A-shares often have to wage a "defense war," lingering around 3000 points for a long time. Why is that? How to improve A-shares?

Our long-term research has found that the most important thing to improve A-shares is to transform the stock market from a financing market to an investment market. The financing market is mainly characterized by: in the past, the stock market has been used as a cash machine for listed companies to raise funds, and investors are regarded as leeks, leading to many strange operations. For example, financial embellishment before listing, performance changes after listing, long-term financing amount is greater than the dividend amount, low cost of financial fraud and illegal crimes, difficulty in delisting, and investors' rights and interests are difficult to protect.

In the future, it is necessary to completely change the financing market from the concept and system, establish the institutional design of the investment market, and ensure that investors can make money in the long term: listed companies with low dividends, broken issuance, and broken net value are not allowed to reduce holdings until the company is well managed, severely punish financial fraud, implement collective litigation to reduce the rights protection cost of small shareholders, establish a stabilization fund system, improve information disclosure and delisting system, and make the capital market a virtuous cycle market where the good and the bad are rewarded and punished.

Advertisement

In this way, as long as the interests of investors are protected and investors have the effect of making money, the prosperity and development of the stock market can be expected.

Since the establishment of A-shares for more than 30 years, the Shanghai Composite Index has been hovering around 3000 points for a long time, and there are many reasons. The first explanation is that the approval system has kept new economy companies such as BAT out of the door and cannot reflect economic growth and industrial upgrading; the second explanation is that the expansion is too fast, the quality of listed companies is uneven, leading to distortion of the index components; the third explanation is that A-shares are mainly composed of retail investors, lack of profit-making effect, and it is difficult to have long-term capital inflow.

We believe that the above are mostly technical reasons, and if measures such as suspending IPOs are taken frequently, they can only solve the temporary difficulties.

The deep-seated reason is that A-shares are still in the "financing market." The registration system is a reform that touches the soul, and if the soil problem of the "financing market" is not solved, many tools that have been proven effective in mature capital markets will also become tools for cutting leeks. Only by transforming the "financing market" into the "investment market" can the problem be fundamentally solved.

There are six differences between the financing market and the investment market:

First, the initial positioning of A-shares has the "financing market" gene, and there is still a listing impulse among all parties to this day. The original establishment of the Chinese stock market was to serve the financing and debt relief of state-owned enterprises. Under this tone, whether to list depends on whether local governments and competent departments support it. Until now, pursuing the number of IPOs is still one of the KPIs of many local governments. A market with the "investment market" gene should provide convenience for investors.

Second, in the issuance link, the financing market has scarce listing resources, and huge excess returns attract enterprises to queue up for listing. In 2022-2023, the financing amount of A-shares was the first in the world for two consecutive years. Even with the registration system reform, in the soil of the financing market, the market still cannot rationally price the value of listed companies, forcing the regulatory authorities to still screen listed companies and control the listing rhythm. In the investment market, the value of enterprises is determined by the market, and low-quality enterprises cannot obtain excess returns after listing.Thirdly, in the company supervision link, there is a change in performance after listing in the financing market, violations of share reduction, and imperfect corporate governance. In contrast, in the investment market, listed companies continue to create value, focusing on dividends and buybacks. The average amount of buybacks in the US stock market over the past five years is about $967.2 billion, far exceeding the A-share market's 97.3 billion yuan during the same period.

Fourthly, in the exit link, there is significant resistance to delisting in the financing market, with a low delisting rate; whereas the investment market has a well-established delisting mechanism, with a high delisting rate. Over the past decade, the average number of new listed companies per year in both China and the US has been around 300, but the average number of delisted companies per year in the US stock market is as high as 526, while in the A-share market it is only 17.

Fifthly, in the trading link, after listing in the financing market, there is a pursuit of excess returns, making quick money, which can easily lead to chasing rises and killing falls, causing significant fluctuations in the stock market. However, in the investment market, true value investment can be practiced, attracting medium and long-term institutional investment, and promoting high-quality development of the capital market.

