NO 230 – APRIL 2012
Reform and innovation in Chinese capital markets

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WFE Focus January 2012
Reform and Innovation: The driving forces behind China's capital markets

This article was submitted by CSRC

Under the backdrop of the current post-crisis climate, the global economy has become significantly more complex as China itself has also witnessed an increasing number of uncertainties in the domestic macro-economy. In response to these challenges, China’s capital markets have shown their commitment to bringing further reform, innovation and opening up under the guideline of scientific outlook on development, achieving sound, stable and rapid growth through strengthened market regulation.

I. The Developments of China’s Capital Markets in Recent Years
China has seen a 9.3% average annual growth in GDP since 2008, laying solid economic ground work for the steady development of capital markets. In recent years, China’s capital markets have been experiencing rapid expansion in terms of financing scale, number of listed companies, investors and new investment products.

Steady growth in direct financing. From the period of 2008 to 2011, through the use of A-shares, convertible bonds and corporate bonds, a combined amount of RMB 353.5 billion, RMB 571.1 billion, RMB 1,027.5 billion and RMB 678 billion was raised respectively each year, averaging RMB 657.5 billion on an annual basis. The total amount of funds raised through A-shares reached a record high of RMB 2,604.2 billion during the same period, making up 56.57% of the cumulative fundraising value through A-shares for the past twenty years (RMB 4,603.2 billion).

Increasingly improved market system. Building on the stable development of the Main Boards and the SME Board, the GEB (Growth Enterprise Board) was launched in October 2009 with the aim of further diversifying the market supply. Just over two years of its foundation, by the end of 2011, the number of companies listed on the GEB stood at 281, accounting for RMB 743.3 billion in combined market capitalization with RMB 195.9 billion raised through A-shares. In 2009, changes were made to the pilot program on the quotation of non-public companies from Zhongguancun Science Park on the Share Transfer Agent System (“STAS”), making the regulation of this OTC market more standardized.

Continuous development of listed companies. Since 2008, the stock exchanges have been growing at an average rate of 158 new listings each year, and all of the newly listed companies have been showing excellent performance and an average annual return on net assets of 12%. In particular, the listings of a great number of large-cap blue-chip companies and a rising number of innovative enterprises have served as a starting engine of the development of capital markets as well as of the national economy itself. By the end of 2011, there were in total 2,342 listed companies, with a combined equity capital of 3,609.552 billion shares and an aggregate market capitalization of RMB 21,475.81 billion in China.

An increasingly stronger investor base. The annual growth in the number of accounts opened by investors has averaged at 15.32 million since 2008, with both individual investors and, in particular, institutional investors experiencing rapid growth. The number of securities investment funds has witnessed an annual increase of 142. Meanwhile, gradual development was also observed in the investments from enterprise annuity programs, the National Social Security Fund, commercial insurance companies, and QFIIs1, along with a rising trend in the number and amount of funds brought by ordinary institutional investors.

Significantly wider range of investment products. The issuance of corporate bonds was initiated in 2008. By the end of 2011, a total of RMB 290.4 billion was raised through corporate bonds. In the same year, the first of A-shares with a face value lower than 1 RMB (Zijin Mining) went public. The year 2009 was a milestone with the successful listing of the first local government bond (Xinjiang Uyghur Autonomous Region Government Bond), while the year 2010 saw the launch of stock index futures trading. By the end of 2011, CSI 300(China Securities Index 300) Futures were traded with a total of RMB 84,835.7 billion in turnover. The expansion of the range of investment products has helped to satisfy a diverse range of financing and investment needs.

Steadily enhanced trading and clearing technologies. The Shenzhen Securities Exchange (SZSE) completed the upgrading and capacity expansion of the trading system’s main frame in 2008. Meanwhile, the China Securities Depository and Clearing Corporation Limited renewed its depository and clearing IT system. In 2009, the SZSE established the GEB’s technical systems and put them into operation, as the new generation of the trading system was being developed and launched at the Shanghai Stock Exchange (SSE). In 2010, the China Financial Futures Exchange launched the stock index futures trading system, while regulatory bodies also strengthened their supervision and administration on the safety of information technologies employed by the exchanges. By the end of 2011, a total of 12 standards for information technology were promulgated. At present, China’s capital markets use cutting-edge trading and clearing information technology systems which meets the global standards in terms of trading volume capacity, operating speed, system stability and safety.

