Push on with stock market reform

The change at the top of China's securities watchdog has made a stir in the market. Xiao Gang, the former head of Bank of China, has replaced Guo Shuqing as chairman of the China Securities Regulatory Commission, and great hopes have been pinned on Xiao being able to push through further reform to transform the country's controversial stock market.

His predecessor was widely deemed a reformist. During his short tenure of about one and a half years, Guo made or revised 68 rules to improve the systematic framework of the 22-year-old market. For pragmatic and often impatient individual investors, however, such reforms were not enough, as they didn't result in an instant surge in the stock index. In fact during Guo's tenure the benchmark Shanghai Composite Index dropped by nearly 200 points, and it hit a three-year low of 1,949 in early December.

Guo is certainly not to blame for this. As head of the CSRC he would have disrupted normal market order if he introduced policies targeting short-term movements. Instead he prioritized building a comprehensive system that will better serve the long-term viability of China's stock market.

Among the most notable policies Guo introduced were the strengthening of the requirement for truthful and transparent information disclosure and reinforced rules on delisting. He also made efforts to lower the price of newly listed shares to deflate initial public offering bubbles.

As a result, the average price-to-earnings ratio of new shares had declined to 31 times by June, 2012. It was further reduced to 30 times from as high as 48 times in 2011, according to official data.

Moreover, in a bold move that was unpopular with interest groups, Guo has postponed new listings for more than four months, as the CSRC required intermediaries, such as underwriters, accounting firms and law firms, to thoroughly check the financial situation of applicant enterprises to ensure they really qualify for listing. Since the freeze on new listings introduced in October, the number of pending applications for the Shanghai and Shenzhen stock exchanges has grown to 800.

And since the start of this year, 55 listed companies have received investigation orders from the regulator, with many of them allegedly being investigated for fraud, according to Securities Times.

It was obvious Guo was determined to make the IPO mechanism and the market as a whole more quality-based and less speculation-driven. Individual investors had long complained that the market had been reduced to a moneymaking machine for some listed companies. Such companies, after being listed at high IPO prices, often see their corporate performance suddenly precipitate a sharp fall in their stock prices after the lock-in period. While the original shareholders pocketed a lot of money after the IPO, individual investors make great losses.

But it will take some time for the new policies to bring about significant changes in China's still young and problematic market. Critics that only eye the short-term change in stock index when appraising Guo's performance are not fair.

The task facing the new head of the CSRC is how to build on Guo's market-oriented reforms to build a comprehensive system that supports the long-term viability of the stock market.

New measures and policies are set to be introduced to further regulate the market, but no matter what they are they should focus on protecting the interests of individual investors and building a fair and honest market culture where cheats can be singled out and punished. Otherwise it will be impossible to restore investors' lost confidence.

The author is a senior writer with China Daily.

(China Daily 03/26/2013 page8)