Sixthly, in terms of punishment and investor protection, the cost of illegal activities in the financing market is low, and the investor protection mechanism is weak, while the investment market emphasizes severe penalties and investor protection. The new Securities Law has significantly increased the maximum penalty for financial fraud from 600,000 to 10 million, but it is still not enough to deter securities fraud cases involving hundreds of millions of yuan. The "Chinese-style class action lawsuit" has made some breakthroughs, but so far only a few cases such as ST Kangmei and Feiyue Audio have received compensation, and some cases are still awaiting substantial progress in the trial, indicating that investor protection still has a long way to go.

For the A-share market to improve, it should not repeatedly tinker with technical aspects such as T+0 and suspending IPOs, but rather address deep-seated issues, transforming the financing market into an investment market in terms of concepts and systems, improving the quality of listed companies, and allowing investors to make money in the long term.

In the short term, a stabilization fund of 3-5 trillion yuan could be considered to increase the counter-cyclical adjustment of macro policies and promote economic recovery. What the A-share market needs most now is a "rise" – a continuous rise for three months, with the index increasing by more than 20%. Once everyone's confidence is boosted, the wealth effect will drive consumption, and the capital market can contribute to the wealth effect for residents, consumption recovery, technological innovation, and the real economy.

Text

1. Why does the A-share market linger around 3000 points for a long time?

The A-share market often has to fight a "defense war," and returning to 3000 points is indeed inspiring. However, we need to consider why the A-share market has been lingering around 3000 points for a long time.

The A-share market's long-term hovering around 3000 points does not match China's economic growth and fails to reflect the fundamentals of China's economy. Major stock indices are one of the important windows to reflect a country's economic strength. Between 2007 and 2023, China's economic compound growth rate reached 10.49%; China's GDP reached 126 trillion yuan, ranking second in the world for 13 consecutive years, contributing 32% to global economic growth. In contrast, looking at our stock market, since the Shanghai Composite Index first reached 3000 points in February 2007, as of March 1, 2024, the index has recaptured the 3000-point mark 57 times. Among them, the adjustment cycles below 3000 points in 2008, 2011-2014, and 2018 lasted for more than a year.A-shares have long lingered around the 3000-point mark, diverging from the trend of global major stock markets. Between 2007 and 2023, while the Shanghai market continued to oscillate horizontally around 3000 points, the Dow Jones Industrial Average tripled, the NASDAQ Composite increased sixfold, the Nikkei 225 doubled, and the India SENSEX 30 quintupled. Without considering other factors such as valuation levels, just looking at the correspondence between stock index growth and national economic growth, the U.S. and Indian stock markets genuinely reflected national progress and economic development, while China's economic miracle has not been reflected in the Shanghai Composite Index at all.

There are various opinions on why A-shares have long lingered around the 3000-point mark. The first explanation is that the long-term approval system has kept new economy companies like BAT out, causing the index to be distorted and unable to reflect economic growth and industrial upgrading. The second explanation is that the market has expanded too quickly, but delisting has been too slow, with the quality of listed companies being uneven, leading to distortion in the index components. The third explanation is that A-shares are dominated by retail investors, lacking a profit effect, and investors vote with their feet, making it difficult to have long-term capital inflow.

We believe that the above mainly seeks reasons from a technical level, but it cannot solve the fundamental problem. The mystery of A-shares lingering at 3000 points for a long time may need to start from deeper levels such as concepts and systems. In 2018, we proposed that the registration system is a soul-stirring reform, involving a series of systemic changes and a series of legal revisions. Ultimately, it is necessary to transform from a "financing market" to an "investment market" to fundamentally solve the problem.

The crux is the "financing market," with deeply rooted concepts and systems. The financing market is mainly characterized by: in the past, the stock market was regarded as a cash machine for listed companies to raise funds, and investors were regarded as leeks, leading to many bizarre operations. For example, financial embellishment before listing, performance changes after listing, long-term financing exceeding dividends, low costs of financial fraud and illegal crimes, difficulty in delisting, and investors' rights and interests are hard to protect.

In the future, it is necessary to completely change the financing market from the concepts and systems, establish the institutional design of the investment market, and ensure that investors make money: listed companies with low dividends, broken issuance, and broken net value are not allowed to reduce holdings until the company is well managed, severely punish financial fraud, implement collective litigation to reduce the rights protection cost of small shareholders, establish a stabilization fund system, improve information disclosure and delisting systems, and make the capital market a virtuous cycle market where the strong survive and the weak are eliminated, rewarding the good and punishing the evil.