Faced with a complex and volatile economic and financial climate both home and abroad, China’s capital markets have pushed forward with a series of market reforms and innovations.

II. Reform and Innovation of China’s Capital Markets in Recent Years
Faced with a complex and volatile economic and financial climate both home and abroad, China’s capital markets have pushed forward with a series of market reforms and innovations, encouraging market participants and safeguarding the sound and stable market growth.

Furthering the reform of new stock issue system. In June 2009, Phase I of the new stock issue system reform was officially launched centering on two critical processes—pricing and underwriting. Phase II was initiated in October 2010 to further enhance the discipline of price quotation and placement during the price inquiry. Phase II has increased the volume of shares placed with individual institutions, expanded the scope of persons to whom price inquiry is to be made, and reinforced the transparency of pricing information and the mechanisms of claw-back and issuance suspension.

Improving the overall quality of listed companies. Over the past few years, a series of measures were adopted to regulate corporate governance of listed companies, namely the reinforcement of senior management training programs in listed companies in 2008, the ad-hoc “Corporate Governance Improvement” project in 2009 and the ad-hoc “Mitigating Peer Competition and Curbing Related Party Transactions” initiative in 2010. Furthermore, in 2011, the listed companies were urged to stipulate their policy pertaining to dividend distribution and increase the transparency of dividend distribution. It was also during this time that a coordinated system comprised of the CSRC, exchanges and the CSRC regional offices was created to promote and regulate the M&A and restructuring of listed companies. During the period of 2008 to 2011, more than 340 projects of material asset restructuring were completed, with a combined transactional value of RMB 1,067.2 billion.

The market reforms have accelerate d the growth in the funds industry. By the end of 2011, a total of 702 securities investment funds were in operation throu ghout China.

Generating a comprehensive approach regarding the governance of securities firms. The initiatives of the CSRC cover a wide range of issues which are as follows: 1) the placement of customer trading and settlement funds in custody by third-party depositories was launched in 2008; 2) the classified regulation of securities firms has been increasingly enhanced since 2008; 3) the securities firms have deployed the compliance management system in 2008; 4) the risk control system focusing on net asset indicators has been progressively developing since 2008, with the implementation of standardized stress tests throughout the industry; and 5) in 2009, the pilot program of direct investment business of securities firms was successfully launched, together with the system for broker administration.

Propelling market reform in the funds industry. Since 2008, the funds industry in China has been increasing in speed in its market reform through the following: 1) implementing a market-oriented system of review and approval by category of fund products, 2) promoting specific customer asset management under the business model of “one to multiple”, 3) promoting the specialization of fund selling institutions, and 4) launching the procedures of administration on fund evaluation and sales costs. These market reforms have, in turn, accelerated the growth in the funds industry. By the end of 2011, a total of 702 securities investment funds were in operation throughout China.

Regulating the practice of service providers. Since 2008, regulation over securities service providers has been increasingly strengthened: 1) establishing the rules of practice applicable to securities investment advisories’ publication of research reports and provision of investment advisory services; 2) developing the system of filing on certified accountants’ securities-related business and carrying out on-site inspections of accounting firms and asset appraisal firms; 3) improving standards of lawyers’ practice in securities-related activities by adopting the Rules of Practice of Law Firms Engaging in Securities-related Legal Services and the Detailed Rules of Practice of Law Firms Engaging in Securities Investment Fund-related Legal Services in 2010.

III. Experience Drawn from the Steady Development of Capital Markets in China
In recent years, China’s capital markets experienced considerable fluctuations. The closing price of the SSE Index saw a 65% drop in 2008, an 80% surge in 2009 and eventually remained steady despite slight decrease over the course of the past two years. China’s capital markets have been committed to serving the real economy, exploring a growth path suitable for today’s China and compatible with market principles through reform and innovation.

