Chinese shares have rebounded 24 percent from the low of August 26 after the authorities unleashed a slew of measures to bolster investors’ confidence in the capital markets. But the financial reform has just begun.
President Xi said at a meeting last week that China will step up its efforts to build a stock market that protects investors’ interests and reduces financial risks. It was the fifth time Xi mentioned the stock market in the past 50 days. The Communist Party has proposed to push forward the financial system reform in its new five-year development plan for the 2016-2020 period.
The news of reform is morale boosting for retail investors who endured an unprecedented stock rout that sank them from heaven to hell this summer.
The bloodbath in the Chinese stock market was an explosion after a long-term accumulation of problems, which exposed immaturity of the market, ill-fitted regulations, pervasive speculation and poor supervision. Private investors suffered hefty losses before the government came to rescue their shattered confidence.
Regulators rolled out a basket of measures to stem the slump and establish order, including suspension of IPOs, purchase of stocks with government funds, prohibition of share sale by big shareholders, and crackdown on short-selling. The efforts worked in the short term but wouldn't hold water in the long run.
China’s stock markets have been a crucial source of funding for state-owned companies and innovative enterprises in the past 20 years. But private investors regrettably failed to get due bulwark from risks. The capital market became a cash cow for some listed companies. The regulators have to show strong resolution to reform the financial sector in building solid infrastructure and effective supervision.
The China Securities Regulatory Commission announced on November 6 that it would restart IPOs in A shares. The commission also allowed investors to subscribe without paying into escrow accounts in advance, giving more priority to information disclosure instead of pre-IPO approvals and simplified procedures for smaller IPOs.
IPOs in China were suspended in July after the main market index plunged 30 percent from its June 12 peak, as panic-triggered sell-off spiked a market bubble that was inflated partly by heavily leveraged trading.
The IPO resumption heralds the recovery of the capital market and is a litmus test to see if the bull market returns. The A shares are still 30 percent off the June 12 peak of 5,178 points. Optimists expecting a long-term bull market will be closely watching the effects of the reforms.
Be it bear or bull market, both financiers and investors need to be more rational and less impetuous in facing the market fluctuation.
(The article is translated by Wu Jie.)