CSRC Chairman's speech at Asian Financial Forum

Guo Shuqing, Chairman of China Securities Regulatory Commission (CSRC), delivered a speech at the Asian Financial Forum, Hong Kong, Monday, titled "To Develop a More Open and Inclusive Capital Market in China". Chinese stocks produced their best performance in almost a month on Monday, led by financial and defense shares. Following is the full text of Guo Shuqing's speech as released by the CSRC's official website.

To Develop a More Open and Inclusive Capital Market in China

Guo Shuqing, Chairman of China Securities Regulatory Commission

Good morning, Ladies and Gentlemen,

It is a great pleasure to attend the Asian Financial Forum. I would like to extend my sincere thanks to the organizer for inviting me and allowing me to share with you our experiences and views.

First, let me update you the latest development of the capital market in China.

Our capital market is a product of reform and opening up. Currently, the stock market capitalization, the balance of bonds and the trading volume of commodity futures all rank among top markets globally. We can say that, China spent only 20 years to travel the journey which took Europe and North America 200 years. However, like all metaphors, it is not exactly accurate.

Our market is full of vitality. Electronic trading technology has been adopted since the capital market's inception in the early 1990s. E-trading makes it easy for investors to participate, thus a huge number of investors have come to trade. In the A-share market alone, there are 78 million retail investors, with over 168 million trading accounts. If we take their families into consideration, then the stock market involve around 200 million people.

Our market has great prospects. China has almost the highest savings rate in the world. Even calculated at the current exchange rate, China's total annual savings is about 4 trillion US dollars, far ahead of other countries. The demand of residents and corporate sector for investment and wealth management is extremely booming. Thus the potential supply of financial resources in the market is sufficient. Meanwhile, in China over 13 million incorporated enterprises, more than 40 million self-employment businesses, and a great deal of innovative and startup activities need to raise funds in the capital market.

However, we are also fully aware that, our market is still rather immature. It is still essentially an emerging market in a transitional period. The reasons are as follows:

First, market structure is unbalanced. The bond market is significantly lagging behind the equities market, but the equities market is also not diversified. The futures and derivatives market is underdeveloped as well.

Second, valuation in the equities market is unreasonable. High quality of blue-chip companies are not reflected by high P/E ratio. SME shares have a premium of 50% to their nominal value on average.

Third, share holding structure of listed companies is rather unique. A large percentage of listed companies are state-owned or family-owned. State-owned shareholders take up over 57.8% of capital stock in the market, and single largest shareholders of listed companies hold 37% of the shares on average. It is common to see a single largest shareholder that dominates a listed company.

Fourth, market order and rules need to be improved. There is a lack of market integrity and legal awareness among some market players. Some listed companies make frauds in disclosure and financial statements. Insider trading and market manipulation happen from time to time.

Fifth, market volatility is substantial, especially in the past 5 or 6 years. The Shanghai Composite Index surged by 97% in 2007, plunged by 65% in 2008, and then sky-rocketed again by 80% in 2009.

However, in 2012, some positive changes have taken place in the capital market:

First, markets have become more balanced. In 2012, although equities financing has lowered, corporate bond financing increased by 60% to 3.62 trillion RMB Yuan. In the futures market, turnover grew by 38% to 1.45 billion lots, with 171.1 trillion RMB Yuan in trading value, 24% higher than the year before.

Second, investor structure has been improved. Now professional institutional investors hold 17.4% of free-float market cap of A-shares, 1.7 percentage points higher than that at the end of 2011. Retail investors' holding is 25.3%, decreasing by 1.2 percentage points. Enterprises and other institutions' holding takes up 57.3%, which is 0.5 percentage points lower.

Third, trading structure has become better. Now retail investors account for 80.9% of the total trading volume, which is 3.1 percentage points lower than the level in 2011, whereas professional institutional investors take up 15.2% of turnover, up by 1.8 percentage points.

Fourth, equity price structure has been improved. Blue-chips' valuation increased. The CSI 300 index grew by 7.6%, Shanghai 180 shares index climbed by 10.8%, Shanghai 50 shares index gained 14.8%, which are far higher than the market average. In addition, the average offering price dropped by 28%, and the P/E ratio declined by 36% last year.

Fifth, equities market fluctuation is much smaller. Share prices become more stable.