Abstract: In his speech at the 3rd member congress of China Association for Public Companies (CAPCO), Yi Huiman focused on the high-quality development of listed companies in China, touching upon key issues of concern including the registration system, expansion of Stock Connects, audit of China concept stocks, and the exits of shell and zombie firms. Yi called on listed companies to step up efforts at five fronts: 1) lay a solid foundation and improve governance; 2) enhance main business and increase competitiveness; 3) develop robust strengths and advantages and step up innovation; 4) build risk resilience; and 5) focus on performance, elevate returns, and break paths for high-quality development.
Dear representatives, ladies and gentlemen,
Good morning!
It’s my pleasure to join you at the 3rd member congress of China Association of Public Companies. On behalf of China Securities Regulatory Commission (CSRC), I would like to congratulate the organizer of the event, and pay our highest tribute and extend our warmest greetings to our representatives here today and all listed companies in our country.
I still recall the conversation with you three years ago on the quality of listed companies. Today, I would like to renew our dialogue with some of my latest understandings and observations on this topic.
I. LISTED COMPANIES IN CHINA ARE GATHERING MOMENTUM, UNDERPINNING THE LONG-TERM DEVELOPMENT OF THE CHINESE CAPITAL MARKET
The Chinese government has been dedicated to promoting high-quality development of listed companies, which is of strategic importance as it lays the micro foundation for the country’s economic growth. Over the past three years, the CSRC has been working to fully implement President Xi Jinping’s instructions on building a sound capital market, the Opinions of the State Council on Further Improving the Quality of Listed Companies, and the Implementation Plan for Improving the Delisting Mechanism for Listed Companies approved by the Central Committee for Comprehensively Deepening Reform, and taken improving the quality of listed companies as the top priority amid its efforts to deepen comprehensive reforms of the Chinese capital market. Sticking to the market-oriented and law-based principles, the Commission has strived to enhance market entry management while opening up diversified channels for exits, working on improving both information disclosure and corporate governance, and focusing on key problems such as illegal guarantees and stock pledges, in order to improve the market environment, promote sound competition, and lay a solid groundwork for the high-quality development of listed companies. Listed companies in China, on the other hand, have been devoted to improving their own governance, accountability, integrity and risk awareness, with heightened respect for market disciplines and the rule of law, while observing the bottom lines of not engaging in false information disclosure, insider dealings, stock price manipulation and other deeds harming their fundamental interests. With these endeavors, listed companies in China are showing refreshed vitalities, playing a better role as the market’s barometer and underpinning the sound development of the Chinese capital market.
The community of listed companies in China, being a pillar for the real economy, is swelling. As of the end of March, 2022, China recorded 4,782 listed companies with a total market value of 80.7 trillion yuan, ranking No.2 in the world. The number and capitalization of Chinese listed companies jumped by 33.4% and 85.3% respectively compared with the end of 2018. Listed entities now contribute to around half of the total profit of industrial businesses above designated scale across the country, up from less than a quarter in 2018, while almost a quarter of national taxation income come from listed companies. The importance of listed companies as the pillar for the Chinese economy speaks for itself.
Listed companies are increasingly dynamic, playing a greater role driving economic growth. Drawing on a fast-developing capital market, over the past three years, listed companies in China have managed to refinance a total of 3.1 trillion yuan, with almost 10,000 mergers and acquisitions amounting to 5.5 trillion yuan, while the exchange market has seen bond financing of a whopping 3.5 trillion yuan. As a result, the real economy has been restructured while scoring growth of higher quality, adding to the momentum of economic growth. Listed entities now boast an R&D intensity of 2.3%, 1.6 times the average of all businesses above designated scale; over half of total R&D investments of all companies nationwide are contributed by listed companies, having doubled over the past three years with the number of patents surging 74%. Listed companies are emerging as a key force promoting the integration of innovation factors and the application of R&D achievements. Amid the blows from the devastating COVID-19 pandemic, listed companies have donated a huge amount of money and relief supplies while working hard to restore production, step up supply and increase employment. With these efforts, they have managed to improve their performance and injected strong momentum into China’s economic recovery.
Listed companies in China are undergoing continuous structural improvements, emerging as the frontrunner leading the country’s economic transformation. The STAR board and the ChiNext stock market are carrying out pilots of the new registration system, with major reform moves soundly delivered including those with the National Equities Exchange and Quotations (NEEQ) and the establishment of the Beijing Stock Exchange. These efforts have made the Chinese capital market more attractive to high-quality businesses, improving the composition of listed companies. As of now, over 400 and 1,100 companies are listed on the STAR board and the ChiNext market respectively, while the A-share market records nearly 2,200 listed companies in strategic and emerging sectors, around 900 more than three years ago. Share of hi-tech sectors such as the biomedicine and next-generation IT industries in terms of market value has risen from 22.2% three years ago to 31.8%. Among the top 10 listed entities as measured by the market value, 4 are hi-tech businesses, in contrast to only 1 three years ago. The structural improvement exhibits both the upgrade and transformation of the Chinese economy and the Chinese capital market’s efforts to promote innovation-driven development.
