Shenzhen Stock Exchange has recently suspended the listings of seven companies including once-famous Internet firm Leshi, also known as LeTV. In addition, four others have been delisted from Shenzhen and Shanghai bourses.
This latest move is a strong signal that Chinese regulatory authorities will not tolerate the country’s capital markets serving as a money-pumping machine for wanton companies, but will make the capital markets play a more significant role in driving the country’s real economy and facilitating highly expected quality development and industrial upgrading. In the context of external uncertainties and international market fluctuations, especially at a time when the United States and China are hiking tariffs on goods from each other, such a measure is of key importance for China to stabilize its domestic economic development.
Delisting those unqualified companies from stock exchanges is only a small part of the job. In my point of view, enhancing the quality of listed firms as part of the supply-side reforms in the financial sector is a more important task for regulators since high-quality listed companies act as the pillar of a country’s efficient resource allocation and high-quality economic momentum.
We know that capital markets are the barometer of economic development. In order to ensure economic prosperity, the Chinese Government should take concrete and urgent measures to stabilize the country’s capital markets and shrug off lingering concerns about escalating Sino-American trade tensions.
Firstly, regulatory authorities should revise those rules and regulations regarding mergers and acquisitions, reorganizations and bankruptcies, so as to make it easier for the injection of high-quality assets into qualified listed companies. Meanwhile, by pushing forward the registration-based initial public offering (IPO) mechanism, more promising, innovative, high-tech companies and those companies that have close relations with the development of the real economy in the country should be encouraged to go public. According to official statistics, 33 listed Chinese banks posted much better results in the first quarter of 2019 than all listed companies from other sectors. The 33 listed lenders realized a total operating income of 1.3 trillion yuan (US$189.38 billion) in the first quarter this year, up 15.4 percent year-on-year. On the one hand, it is good to see that all Chinese banks have had sound performance in the past months. On the other hand, it is abnormal to see that all listed banks were operating much better than companies from any other industries in the country.
Secondly, Morgan Stanley Capital International (MSCI) inclusion will serve as an external propeller for China’s listed companies to improve their quality and efficiency. The global index provider decided to double the weighting of A shares in its indexes on May 14 this year. The inclusion factor of 238 large-cap A shares in MSCI will be increased from 5 percent to 10 percent, while another 26 shares are expected to be added with a 10-percent inclusion factor from May 28. MSCI also said it would continue the plan to further include A shares in August and November.
Thirdly, compared with the comprehensive strength of China worldwide, the share of renminbi assets in global investors’ portfolios is far too low. Against the backdrop of a stumbling world economy with mounting risks, China’s economic prospects may make yuan assets more alluring than assets denominated in other currencies. It is obvious that foreign capital will not flow into the Chinese market automatically. As China accelerates reforms and gradually lifts restrictions on foreign investment, its attraction to global investors will see an increase.
Last but not least, regulatory supervision of listed companies must be strengthened. In recent months, some big listed companies such as Kangmei Pharmaceutical have been revealed by the media and regulator to have conducted fraudulent activities in accounting and the preparation of annual reports. Information disclosure, risk management, internal control and auditing of all listed companies should be key aspects of governmental supervision in China.
(The author is the editor-in-chief of the Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)