Will the A-share market embark on a new bull market?

The resilience of China's economy is striking, yet there remains a disconnection between its overall performance and the trajectory of the A-share marketValuation metrics indicate that the A-share market possesses a solid foundation for a long-term bull marketHistorical patterns reveal that a bull market typically follows the appointment of a new head of the China Securities Regulatory Commission (CSRC), although these bull runs tend to be fleeting, lasting only one to two yearsThis raises questions about the systemic issues embedded within the A-share market that might be stunting its potential growth.

China's capital market regulations have undergone gradual enhancement, but a pressing concern remains: what steps will regulators take in the future? What systemic issues must be resolved for a sustainable bull market to thrive? Below, we explore ten critical reforms necessary to rejuvenate the A-share market.

1. Investor Protection Framework - Prioritizing investor interests and ensuring reasonable returns.

Both exchanges and regulatory bodies must center their focus on the interests of investors

With a large proportion of individual retail investors contributing to the trading volume and volatility in China's stock market, safeguarding their interests is criticalIn contrast to the U.Smarket, where institutional investors dominate, China's market is heavily skewed towards retail investors, who comprise approximately 80% of participantsThis disparity magnifies the impact of market fluctuations on personal wealthHence, it is vital to establish mechanisms that protect individual investors' returns, whilst also providing avenues for education that encourages long-term value investingFeedback loops from ordinary investors must be developed to ensure corporations adhere to their obligations to return value to shareholders.

Historically, loopholes in stock reduction rules for listed companies have led to significant problemsThe CSRC has made progress in policy adjustments, yet further refinements are necessary

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For example, strict regulatory constraints should be imposed on major shareholders and actual controllers regarding their stock reduction actionsBefore proportional reductions can occur, measurable profits and dividends must be demonstrated by the standing companyCurrently, many firms—including those in high-tech sectors—struggle with profitability while major shareholders offload shares, adversely impacting smaller investors.

2. Revising Short Selling Regulations

In an environment that is predominantly built for long positions, the A-share market provides an efficiently structured mechanism for short selling—primarily accessible to institutional investorsCurrent trading rules allow these entities to engage in sophisticated short-selling strategies, while retail investors must passively react to market movements, often facing losses as a result of institutional practices.

Concerns about the sufficiency of regulation are valid

If market authorities excessively intervene whenever stock indices rise, it creates a tumultuous cycle where legitimate investment activities are stifled, leading to panic in retail participationA balanced approach must be instituted, allowing a fair playing field for all players and avoiding the damping effects of short-selling exclusively benefiting large institutions.

Additionally, the capability for retail investors to participate in short-selling mechanisms must be extended, offering options similar to those available in more mature markets, creating a more equitable trading environment.

3. Refining the IPO Registration System

A robust initial public offering (IPO) framework is contingent upon a well-established market economy and a solid legal systemRegrettably, the A-share market still grapples with challenges in this domain, exhibiting symptoms of inefficiencies such as inflated pricing for new issues and a lack of genuine financial health among newly listed firms

The prevailing tendency sees major shareholders profiting at the expense of retail investors.

The differences between the U.Sand European markets and the A-share market are staggering in terms of how IPOs are priced and executedThe emphasis could be placed on developing a mature pricing mechanism and stringent assessment before granting a public listingThis ensures that while more companies can enter the market, they do so under strict scrutiny to maintain overall market health.

4. Enhancing Regulatory Frameworks

The evident gaps in legal frameworks have resulted in cases of fraudulent disclosures among potential and existing public companiesFor regulatory measures to be effective, the legal statutes must not only be laid out on paper but actively enforcedHeightened legal repercussions for entities that breach information disclosure mandates must be communicated effectively, with a scale of penalties that deter misconduct.

5. Establishing Long-term Capital Structures

In stark contrast to Western markets where pension funds and sovereign wealth funds serve as major long-term investors, the structure in China lacks the same depth

While trust in institutional investors like public funds is slowly built, they predominantly mirror retail behaviorBroadening the scope of genuine long-term investors is crucial to stabilize market fluctuations, particularly amidst panic selling.

Investment from sectors such as insurance and pension funds should be catalyzed, directed toward equities to nurture a healthy ecosystem of investment for the future.

6. Market-oriented Exchanges and Corporate Governance

Most prominent exchanges globally operate under a corporate structure, contrasting with the Chinese system where government oversight can sometimes stifle innovationTo improve the IPO registration process and overall market dynamics, exchanges must operate as competitive entities that actively select quality listings rather than simply accepting submissionsCreating a curated listing process would drive market quality and investor confidence.

7. Balanced Delisting Regulations

As the number of IPOs increases, so too must stringent criteria for delisting problematic companies

A balanced approach to market expansion will cleanse the market of underperforming companies and enable a renewed focus on high-potential firms.

8. Cautious International Alignment of Trading Practices

While the call for T+0 trading systems and lifted restrictions on price movements echoes around the globe, the introduction of such systems in isolation could lead to heightened volatility and inadequate investor protectionHence, comprehensive reviews and pilot programs should precede widespread implementation to avoid the pitfalls experienced in prior attempts in the Chinese market.

9. Gradual Global Investment Openness

Attracting international investment requires an environment able to support global investors, significantly contributing to China’s economic resurgenceThere is an urgent necessity to dismantle barriers and facilitate a more welcoming atmosphere for foreign investment.

10. Protecting Entrepreneurship

Competitive economies thrive on robust entrepreneurism, and significant protections must be afforded to ensure they operate without undue interference