2.1 Initial positioning: When A-shares were established, they had the "financing market" gene, positioned as financing for state-owned enterprise reform, and all parties had a listing impulse.

The establishment of the Chinese stock market was to raise funds to promote state-owned enterprise reform, with a clear "financing market" gene. In the early 1990s, China's reform and opening up entered a new stage of the market economy, and Deng Xiaoping's southern tour set the tone for the capital market, "Securities, stock market, whether these things are good or not... must be resolutely tried." In 1990, the Shanghai and Shenzhen stock exchanges were officially listed, initially positioned to supplement funds for state-owned enterprise reform. Under this tone, whether to list depends on whether local governments and competent departments support it, rather than whether the enterprise itself is of high quality, so the initial listings were mainly state-owned enterprises.

Until now, the pursuit of the number of IPOs is still one of the KPIs for many local governments. In order to attract investment, tax employment, and create local business cards for the local economy, we have counted the development plans of various provinces and cities in recent years, and many economically developed provinces have set new IPO targets. Although listed companies to some extent represent the economic development strength of various regions, it is also difficult to truly cultivate good enterprises by ignoring quality and pursuing quantity.

A market with an "investment market" gene should provide convenience for investors. Looking back at the century-old changes of the New York Stock Exchange in the United States, it was initially established by 24 securities brokers who signed the "Buttonwood Agreement" to regulate transactions and spontaneously drove the establishment of the stock market system. After a long period of spontaneous development, a mature and完善的 investment market was formed, starting a long bull market in the U.S. stock market.2.2 Issuance Phase: In the financing market, companies scramble to go public, necessitating the raising of listing thresholds; in the investment market, there is a broad admission, and the value of enterprises is determined by the market.

In the financing market, listing resources are scarce, and companies can quickly cash out after going public. The huge excess returns attract companies to scramble to go public, so for a long time, we have had to implement a "approval system" with high thresholds such as net profit.

Even though there has been a registration system reform in recent years, in the soil of the financing market, the market still cannot rationally price the value of listed companies, forcing the regulatory authorities to still screen listed companies and control the pace of listing. Under the registration system, admission cannot be completely liberalized. Data shows that as of now, there are more than 600 companies in the A-share market queuing up to go public.

In the investment market, the value of enterprises is determined by the market, and investors vote with their feet. Enterprises with lower quality cannot obtain excess returns after going public, and the behavior of companies going public is more rational. The responsibility of the government and regulators is to strictly control information disclosure, and there is no need to artificially set listing thresholds.

A-share stock issuance fundraising leads the world. In 2022-2023, A-share financing was the highest in the world for two consecutive years. In 2023, the number of A-share IPOs was 313, while the U.S. stock market was 245, and the A-share IPO fundraising amount was about twice that of the U.S. stock market. The number of A-share IPOs is high, there are more additional financings, and the overall pace is faster, which leads to a certain supply and demand imbalance in the market.

2.3 Company Supervision Phase: In the financing market, there are many performance changes, reduction impulses, and "mowing leeks"; in the investment market, there is a focus on dividends and buybacks, rewarding investors.

Under the financing market, obtaining the qualification to go public means a huge arbitrage space, focusing on reduction and issuance rather than dividends and buybacks, leading to various routines. There are three specific manifestations:

First, in order to go public, companies will boost performance and embellish financial statements, but this is not sustainable, and performance changes after going public. To successfully go public, some companies will take measures to embellish performance. These measures may include inflating revenue, exaggerating profits, hiding liabilities, etc., leading to the exposure of problems one by one after going public, resulting in "performance changes".

Second, the chaos of illegal reduction has not been fundamentally cured. Listed companies often choose to reduce a large amount of cash when the stock price is high, treating investors, especially small and medium shareholders, as "leeks". Although the reduction regulations in 2016 and 2023 have standardized the reduction issue, in the face of high returns, there are still many reduction chaos, such as reducing through pledge, guarantee, securities lending, and even technical divorce. If the "financing market" soil is not fundamentally cured, it will still exploit systemic loopholes.

