Latest regulations continue PM Li’s ‘big market, small government’ attitude, reports Asia Sentinel’s Steve Wang

The stock market reforms that China’s Securities Regulatory Commission posted last Saturday represent a near revolution for its financial markets and are the latest manifestation of Prime Minister Li Keqiang’s determination to continue the transformation to a market-based economy in which retail investors hopefully can expect rational market rules to prevail.

The reforms, in gestation for more than a year and due to go into effect on Jan. 1, mark a fresh beginning for a financial regime that since China’s first steps into the market economy has been little more than a casino plagued by insider trading. They very much are intended bring China’s markets into line with western practices, equipping the retail consumer with protections long enjoyed by overseas markets and Hong Kong from years of reform.

Pic: AP.

Given the new set of regulations, the next concern is that the markets themselves will have the necessary will and sophistication to enforce them. And the regulation is only at the front end. After the regulators have determined whether the listing applicants are qualified, Li’s philosophy of big market, small government comes into play again, leaving investors and the markets to a caveat emptor philosophy in which they must rely on their own judgment as to value and risk.

Since the 3rd Plenum, the government has been involved in a whirlwind of activity in the financial sector. The CSRC yesterday also issued a directive supporting financial reform in the nascent Shanghai Free Trade Zone, followed by Finance Ministry clarification of corporate tax rules in the free trade zone. Other announcements have included a Yunnan-Guanxi border rea financial reform program to push for greater cross-border use of yuan to enhance cooperation with Asean countries. Land reform, the streamlining and disclosure of party and government administration have also been pushed.

The rules include a transition towards a registration-based IPO system, potentially removing a stumbling block that has inflated valuations of new offerings. New IPOs in the Shanghai and Shenzhen exchanges were shut down more than a year ago for a variety of reasons including concerns over fraud and abuse and that too many dud companies were being brought to the market and that investors weren’t allowed a level playing field.

Some 50 companies are expected to take advantage of the listing rules in January alone. As many as 765 Chinese companies have been jammed up waiting for the new rules to take effect. That in turn raises the question of whether there will be market saturation as the numbers of new companies outstrips the number of investors out there to buy the shares.

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