China's capital market reform: Balancing investment and financing for enhanced market efficiency and investor protection

The "Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization" was issued on July 21. This blueprint covers all aspects of promoting Chinese-style modernization, focusing on deploying major reform measures for the next five years.

The Resolution proposes to improve the functions of the capital market to give balanced weight to investment and financing.

In an exclusive interview with Shanghai Daily, Professor Li Feng, deputy dean of Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, talks about how this policy is likely to serve investors better, and how foreign investors and enterprises are going to benefit from it.

Shanghai Daily: What does "improving the functions of the capital market to give balanced weight to investment and financing " mean?

Li: As we know, the Third Plenary Session of the 20th Central Committee argues that we should improve the function of the capital market by balancing the investment and financing sides of the market.

To understand this, we first need to understand the ultimate function of the capital market is to allocate resources effectively and efficiently across the different sectors of the economy.

During this process, we have two sides: the supply side and the demand side. The supply side is the investment side. The demand side is the financing side, meaning companies that need money raise money from the market. If you compare the Chinese equity market to international markets, it's very financing-oriented, meaning it focuses on helping companies raise money.

What this new proposal or argument suggests is that we should also focus on the investor side. Not only do we need to care about the companies that raise money, but we also need to care about the investors -- whether they are protected well enough, and whether they have enough returns from the stock market.

That's the basic understanding of this policy.

This policy is part of the integrated, systematic effort by the regulators to boost the equity market. It's not a short-term rescue policy. Rather, it's a long-term effort from many years ago, when we started the comprehensive registration-based listing system, starting with the STAR market and then gradually applying it to the whole market.

And then a few months ago, the State Council issued a guideline. In that guideline, the regulators of government argue that we should improve the quality of public companies, improve their quality, improve their corporate governance, and incent listed companies to pay dividends.

So, this is part of the holistic effort that we are observing. And the ultimate goal is to improve the function of the capital market, but also serve investors better.

Shanghai Daily: Could you share with us some existing practices in Shanghai to improve the functions of the capital market while giving balanced weight to investment and financing? What role has fin-tech played in this?

Li: I think there are at least several ways that Shanghai has been improving the investing side of the equity market.

First, Shanghai has a lot of publicly listed companies. We observed in May that Shanghai proposed to set up a pilot demonstration zone for high-quality listed companies. We're still following this development, but Shanghai has proposed that it needs to improve the quality of its listed companies by setting up this pilot zone.

Second is that the Shanghai Stock Exchange, aka SSE, has done a tremendous amount of work in terms of investor education, investor protection, and listed company regulation. SSE has set up an Investor Education and Protection Committee. They routinely go out and educate investors. They've also encouraged different technology-based methods for investors to file complaints. It's much easier for retail investors to file complaints not only to regulators but also to the stock exchange.

Third, in terms of fintech, the CSRC, or the main securities industry regulator of China, has initiated the so-called regulatory sandbox regime for the capital markets. In other words, they set up some sort of regulatory experimental project where you can experiment the cutting-edge fintech technology in terms of helping investors help listed companies raise capital. Shanghai has 28 projects approved by CSRC. That's the most for any given city in China. A lot of these projects have been designed to facilitate efficiency in terms of the equity market.

Shanghai Daily: For foreign enterprises and investors, what does this policy mean? How will it shape their strategies in China?

Li: I think this is very good news for foreign financial institutions, foreign investors, and foreign enterprises in general.

Firstly, foreign investors, compared to Chinese retail investors, are more sort of value investors. They like to buy companies that are of better fundamental value. They are not necessarily into those companies with hypes. Now, with this new policy, foreign investors can be more confident in their investing style. Because now there are more than 5,000 listed companies in China. They can look into the smaller companies that potentially have higher quality.

Secondly, foreign financial institutions can potentially have more freedom in China. Recently in the last 2 years, we have observed that the Chinese government and also regulators have encouraged foreign financial institutions to set up shops in China. And in the old days, there was an equity percentage limit. Now a foreign financial institution can own 100 percent subsidiary in China in the securities industry or the banking industry.

One example is a leading French bank, BNPP. They recently set up a wholly owned securities companies subsidiary in Shanghai. So, this new policy and also a lot of other policies in the Resolution of the Third Plenary Session will encourage foreign financial institutions to get into the Chinese market.

And lastly, not only financial institutions but also foreign enterprises in general, for instance, manufacturers. In the last 40 years, they have been benefiting tremendously in terms of accessing the supply chain of China, in terms of accessing the huge consumer market of China. But now with this new financial policy or the new regulation trend, potentially they could raise funds in China.

Shanghai Daily: To further improve the well-functioning capital market with coordinated investment and financing, in which areas should Shanghai strengthen its efforts in the future?

Li: One thing extremely important is that Shanghai should strengthen its legal infrastructure so that investors can feel better protected.

Shanghai has the first specialized financial court in China, the Shanghai Financial Court. If you want to grow the financial industry, it's extremely important that you have very strong, transparent legal infrastructure. This infrastructure not only includes financial court, but also includes what we call diverse dispute resolution mechanisms, like arbitration or other ways of settling disputes between transactions of parties.

Number two is professional services companies. When we talk about the financial industry, we're not necessarily just talking about banks, securities companies, insurance companies. We also look at the accounting firms, lawyers, and also rating companies. These are part of the ecosystems. We need to have a cluster of top professional services companies covering a comprehensive set of areas.

The last point is talent. Relatively speaking, Shanghai has one of the biggest and best talent pools in China. But if compared to other international financial centers, such as New York or London, I think there's still potential for improvement. We definitely would think it's important for Shanghai to attract more talent with international perspectives, talent with the view that the financial industry should serve the manufacturer, should serve the science of technology growth.