Smarter systems to woo investors back

At LSE or Lao Security Exchange — one of the smallest stock markets in the world — it's little surprise that the Chinese form the biggest group of foreign investors. The Laos government controls foreign investment tightly, and LSE is certainly not the most attractive of money-spinning destinations. Yet Chinese investors prefer to dip into every financial pie, faced with a stagnant equities market at home.

But the gloom is lifting already as China sprang a surprise over the May Day holidays by bringing in a swathe of stock market reforms. The China Securities Regulatory Commission (CSRC) lowered trading fees, rolled out detailed delisting rules and formed new guidelines for reforming IPO systems.

For the first time, the focus has shifted from companies to investors. Current rules in China's stock market focus more on ensuring listed companies' rights to raise funds, but pay less attention to protecting investor interests.

The unfairly designed system is partly to blame for the recessive market, the question now is will a dash of regulatory changes clear the runway for a bull market, encourage retail investors to return to the A-share market and push up low trading volume?

Bring back the investor

Since 2008, the Shanghai Composite sank from the 6,000 mark to below 2,500. Only in 2012 has it started gaining, after falling a combined 33 per cent in the previous two years. The CSRC's decision to lower trading fees at the Shanghai and Shenzhen bourses by 25 per cent is expected to help traders save around 3 billion yuan annually. After the cut, the two exchanges will charge buyers and sellers 0.087 per cent of the transaction value.

The two bourses have also drawn up plans to widen the criteria for delisting companies. Current delisting rules in China fail to get rid of junk stocks as many companies, despite their unprofitability, manage to find ways to meet existing standards to stay public. Now, companies with negative net assets will no longer be allowed to remain listed. This is the first time the delisting rule has been introduced in China as listed companies have seldom been ousted from the market unless involved in serious trading scandals.

The IPO framework will also be beefed up considerably with more disclosure requirements. Guidelines carry specific and separate responsibilities for issuers, intermediary institutions, law offices, accounting firms and rating agencies, with stricter punishments for irregularities and illegal practices. There will also be a provision to introduce independent third parties to carry out risk evaluations regarding information disclosures by companies.

Foreign hand

Along with these regulatory steps, an important milestone for foreign investors was also achieved last week. China raised the ceiling on foreign banks' investments in securities ventures for the first time in more than a decade.

Foreign companies can raise their stakes in joint ventures with domestic securities firms to as much as 49 per cent. The current maximum is 33 per cent. Experts, however, say that by stopping short of 50 per cent, regulators continue to show reluctance to go the full distance.

Yet another development indicates just how important foreign institutional investors are becoming. Of the 1,156 Shanghai and Shenzhen-listed companies that have released their first-quarter financial reports, 52 have qualified foreign institutional investors, or QFIIs, among their top 10 stockholders.

The financial reports indicate that foreign investors have assiduously wooed the vehicle, real estate and non-ferrous metal sectors. By March end, 74.5 per cent of the investment volume under the QFII program had been injected into the domestic stock market. The other part went to bonds and bank deposits, according to the China Securities Regulatory Commission.

In the short term, the regulatory reforms are almost guaranteed to boost the market. The Shanghai index rose for three trading days soon after the May Day holidays, sending it to a seven-week high. Market watchers, however, are quick to point out that the longer-term prospects rest on economic fundamentals and a freer market, not just stimulus measures.

Although reforms would help standardise the market and make it more mature, it is listed companies' profitability and the macro-economic outlook that will decide the prospects in the longer term. The stingy outlook when it comes to monetary policies remains a sore point with the market.

The writer is a freelance journalist based in China.