The governance of listed companies has seen improvement, with businesses above designated scale playing an exemplary role. At the Chinese government’s urging and with strengthened regulation, listed companies have intensified self-inspection and corrected improper behaviors, with greater motivation to enhance standard operation and thus improved their level of governance. Over 70% of fund embezzlements by major shareholders and illegal pledges have been rectified, while the number of listed companies with a high proportion of stock pledges has been slashed by two-thirds from the peak so that stock pledges no longer pose major threats to the Chinese capital market. In the past three years, listed companies have paid dividends amounting to 4.4 trillion yuan, up by almost 50% from three years ago. In 2021, almost 90% of listed companies have publicly elaborated on their performance, and a quarter have disclosed ESG or CSR (corporate social responsibility) reports, demonstrating Chinese listed companies’ increasing devotion to improving governance and giving back to the society.
These achievements are owed to both the hard work of the companies themselves and the coordination and support from all related parties, including local governments introducing supporting policies, intermediary agencies implementing strict standards, and media scrutiny on a continuous basis, all of which have combined to promote the high-quality development of listed companies in China. On behalf of the CSRC, I would like to take this opportunity and say a big thank you to friends from all walks of life who have shown your concern and support for our listed companies over the years.
II. PROPERLY UNDERSTAND NEW OPPORTUNITIES AND CHALLENGES, AND REINFORCE FAITH IN PURSUING HIGH-QUALITY DEVELOPMENT
Listed companies are finding themselves in an extremely complicated and profoundly changing environment. The once-in-a-century COVID-19 pandemic is fueling risks and uncertainties worldwide, with receding globalization, vulnerable global supply chains, slowing economic recovery, and ballooning inflation. The Chinese economy, under triple pressures from contracted demand, supply chock and weakened expectation, is increasingly hindering the development of listed companies in terms of costs, resources and environments, placing in front of them greater difficulties in finding a proper solution to restore and sustain profitability.
While recognizing the risks and challenges, we should also understand the various favorable conditions that could underpin the high-quality development of listed companies.
First, macroeconomic policy aimed at stabilizing growth and expectation is taking effect. China boasts the world’s most complete and biggest industrial system as well as a super-large internal market. There has been no reversal to the long-term progress and stability of the Chinese economy, and that is the source of momentum driving the high-quality development of listed companies. Governments at all levels have introduced policies to stabilize price and prop up industrial production since the start of this year, securing a proper level of liquidity in the market, while continuing to cut taxes and fees which could further reduce the costs of businesses so as to improve their efficacy and spur their development. There have also been recent moves to resolve risks in the real estate sector and regulate the platform economy, further boosting market expectations. Meanwhile, the CSRC has rolled out measures to reduce the initial and annual costs that listed companies incur and step up regulatory supports, an attempt to help them weather through and stimulate the real economy.
Second, a sound market ecology that protects proper competition is taking shape. The revised Securities Law of the People’s Republic of China has been followed by rules and mechanisms on listing, financing, restructuring and bond issuing that are poised to support the high-quality development of listed companies. The Amendment (XI) to the Criminal Law of the People’s Republic of China and the Opinions on Strictly Cracking Down on Illegal Securities Activities According to Law issued by the Chinese State Council have underpinned intensified efforts to fight against irregularities, providing a sound legal basis for building a better capital market. Over the past three years, 232 cases have been filed for inspection against listed companies, 82.7% up from three years ago; a total of 77 companies have exited, 6 times that three years ago. The quality-oriented transition of the Chinese capital market is picking up pace.
Third, the Chinese capital market is growing increasingly attractive for investors. The number of investors in the Chinese securities market has exceeded 200 million, while Chinese institutional investors and foreign investors now hold 24.3% of stocks in circulation, up from 17.6% three years ago. The Chinese capital market is emerging as an important destination for household investments and global asset allocation, with investment and financing increasingly balanced and mutually-reinforcing.
