The Core of Xi’s Capital Market Reforms Lies in Comprehensive Registration System Despite Headwind Impacts: Guan Qingyou

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Domestic analysts point to the launch of the “comprehensive registration system” (全面注册制) for A-share listings as lying at the core of Xi Jinping’s reforms of the Chinese capital market.

China’s 2023 “Government Work Report” released at the start of the year called for “promoting the reform of the stock issuance registration system, improving the basic system of the capital market, and strengthening the development of financial stability and the rule of law.”

Financial News (金融时报) the official news site for China’s financial regulators, recently reported that after four years of pilot testing “the stock issuance registration system reform has been fully implemented in the capital market.

“With the registration system reform as the driving force, the optimization of the basic system of the capital market and the development of the rule of law have steadily progressed.”

In an interview with Financial News, Guan Qingyou (管清友), chief economist with the Rushi Financial Research institute (如是金融研究院), said the registration system marks the culmination of recent reforms designed to increase the role of the Chinese capital markets in the financial system.

“Under the firm leadership of the Party Central Committee with Comrade Xi Jinping at its core, the registration-based reform has become the ‘flagship’ project of the comprehensive deepening of China’s capital market reforms,” Guan said.

“The China Securities Regulatory Commission (CSRC) firmly adheres to three principles of respecting the basic significant of the registration-based system, drawing on international best practices, and embodying Chinese characteristics and stage features, in promoting the reform trials in a steady and step-by-step manner.”

The registration-based system was first trialed with the Science and Technology Innovation Board in Shanghai in 2019, while in 2020, the registration-based system was introduced to Shenzhen’s Growth Enterprise Market. In 2021, the Beijing Stock Exchange was launched, implementing a trial version of the registration-based system from its inception.

On February 17, 2023, CSRC issued relevant rules for the comprehensive implementation of the stock issuance registration system, with regulators highlighting it as a major advance in the comprehensive deepening of capital market reforms.

“Under the comprehensive registration-based system, the positioning of different sectors becomes more clear, covering enterprises from different industries, types, and growth stages, and further consolidating the multi-level capital market system,” Guan said.

“This not only means the separation of audit and supervision, improvement of trading systems, but also the introduction of short-selling mechanisms.

“The comprehensive registration-based reform will effectively promote the development of a multi-level capital market system while promoting the unity of market systems, making the transfer mechanism more smooth, and promoting the formation of a new ecosystem of multi-tier capital markets that is tailored to the different development stages of the real economy.

“The implementation of the comprehensive registration-based system means that the capital market is transitioning from a supply-and-sales model to a supermarket model. Enterprises must also recognize the significant opportunities that this transformation presents.”

Following the launch of the reforms, Guan highlighted the following features of China’s equities market:

  1. Normalization of Initial Public Offerings (IPOs): “After the implementation of the registration-based system, the number and rate of IPOs passing the review will continue to show a ‘double peak’ trend.”
  2. Differentiation of capital value: “The A-share market is becoming more institution-dominated, and investment strategies are quietly changing. Core assets and value investments are becoming mainstream, with the strong and big players as the kings.”
  3. Normalization of value return: “Following the acceleration of the registration-based reform, about 80% of enterprises have fallen below the closing price on their first day of listing. Venture capital and private equity firms need to fully consider their exit timing and methods, rather than just ringing the bell and being done with it.”
  4. Normalization of delisting: “The number and frequency of delistings will increase significantly in the future, and small-cap listed companies must strengthen communication with the capital markets.”
  5. Institutionalization of funds: “Whether in the primary or secondary market, the role of institutions is becoming increasingly prominent, making it increasingly difficult for non-regular forces and individual investors to make money.”

Guan further points out that “a new rationale for pricing” has been created by the comprehensive registration system.

“The comprehensive registration system also forces the improvement of pricing capabilities and the transformation of pricing methods. Of course, in the short term, after the significant reform of the comprehensive implementation of the registration system, we must also see that the downward shift of the structural valuation hub will be the ‘headwind’ of the A-share market for a period of time in the future.”

Guan highlights several negative impacts of the comprehensive registration reforms:

  1. Excess capacity in the real economy has directly accelerated a new pricing cycle. “Excess capacity at the macro level is a result of the aging population and declining demand after negative growth. Without the ‘first driving force,’ China may face the possibility of economic growth persistently lower than the potential growth rate for a period of time. The strategy of ‘running faster’ since 2019 is based on China’s long-term high economic growth. If the situation does not change, the valuation logic of the A-share market will change. Under low growth and tight liquidity, we need to re-examine the meaning of value and growth.”
  2. The oversupply of stock assets will inevitably squeeze the valuation bubble. “For the Chinese market, the comprehensive registration system is an extremely important historical change. The registration system provides more market-based financing opportunities for start-ups and technology companies, and also gives investors more choices. However, it should also be noted that it only took us a little over two years to rapidly expand from over 4,000 companies to now over 5,000. Although delisting is accelerating and issuance is also paying attention to the pace, the increase in stock supply is the trend. The normalization of IPOs is likely to be faster than the normalization of delisting, and many sectors are likely to see a downward trend in valuation after the transformation from approval-based to registration-based.”
  3. The increasing difficulty in selecting stocks is forcing the improvement of pricing ability. “The comprehensive registration system does indeed disadvantage small and medium-sized securities firms in terms of capital and investment capabilities, but it is relatively advantageous for large securities firms and investment banks. Although the stock market as a whole is becoming increasingly closely related to the macro economy, investment practice has placed new demands on pricing ability. The convergence of investment behavior is still unavoidable. The difficulty of selecting high-quality companies is greater, and it is also a sorter of outstanding and mediocre institutions.”