The Chinese A-shares market has been under significant pressure, especially following a tumultuous decline that began in the latter half of last year and continued until early this yearStakeholders at all levels, from the market to the Chinese leadership, have expressed growing concern about how to maintain the inherent stability of the stock marketThis concern stems from the stark reality that after a pivotal meeting on July 24 last year, which called for the revitalization of capital markets and bolstering investor confidence, the A-shares failed to rallyInstead, they plummeted sharply, with the Shanghai Composite Index crashing from 3,164 points to around 2,635 pointsMany individual stocks saw their prices slashed in half or even lower, which has left investors feeling disillusioned.
In light of these challenges, a distinct set of objectives has emerged for the 2024 capital market operations which specifically calls for enhancing the inherent stability of the capital markets
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This directive not only underscores the authorities' keen interest in the stability of stock markets but also highlights the fundamental importance of maintaining such stability.
For the A-share market, its inherent stability is seen as crucialPrimarily, it serves as an indicator of the market's overall healthA stable market is usually a sign of robust developmentConversely, if a market experiences excessive volatility or prolonged downturns, it raises concerns about its viabilityA healthy stock market must be able to withstand pressures and fluctuations without shaking investor confidence.
Additionally, the absence of inner stability can severely compromise the interests of investorsA market characterized by sharp fluctuations or a steep downward trajectory poses significant risks for shareholders, leading to potential wealth evaporating practically overnight
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Particularly in bear markets, holding onto stocks translates to assured losses, which can catalyze a broader crisis of confidence among investorsThus, placing a strong emphasis on enhancing the inherent stability of the capital markets is not merely a theoretical exercise, but an urgent necessity for the A-share market.
So, how can the A-share market bolster its inherent stability? There are several crucial strategies that could significantly enhance this stability.
Firstly, improving the quality of publicly listed companies is essential, as these companies form the cornerstone of the stock marketIf the foundation upon which the market is built is shaky, then true stability will remain elusiveThis isn’t a complex principle, but translating it into reality is far from simpleEnhancing the quality of listed companies can be tackled through three primary routes: 1) Ensuring that companies going public (IPOs) meet high-quality standards; 2) Improving the quality of existing listed companies through mergers and acquisitions; and 3) Intensifying the scrutiny that leads to delisting inferior companies
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However, achieving this requires concrete steps, as merely articulating these objectives isn’t enough.
Various challenges hinder these effortsOn one hand, institutional frameworks may be inadequate; on the other, there’s often insufficient enforcement of existing regulationsFor instance, rather than seeing an uptick in the quality of IPOs in recent years, the trend has been troubling, with many unprofitable enterprises being allowed to enter the marketAdditionally, some companies have taken advantage of mergers and acquisitions as a means of transferring wealth rather than genuinely enhancing qualityProducts of such practices need to be examined and rectified; otherwise, talking about enhancing the quality of listed companies will remain pure rhetoric.
Secondly, addressing the "three highs" issuance problem—high issue prices, high price-to-earnings ratios, and excessive funds raised—is essential
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Highlighting this problem emphasizes the urgent need for market attentionThe "three highs" characteristic severely undermines market stability, leading to substantial capital outflowsMoreover, it tends to deplete the intrinsic investment value of the stock, inevitably resulting in price declinesIt’s common to witness newly-listed shares perform poorly post-IPO, displaying a continual downward trend which hinders stable market development.
Thirdly, maintaining a balance of supply and demand is vitalSlowing down the IPO pace and ensuring controlled expansion in the market is crucialThe stability of the stock market hinges on this balance; increasing the supply of stocks without matching it with a corresponding influx of capital inevitably leads to instabilityRecently, while stock supply has significantly increased, the inflow of new capital has not kept paceMarket expansion is complicated, including not just IPO activities but also refinancing and the reduction of locked-in shares