A steady and growing capital market will always pillar the high-quality development of listed companies. The Chinese capital market will remain dedicated at four fronts, and serve as the inexhaustible source of power supporting listed companies at hard times to move forward. These four fronts are:
First, deepening reforms. China will continue its effort to fully deliver the registration system, and press ahead with a set of reforms including building a sound institutional basis, enhancing the rule of law, stepping up regulatory transition, and promoting a higher level of corporate governance, etc. China will work to build a set of flexible and inclusive institutional mechanisms, and optimize the structure and ecology of the market on a continuous basis in order to give better play to its role in capital formation and resource allocation.
Second, pursuing high-level opening up. China will step up formulating and implementing a new set of pragmatic moves to promote opening-up, expanding the scope of its Stock Connect programs between Shanghai/Shenzhen and Hong Kong, optimizing the Shanghai-London Stock Connect, and steadily promoting the two-way opening of commodity and futures market, in order to diversify the supply of financial products and provide a sound institutional basis for a capital market with global competitiveness. China will also accelerate introducing new regulations on the overseas listing of Chinese companies to ensure that the mechanism works well so that Chinese companies can explore new possibilities for development provided by overseas markets and resources. While observing both international practices and its own laws and regulations, China will work to promote tangible outcomes of its cooperation with the United States on auditing and regulation, so as to build a predictable international regulatory environment that could facilitate the high-level opening-up of the Chinese capital market. It will also enhance pragmatic cooperation between the mainland and Hong Kong capital markets, and help to cement Hong Kong’s place as an international financial hub.
Third, supporting both state-owned enterprises (SOEs) and private businesses. The Chinese capital market, while backing SOE reforms and the cultivation of state-owned capitals, will remain committed to promoting the innovation-led transformation and the sound development of private businesses. China now have over 3,000 listed companies that are private, two-thirds in total, while the proportion is over 80% if we look at newly listed ones in recent years. China seeks to create a level playing field for businesses of various ownerships, and provide stronger support for private businesses via various financial instruments including stocks, bonds, funds, REITs, futures and options, so that high-quality private companies can enjoy smoother and wider financing channels.
Fourth, pooling efforts to sustain sound and stable development and boost expectation, which underpin the operation of the capital market and embody the anticipations of all market participants. All related authorities, departments and organizations shall continue to join endeavors, with the shared goal to build a market-oriented, law-based and international capital market, in addressing common concerns and enhancing expectation management, in order to create a favorable environment.
In general, listed companies in China face an important window period for high-quality development now and going forward. Let’s forge ahead together with firm confidence, grasp opportunities and overcome obstacles, in order to promote the sustainable and high-quality development of our listed companies.
III. BUILD FIVE CAPACITIES TO ACHIEVE HIGH-QUALITY GROWTH
President Xi has urged efforts to cultivate a group of world-class enterprises with outstanding products and brands, leading innovation, and modern governance. Listed companies, representing the 48 million plus businesses in China, shall serve as role models and strive to achieve growth of higher quality. Public companies need to stay true to their original aspirations and remain aware that the purpose of going public is far more than raising capital; more importantly, it’s to improve their governance and sharpen their competitive edges, in order to give back more to the shareholders and the society. Going public is not the destination, but a new departure toward development of higher quality. Public companies need to understand their unique position and orientation, respect market disciplines and the rule of law, improve modern governance and risk management, while observing the bottom lines. I would like to suggest that listed companies build the following five capacities to achieve high-quality growth.
1. Corporate Governance
The performance of a publicly listed firm is determined by corporate governance. Effective governance and internal control maintain a healthy balance between shareholders and executives, majority and minority stockholders, the firm, and other stakeholders, resulting in complete incentives and restraints that ensure a company's production. Financial fraud, controlling shareholder expropriation, "double BODs," and other snafus in recent years are all examples of corporate governance failure.
On the one hand, legislators should add Supervision and Regulation of Listed Companies to China's laws and regulations, with items of independent directors and defined rights and obligations; on the other hand, best practices should be praised to strengthen companies’ self-discipline.
2. Competition
Companies should concentrate on their core business, whether they are industry giants or niche market captains. Some listed companies have been expanding projects and investments that defy economic rules in recent years. Excessive diversification and capitalization result in core business hollowing out, jeopardizing their own development, shareholder rewards, and market stability.
The CSRC will improve capital market laws and regulations, guiding listed firms to focus on their core business and healthy development, and increasing development efficiency and benefits. We will continue to support head enterprises with the outstanding main business and strong competitive ability, and we will let them play a role of demonstration; for the one-sided pursuit of diversified development, we will strictly supervise their M&As and financing behavior; and "zombie" companies with shrinking main business and inability to continue operations should be delisted.
