can encourage medium and long-term capital to develop value investments.
As long as investors trade according to the rules of the capital market, we should not interfere in their behavior. Securities regulators must treat each type of investor fairly and accept normal stock price fluctuations. In particular, retail investors must accept losses, as well as profits, or we will struggle to cure the “giant baby syndrome” of some of them.
We also need to gradually complete the investor’s mantra that “buyers bear the seller’s responsibility” in the actual market. Only after investors feel the risks and opportunities in the market will they make more rational decisions. Warnings from spokespersons or official organs and suspending transactions are not long-term solutions.
Zero tolerance has its own “red line,” namely insider trading, false declarations, financial fraud, fraudulent issuances and other legal violations. Regulators must severely punish such actions and move to adjust the rules when tricksters try to skirt them.
Despite various shortcomings, China’s stock market has played a pivotal role in the allocation of capital and productive elements and is now accelerating the process of internationalization in accordance with the principle of high-level opening up. The opening of the ChiNext market sets the stage for growth-oriented, innovative, entrepreneurial companies — especially small and midsize technology firms — to finance their needs and improve corporate governance.
Beginnings are always hard. In accordance with the policy of system-building, nonintervention, and zero tolerance, we must promote full information disclosure, comprehensively purify the market ecology, and build an honest, law-abiding capital market. Only then can ChiNext have a stable and far-reaching impact.
The Chinese version of this article was published in Caixin Weekly on Sept. 28, 2020, and is only available for Caixin Global’s app users. To unlock more bilingual articles, download the Caixin app.
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