Third, corporate governance is not perfect enough, and dividends and buybacks need to be further improved. Under the investment market, listed companies continue to create value, focus on dividends and buybacks, and optimize governance structures. In recent years, with the encouragement of the regulatory authorities, the habit of listed companies' dividends has gradually formed. In the past five years, A-share listed companies have paid a total dividend of more than 8 trillion yuan, but there is still a certain gap with the investment market. The U.S. stock market has paid a total dividend of more than 4 trillion U.S. dollars in the past five years, and the average amount of buybacks in the past five years is 967.2 billion U.S. dollars, far higher than the A-share 97.3 billion yuan in the same period. In addition, there are also a few A-share companies that pay dividends with one hand and finance with the other, and the majority of cash dividends flow into the pockets of major shareholders.2.4 Exit Mechanism: In financing markets, the resistance to delisting is high and the delisting rate is low; in investment markets, the delisting mechanism is well-established, leading to a higher delisting rate.

Financing markets are oriented towards the financing needs of enterprises, and some enterprises that should have been phased out try every means to maintain their listing status. At the same time, as an important financing channel and a carrier for local economic development and employment, poorly managed listed companies receive protection and support from local governments, with non-market factors reducing the delisting rate.

On the other hand, investment markets have a sound set of quantitative indicators for delisting and supporting systems, with multiple channels for delisting and clear quantitative regulations for delisting standards, resulting in a higher delisting rate.

In the past decade, both China and the United States have seen an average of about 300 new listings per year, but the average number of delistings in the U.S. stock market is as high as 526 per year, while in China's A-share market, it is only 17 per year, with an average delisting rate of less than 1%, compared to an average delisting rate of over 5% in the U.S. stock market.

2.5 Trading Mechanism: Financing markets are characterized by speculative behavior, chasing gains and cutting losses, leading to significant fluctuations; investment markets focus on value investment, long-termism, and sustained growth.

In financing markets, the pursuit of excessive returns after listing, aiming to make quick money, can easily lead to chasing gains and cutting losses, with a pronounced herd effect and a strong atmosphere of speculative trading, which can easily cause significant fluctuations in the stock market.

In contrast, investment markets truly practice value investment, attract medium to long-term institutional investments, and promote the high-quality development of the capital market.

U.S. pension funds have made long-term stable investments in the stock market, significantly increasing the proportion of institutional investors' holdings in the U.S. stock market. Currently, the market value share of institutional investors in the U.S. stock market is 59.3%, far higher than the 21.7% in China's A-shares.

The flexible trading system in financing markets can easily lead to problems, while investment markets are more conducive to market-oriented trading. The flexible trading systems in financing markets, such as securities lending, T+0, and short-selling mechanisms, can exacerbate speculative behavior and further distort the market, thus some restrictions are imposed; investment markets are market-driven and often more bold and flexible in trading rules, implementing T+0 trading systems, allowing for greater fluctuations and higher frequency of transactions, which is conducive to value discovery. The hotly debated trading systems such as securities lending and T+0 do not have absolute good or bad, and the final effects can also vary significantly due to different market environments, ultimately it is essential to first cultivate a good market environment.

2.6 Punishment and Investor Protection: Financing markets have low costs for illegal activities and weak investor protection mechanisms; investment markets emphasize severe penalties and investor protection.

In financing markets, the cost of illegal activities is low and investor protection mechanisms are weak, leading to a lack of effective deterrents against illegal activities and insufficient protection for investors. In contrast, investment markets place a strong emphasis on severe penalties and investor protection, providing a more robust legal framework and stronger support systems to safeguard investor rights and interests.In terms of punitive measures, the financing market has lighter penalties for securities fraud, while the investment market employs severe laws and regulations. The new Securities Law has significantly increased the maximum penalty for financial fraud from 600,000 to 10 million yuan, but it is still insufficient to deter securities fraud cases that often involve hundreds of millions of yuan. The Criminal Law stipulates a maximum prison term of 10 years for insider information disclosure, but actual sentencing is generally between 3 to 5 years, indicating that the relevant laws impose lighter penalties on illegal and criminal activities, making it difficult to effectively protect investors. In contrast, the investment market imposes heavier penalties on illegal activities. For example, the U.S. stock market has strict punishments for securities fraud and other illegal and criminal acts, with fines of up to 5 million U.S. dollars and imprisonment of up to 25 years for financial fraudsters, comparable to severe crimes such as armed robbery, which serves as a deterrent to illegal and criminal activities.