3. Innovation
China's modernization is based on innovation, and it is the only way to achieve high-quality economic and social progress. It is not just an issue of growth, but also of survival, to innovate. The ability of Chinese listed firms to innovate has improved in recent years, yet it remains insufficient and unbalanced. R&D spending in the top 100 listed firms accounts for nearly half of all listed firms' R&D spending. In terms of innovative capability and R&D intensity, there is much to be improved.
In the implementation of the stock issuance registration system, we will adapt basic systems for issuance and listing, refinancing, M&As, and restructuring to technological innovations; let PE and VC funds play a strategic role in supporting innovation; let the bond market finance for tech companies; and promote a quality circulation among technologies, capitals, and industries. Listed companies should continue to prioritize innovation, making good use of the various tools available in the capital market to support innovation, making innovations on the basis of tradition, enhancing the "content" of sci-tech, and establishing themselves as an industry leader.
4. Resilience
The ability of a corporation to manage risk has a significant impact on its growth. Listed firms should combine the entrepreneurial spirit of daring and creativity with the development of risk-prevention procedures in order to continuously improve their companies' resilience. High debt and leverage are one of the biggest sources of risk for enterprises. Some listed firms and big shareholders grow leverage without thinking about it, using on- and off-balance sheet, on- and off-market, local and foreign currency for funding, which has resulted in hazards, a predicament, as well as a lesson that must be learned.
We'll improve our risk monitoring and identification, as well as information sharing, in order to detect early warning signs of emerging and trending problems. Meanwhile, we will strengthen the bond financing restraint mechanism, improve the consistency of on- and off-market equity pledge financing business supervision, assist listed companies in reducing leverage and resolving risks through restructuring and reorganization, and promote the sound development of listed companies.
The quality improvement of listed companies should ultimately be reflected in their ability to create and distribute value. Listed companies should enhance returns to shareholders through cash dividends and share buybacks.
They should also pay more attention to other stakeholders, such as providing a better development platform for employees, better products for customers, solid performance protection for creditors, increased tax revenue for the country, a better ecological environment for people, and higher quality development in a positive interaction with society.
5. Earning
The CSRC will increase our efforts in investor protection, guiding listed companies to return "real money" to investors and actively respond to stakeholder demands, better fulfilling their social responsibilities, and serving as an example of how the new development should be.
Ⅳ. COLLABORATE TO IMPROVE THE QUALITY OF LISTED FIRMS' DEVELOPMENT
Promoting the quality development of listed companies is a difficult and time-consuming task that requires full synergy and long-term commitment. The CSRC will assess the implementation of the State Council's Opinions on Further Improving the Quality of Listed Companies, as well as recent work experience, formulate a new round of action plans that address the inherent and external constraints to the quality of listed companies, accelerate the regulatory transformation, improve the adaptability, effectiveness, leadership, and synergy of regulation, and promote the high-quality development of listed companies with the high-quality system and regulation.
To promote the high-quality development of listed companies, we must gather the wisdom of the people based on collaboration, participation, and common interests.
The role of controlling shareholders, actual controllers, directors, supervisors, and executives is critical in the development of listed firms. They should be role models for compliance, integrity, responsibilities, and entrepreneurial spirit, as well as leaders in the quality development of listed companies.
Intermediaries should act as "gatekeepers" in the procedures of listing, oversight, and delisting, The focus of intermediaries should be switched from "approvability" to "investability" in order to grasp the relationship between the registration system and quality growth of listed firms – pick and suggest qualified enterprises and supervise and improve the standard operation of companies.
The capital market is built on the backs of investors. We expect to see investors follow logical and value-based investing strategies and take a more active role in corporate governance by attending performance briefings and shareholder meetings.
Local governments have a crucial role in the listing, risk resolution, and delisting; thus, in addition to enforcing laws, they should place a premium not only on the number of listings and but also the quality of listed firms, so that problems and risks may be identified and addressed quickly.
The business climate and development aspirations of listed businesses are directly tied to policies of macro-management departments and industry authorities. We will improve communication with relevant departments to promote a more uniform, transparent, and predictable regulatory environment, as well as implement policy measures that strengthen market confidence, in order to ensure a stable capital market.
Since its second member assembly, China Association for Public Companies has diligently implemented the Party Committee’s requirements, strengthened its role in "service, self-discipline, standardization and improvement", built itself as a "home for listed companies", and improved the quality of listed. I hope the CAPCO could continue its efforts in promoting the quality of listed companies, optimizing services, reflecting members’ needs, and become a communication bridge between listed companies and regulators, a major forum for self-regulation and exchanges among listed companies, and a window for the effectiveness of high-quality development.
Thank you.
This is the speech made by the author at the 3rd member congress of China Association of Public Companies (CAPCO) on April 9, 2022. It is translated by CF40 and has not been reviewed by the author himself. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
