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Market reform key to 5-year plan

February 24, 2021

Like many startup founders in China, Shen Cong, the CEO of an internet-based education business, gained his knowledge about the capital market through years of meeting investors. Now he is aiming at an initial public offering for his company GEC Academy.

The 32-year-old Columbia University graduate, who was selected on Forbes China's 30 under 30 list in 2018, said his goal is to launch his company on the stock market within the next five years as he foresees "robust growth" in the country's capital market.

On Jan 31, the General Office of the Communist Party of China Central Committee and the General Office of the State Council announced an action plan with 51 measures to develop a high-quality market to correspond with the 14th Five-Year Plan (2021-25).

The measures include improving market institutions, the efficient allocation of production factors, boosting the market environment and quality, high-level opening-up and the establishment of an oversight mechanism.

Promoting a healthy capital market is an important aspect of the five-year blueprint, with additional financial opening-up steps in the pipeline.

Robin Xing, chief China economist at Morgan Stanley, told China Daily: "The new action plan has pinpointed pressing areas needing further reforms, particularly regarding the underperformance of the onshore equity market and its over-speculative nature." He added that most of the proposals in the plan had been widely anticipated by the market.

Registration-based reform

The plan underlines the need to promote reform of the registration-based IPO system with information disclosure at its core.

Since founding GEC Academy in 2016, Shen has kept a close eye on the progress of this system. His online tutoring platform grew greatly last year as the COVID-19 outbreak pushed students to take online courses. A registration-based IPO mechanism, once expanded, will greatly facilitate the financing needs for many startups, Shen said.

Xing said: "Under the registration-based IPO system, it's likely to be easier for tech and new economy firms to tap capital markets, while alignment with global practices also renders the A-share market more attractive to foreign investors."

"At the heart of the registration-based IPO mechanism is the principle of information disclosure; essentially passing the baton of valuation and judgment to market entities including investors and financial intermediaries," he added.

The registration-based IPO system was first introduced to the technology-focused STAR Market at the Shanghai Stock Exchange on July 22, 2019. The mechanism was also applied to the ChiNext board at the Shenzhen bourse on August 24 last year. China's Securities Law, which took effect in March last year, stresses the overall implementation of a registration-based IPO mechanism.

Xing said the shift toward a disclosure framework does not mean looser listing standards. The reform should be viewed alongside market disciplines such as implementation of delisting mechanisms and the nurturing of domestic institutional investors.

Delisting mechanism

Zhu Ning, deputy dean and professor at the Shanghai Advanced Institute of Finance, said the implementation of improved delisting mechanisms and nurturing domestic institutional investors are highlights of the action plan.

He believes a mature delisting mechanism would mark a milestone in the development of a high-standard market.

In his book, China's Guaranteed Bubble, Zhu wrote extensively about how implicit government guarantees to protect unqualified players hindered China's path to a quality market.

Zhu said in recent years, the criterion for delisting had been lowered, putting more firms under pressure.

The two measures in the guideline will provide tremendous protection for investors and remove the implicit state guarantee of protection for listed firms, he added.

Financial opening-up

The action plan also calls for measures to expand the opening up of the financial services market. The moves include allowing the establishment of foreign-controlled joint venture banks and securities firms, as well as wholly foreign-owned or joint venture asset management firms.

Daisy Ho, president of China operations at Fidelity International, a global asset manager, hailed the opening up of the financial sector as "timely and robust."

Xing said the move will help improve the overall quality of the financial market in China.

"Opening up the financial sector will help bring more foreign and private sector expertise and product diversity to the domestic market, particularly in growing areas such as brokerage, investment banking and asset management," he said. "This could help facilitate domestic development and competitiveness, which is a key enabler toward financing China's high-quality growth."

Opening up would allow China to leverage years of foreign experience and develop domestic infrastructure, such as environmental, social and governance investments.

"While we expect more involvement from private and foreign capital in broader aspects of the market, the pace would likely be gradual, and remains under the overarching principle of growth and financial stability," Xing said.


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