In terms of investor protection, the collective litigation in the investment market is powerful, while small and medium investors are in a weak position in the financing market. Collective litigation is a standard feature of mature foreign capital markets. The U.S. securities collective litigation adopts a mechanism of "opt-out, opt-in," where as long as one person initiates a lawsuit, all shareholders are automatically covered by the final victory or settlement agreement, and the litigation costs are advanced by law firms. Even small and medium shareholders who cannot afford high litigation costs can obtain remedies. Collective litigation has led to fraudulent companies like Enron and WorldCom paying up to 6-7 billion U.S. dollars in civil claims. The new Securities Law has pioneered the "Chinese version of collective litigation," but so far, only a few cases such as ST Kangmei and Feiyue Audio have received compensation, and some cases are still pending substantial progress in the trial, indicating that investor protection still has a long way to go.

3 Suggestions: Transforming the Financing Market into the Investment Market, a Reform that Touches the Soul

The stock market, as an important part of the capital market, is crucial for high-quality economic development and the confidence of residents and enterprises. It is key to stabilizing the market and expectations. The stock market can stimulate consumption and investment through the wealth effect; boosting the stock market is beneficial for accelerating industrial structure upgrading, supporting high-quality development, technological innovation, specialization, and hard technology, and other major strategies. When the stock market is doing well, residents' wallets are fuller, confidence is stronger, and the economy can enter a positive cycle of recovery and improvement. What the A-share market needs most now is a "rise" in the market.

First, introduce a stabilization fund to replenish liquidity in the stock market and boost the capital market. Boosting the stock market can activate the wealth effect, thereby stimulating investment and consumption, and forming a positive cycle of economic development. It is suggested to refer to the 2015 experience, with the Securities Finance Corporation entering the market, and financial, banking, insurance, and other institutions providing financial support, with the central bank providing liquidity support. Given the current total market value of A-shares around 70 trillion yuan, the scale of the stabilization fund can be set at around 2.5-5 trillion yuan.

Second, increase the intensity of macroeconomic regulation to boost the economic fundamentals. Lowering reserve requirements and interest rates to guide further downward movement in real economy loan interest rates, stimulating resident consumption and corporate investment, boosting confidence, and improving corporate profit expectations. The economic fundamentals are the foundation of the stock market. Only by promoting a comprehensive recovery and improvement in the economy can the stock market be boosted in the long term.

Third, comprehensively deepen the registration system reform, improve the information disclosure mechanism and the normalized delisting mechanism, and improve the quality of listed companies. Information disclosure is the core of the registration system. Regulatory authorities should strengthen guidance and standardization of issuer information disclosure, forcing intermediaries to take responsibility and enterprises to operate in a standardized manner. In addition, it is necessary to continuously consolidate the normalized delisting mechanism, adhere to the principle of "delisting as much as possible," and improve the quality of listed companies through market competition.

Fourth, adhere to investor-oriented principles, guide listed companies to reward investors, and increase the protection of investors. Improve the quality evaluation standards of listed companies, guide listed companies to actively carry out share buybacks and cash dividends to reward investors. At the same time, introduce and improve laws and regulations related to investor protection, actively promote collective litigation, and use collective litigation to protect the rights and interests of investors.

Fifth, impose severe laws and regulations on illegal activities in the capital market and increase regulatory efforts. Increase the penalties for false information disclosure, hold securities fraud accountable in criminal, administrative, and civil aspects, set strict penalties to deter and punish, and improve relevant laws and regulations.

In this way, as long as investor interests are protected and investors have the effect of making money, the prosperity and development of the stock market can be expected! If the stock market cannot rise and remains in a long-term slump, investors will lose confidence, become stagnant, and fail to play any role, severely hitting confidence. As long as the stock market prospers and develops, financing and investment are active, and investors have confidence, it can support major strategies such as high-quality development, technological innovation, specialization, and hard technology. As long as the essence of the problem and the cause-and-effect relationship are clear, and the determination is firm, there are always more solutions than difficulties.