Reform seen aiding stock market's long-term development, stability

The long-term trend of the A-share market's sound development remains unchanged as the central regulators deepen capital market reform to ensure market stability and fair trading, said experts.

In a meeting on Monday, the China Securities Regulatory Commission, the country's top securities watchdog, said efforts will be made to secure the stable operation of the stock market. It also said it will step up research on market risks and come up with workable solutions. Market entities will be given full play to stabilize the market performance and improve market expectations, said CSRC officials.

Meanwhile, the countercyclical adjustment mechanism for IPOs should be completed. Capital market tools such as bonds, futures and regional equity markets should be better used to aid the recovery of the real economy, the CSRC said.

Sun Jinju, vice-president of Kaiyuan Securities, said the countercyclical adjustment for IPOs started in the third quarter of 2023, temporarily slowing new floats. So, only 34 new companies went public on the Shanghai and Shenzhen bourses in the first half of this year, down from 131 IPOs during the same period of 2023.

The temporary tightening grip over IPOs can further balance financing and investment in the A-share market while alleviating the liquidity pressure, said Sun.

Policies for foreign investors have also been improving. The People's Bank of China, the country's central bank, and the State Administration of Foreign Exchange, jointly released a set of regulations on Friday to optimize the cross-border capital management for qualified foreign institutional investors and renminbi qualified foreign institutional investors.

The QFII and RQFII registration procedures will be further simplified. The RMB deposit accounts for them to trade securities and derivatives will be merged. While only foreign currencies were allowed for remittances of QFIIs and RQFIIs in the past, both RMB and foreign currencies will now be allowed for such remittances, according to the new regulations that will take effect on Aug 26.

According to PBOC officials, the new regulations will set up a simple, open and unified capital management system for onshore securities investment. Investments of QFIIs and RQFIIs in China will be more convenient, which will be conducive to improving the quality of China's capital market opening-up.

Meanwhile, the regulators have been eliciting public opinion on raising the traffic fees generated from high frequency trading, a part of quant trading.

"Institutional investors should serve as the market's dampers and equalizers, which the market will welcome. If the strategies they adopt boost market performance instead, the market will get spooked and have concerns," said Zhu Liang, chief investment officer for US asset manager AllianceBernstein in China.

Recent performance of some quant funds in China appears to suggest they were instrumental in boosting market performance. So, it may be time to lower the funds' impact on both the market and market sentiment, as some investors appear to be a little bit distressed at the moment. The CSRC's suspension of securities relending and the central bank's recent cuts to key interest rates are part of the regulators' efforts to restore market confidence and stability, said Zhu.

Since January, the central regulators have expressed support or introduced key policies, including the nine-measure document released by the State Council, China's Cabinet, in April to advance the high-quality development of the capital market. These have addressed the most frequently raised market concerns and demonstrated the regulators' resolve to safeguard the capital market, said Meng Lei, China equity strategist at UBS Securities.

In this sense, there is limited room for the A-share indexes to further head south as supportive policies will impart upward momentum, he said. As more long-term capital in the form of pension funds, social security funds and insurance capital will continue to flow into the A-share market, the average value of A-share companies will be enhanced in the long run, he said.

The benchmark Shanghai Composite Index shed 0.43 percent to close at 2879.3 points and the Shenzhen Component Index slid 0.54 percent on Tuesday.