Editor's note: Wang Jianhui is the general manager of research and development at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN.
China's A-share market, which is about to celebrate its 35th anniversary this year, has seen astonishing achievements. The total market capitalization reached $10.89 trillion in 2023, second only to the U.S.'s $48.98 trillion, according to World Federation of Exchanges.
On February 18, 2021, the Shanghai Composite Index climbed to a high of 3,731 points. However, the market has been slipping since then.
The China Securities Regulatory Commission (CSRC) launched a series of tightening measures since the second half of 2023, including hiking the margin requirement for securities lending from 50 percent to 80 percent, restricting share reduction for those companies which did not distribute dividends within the last three years and suspending the loans of restricted shares, which is often viewed as a disguised reduction of holdings not to be sold within a certain period of time.
The market, however, continued to slide down by 6.3 percent (calculated based on the Shanghai Composite Index's 2,883 points on January 29, 2024 and 2,702 points on February 5, 2024) before recovering most of the losses in the following trading days. Obviously, the market had neglected or even misread the primary intent of the policy measures. A couple of months later when the message finally got through to the market, it started a bull run and recorded a surge of 58 percent in the rest of the year.
Whether policy measures could catalyze the much-anticipated turnaround of the current downtrend and help to create new vitality, depends on whether these measures could address the major issues of the market.
The top issue would be the supply-demand imbalance in the A-share market. During the past 10 years, the equity financing totaled 12.92 trillion yuan ($1.81 trillion), up 182 percent compared with the previous 10 years. Meanwhile, China's GDP grew annually by 6.8 percent on average, with the accumulated GDP growing by 167 percent. The growth gap is more significant than it seems to be, considering the fact that total debt financing surged by 5.32 times, accounting for 48 percent of the total GDP. Therefore, pressure on the market is obvious.
Short-term pauses in initial public offering (IPO) processes have been implemented to deal with severe market fluctuations. Since last September, the CSRC has been slowing down the approval process for IPOs and seasoned financing. Equity financing over the last six months declined from 664.9 billion yuan to 212.8 billion yuan. Such measures not only allowed the liquidity market to take a breath, but also bought some time for the authority to establish a long-term mechanism that balances the growth of the market and the economy and avoids passive start-stop interventions.
The CSRC has also launched some other measures and work plans that are worthy of attention. One of them is holding the listed companies accountable for creating and maintaining investment value for investors.
In an official seminar on February 5 this year, the regulatory body called for the listed companies to take principal responsibility for enhancing the investment value and actively increasing returns for investors. To achieve this goal, the institution strongly suggested that share buybacks, increasing holdings by controlling shareholders, dividend distribution as routine, and mergers and acquisitions (M&A) should be more frequently utilized. On the same day, the commission, having initiated the registration system in M&A process last year, also expressed clear support for M&A activities for the purpose of enhancing investment value. it also asked the listed companies to bring in high-quality assets and get rid of less productive capabilities. Based on experience, M&A could be an appeal for the runaway day traders and long-term investors to come back.
If effectively implemented, these measures could help create an investment environment that is much more constructive, productive and attractive to potential investors.
(Cover via CFP)