China's capital markets have been committed to serving the real economy, exploring a growth path suitable for today's China and compatible with market principles through reform and innovation.

  • Developing and improving operating mechanisms of securities and futures markets, following a market-oriented direction. Participants were encouraged to play their roles and trading has been left to the dictates of the market, which functions with a basis on information disclosure. In particular, in 2005 and 2006, the focus was placed on non-tradable share reform in order to render all securities tradable and to set the stage for free market pricing; two rounds of new stock issue reform were carried out in 2009 and 2010 respectively, whereby procedures of price inquiry and underwriting were amended to give a greater role to market supply and demand; in 2010, stock index futures, securities financing and other innovative businesses were successfully launched, and trading rules were also improved in a market economy approach.
  • Safeguarding the principles of openness, equitableness and fairness in strict adherence to relevant laws and regulations. In October 2005, the Company Law and Securities Law of China were significantly revised, providing a sound legal foundation for the healthy and steady development of China’s capital markets. Subsequently, the Amendment to Criminal Law (VI) (on cracking down on activities that are against fiduciary duties and cause serious losses to listed companies, 2006), the Regulation on Supervision and Administration of Securities Firms (2008) and the Amendment to Criminal Law (VII) (on combating against trading in reliance of undisclosed information, 2009) were adopted. Relevant rules and regulations and listing and trading procedures of the exchanges were also amended accordingly, further enhancing the administrations governing securities issuance, market transactions, depository and clearing and settlement services, as well as M&A and restructuring. Meanwhile, regulatory bodies have been committed to regulation and governance by law and cracking down on violations including fraudulent financial statements, insider trading and “rat trading”. From 2008 to 2011, 206 decisions of administrative sanctions were made.
  • Focusing on increasing market transparency in accordance with openness principle. The CSRC has made the information regarding securities and  futures legislations, inspection and enforcement, routine supervision and administrative permissions available to the public. In 2009, the Rules on the Implementation Procedure of the CSRC Administrative Permissions and the Tentative Rules on the Draft of Securities- and Futures-related Regulations for Public Consultations were adopted, and the CSRC started to disclose its annual report. In recent years, pre-disclosure system for companies-to-be-listed was further strengthened and a differentiated information disclosure system was launched for listed companies on the GEB, establishing basic disclosure rules for corporate bonds issuance, listing and trading while reinforcing the information disclosure obligations among listed companies, securities firms and fund firms. In 2008, the credit history database of capital markets was launched.
  • Promoting China’s capital markets to open up further and raise its international reach. In recent years, China has been pushing forward with the opening up and international cooperation of its capital markets. By the end of 2011, 13 joint-venture securities firms and 38 joint-venture fund management firms were established; 119 overseas firms were granted QFII status with a total investment quota allowed amounting to USD 20.89 billion, 41 securities firms and fund firms were granted QDII2 status, nine fund firms and 12 securities firms were allowed to engage in RQFII3 business on a pilot basis. In total, 60 overseas securities firms that conduct securities-related business are permitted to engage directly in B-share trading; in terms of securities financing, 168 domestic enterprises were allowed to issue overseas listed foreign shares, raising a total amount of USD 172.624 billion. Meanwhile, a few Sino-Foreign joint ventures have listed and issued stocks in China.

to ensure further development, it is imperative to implement the guideline of scientific outlook on development and speed up the transformation in economic growth patterns.

As China’s capital markets are still in the early stages of development, these organizations inevitably present inadequacies in the number of market layers, product range, investment culture and regulatory and supervisory systems. Therefore, to ensure further development, it is imperative to implement the guideline of scientific outlook on development and speed up the transformation in economic growth patterns. With further reform and continuous innovation, China’s capital markets shall continue to go from strength to strength.

About China Securities Regulatory Commission

Authorized by the China State Council, China's cabinet, in accordance with relevant laws and regulations, the China Securities Regulatory Commission, a ministry-level organization directly under the leadership of China State Council, regulates China's securities and futures markets with an aim to ensure their orderly and legitimate operation.
Qualified Foreign Institutional Investors
Qualified Domestic Institutional Investors
RMB Qualified Foreign Institutional Investors
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