Further reform of China’s stock markets in 2012

Written by Helen Lin || March 12 2012

After being stuck in a bear market for the past few years, China’s stock market hasn't kept up with the country that has become the world’s second largest economy following the U.S.. Facing this bear stock market, Guo Shuqing, the new chairman of the China Securities Regulatory Commission (CSRC), seems confident in China’s stock market, saying that the blue chips in China’s stock market are of real value, although overhaul and reform are necessary now to move the market forward. He has raised several new ideas that may contribute to this needed reform.


Improving the new share issuing process

One of the key needs of the market is an improvement new shares issuance process. Unlike those IPO mechanisms in the more developed capital markets, the IPO mechanism now in China is based on a complex audit system. The CSRC has to finish all the administrative examination and approval of the listing of companies, playing a role much more like an “IPO controller”, rather than a true supervisor and regulator. Thus, one of the most crucial pieces of reform is to ease the review process of new listings and move to a more market-based IPO mechanism. The new reform of share issuance will also focus on how to improve the pricing process and how to strengthen supervision.

Implementing a delisting procedure

So far in the development of China’s capital markets, there has been no official delisting procedure. To eliminate the speculation of junk stocks and of the stocks of those backdoor listed companies, give those companies with good financial performances more opportunities to grow larger and stronger, and promote the healthy development of both the primary market and the secondary market, the CSRC plans to introduce a delisting system. This system will provide a mechanism to encourage the growth of stronger performing companies and eliminate those that are underperforming. According to Guo, the delisting system of the Shanghai main board is expected to come on the track in the first half of this year

Encouraging dividend distribution

Unlike listed companies in more developed capital markets which have much more clear and transparent policies and regulation of dividend distribution, China’s listed companies typically ignore their shareholder responsibilities of dividend distribution after their companies go public. In order to change this, the CSRC plans to supervise them to start paying dividends. Newly listed companies will be required to disclose their dividend payment in the prospectus before listing and already listed companies are expected to be further encouraged to pay the dividend under the coming reform.

Meanwhile, other reforms, such as the deregulation of China's pension funds to invest in stocks, the permission that small private companies may issue high-yield bonds and the introduction of a national-wide over-the-counter market, also appear on the agenda in 2012.