Investor distrust leads to stock market slump

China's securities regulator recently issued a policy that will shorten the listing process of companies from the nation's west and other less-developed regions. Although the move is aimed at facilitating the development of less-developed regions, it has sparked a heated debate among experts and ordinary stock investors.

Some experts, such as Xie Baisan, a finance professor at Fudan University in Shanghai, have criticized the policy, arguing it will open the door to the listing of substandard companies, which will be detrimental to investors' interests.

Xie seems to have misunderstood the policy.

Odd as it may seem, the China Securities Regulatory Commission policy will not disrupt the normal initial public offering rules because enterprises from poor regions can issue shares only if they meet all the standards of stock listing.

The commission has said that to shorten the application process for enterprises from less-developed regions, mainly the west, it will give them special treatment and approve them ahead of other applications if they meet the listing standards.

Generally, it takes two to three years for a company to go through the entire process of listing. By shortening the process for applicants from less-developed regions, the commission aims to promote the development of those enterprises as well as the regions where they register their business.

The regulator is also encouraging listed companies to merge with or acquire enterprises from less-developed regions and urging financial companies to train professionals in those areas in the art of attracting outside investment funds.

The policy was issued on Sept 9 and China's domestic A-share stock market tumbled on Sept 12, with the Shanghai Composite Index shedding 57 points, or 1.85 percent, from the previous trading day.

Although the remark by Eric Rosengren, the president of the Federal Reserve Bank of Boston, that the US Fed will take real action to raise the interest rate was deemed as a major contributor to China's stock market slump, analysts agree that the selling spree by investors can be attributed to the commission's new "green listing" policy. The US Fed held off the interest rate hike.

Why did the policy dampen investors' mood?

Misunderstanding aside, investors' longstanding distrust of the regulator is a main cause of the slump. In the stock market, only the best and most competent companies can have access to financing to expand their businesses, which in turn benefits investors. But China's stock market has been criticized for going awry by allowing some dubious companies to get listed, causing losses to investors.

Although the regulator has vowed to strengthen the IPO approval process, it will need time to win back the trust of investors. The well-meaning listing policy for enterprises from the less-developed regions has triggered concerns among investors that the regulator may allow such enterprises to cook their books to get their IPO applications approved.

To dispel such misgivings, the China Securities Regulatory Commission needs to more clearly explain to the public that it will not allow that to happen. More importantly, it must show the public that it is capable of strengthening the IPO approval process as well as regular supervision of already listed companies to prevent them from cheating investors.

To solve the problem at the root, the commission must also make efforts to facilitate the revision of the existing Securities Law so that companies using unfair means to make profits get harsher punishments.

According to the law, a listed company that releases false or misleading information faces the maximum fine of just 600,000 yuan ($90,000; 80,200 euros), and the person responsible can be fined up to 300,000 yuan. In contrast, such fraudulent acts can easily cost investors tens of millions of yuan in losses and seriously disrupt the market order.

As such, the punishments are too lenient to prevent crimes.

The author is a senior writer at China Daily.

xinzhiming@chinadaily.com.cn

(China Daily European Weekly 09/30/2016 page13)