China updates capital market guidelines

The State Council vowed over the weekend to push forward an array of capital market reforms in order to create a more transparent, multi-layered market with widened funding channels and more efficient allocation of resources.

In a statement published late on Friday, the State Council said it would encourage direct financing, facilitate a registration-based IPO system, further open up the capital market to foreign investors and develop a system for local governments to issue bonds directly.

The release of the statement, which was an update of capital market reform guidelines published in January 2004, came as China endeavors to open up its tightly controlled and corruption-plagued financial sector amid a slowing economy.

The market will play a decisive role in allocating capital resources, the statement said, adding that the country will encourage financial innovations and develop a system to protect individual investors.

"China's capital market has developed quickly in the past two decades, and the country established a market system that covers stocks, bonds and futures," the State Council said. However, "China's capital market is still immature, and some systemic problems still exist. New problems will continue to show up."

The statement repeated reform policies mentioned in the government work report and central economic conference, but is important because it painted a blueprint for China's capital market reform until 2020, said Li Daxiao, head of research at Yingda Securities.

"It signaled the government's determination to conduct fundamental reforms, and it will give a lift to the stock market as well," Li told the Global Times on Sunday.

China will continue to push ahead with a registration-based IPO system that stresses accurate and timely information disclosure by public companies, and it will develop a multi-layered equity market with a more complete share transfer system for small and medium-sized enterprises, the statement said.

Also, the country will set up a system for local governments to issue bonds directly, the statement said. Currently, they cannot directly sell bonds or borrow from banks, but they seek financing via special vehicles such as urban investment companies, and this system is seen as one of the main culprits for China's mounting local government debt.

The statement also pledged to make cross-border financing more convenient. China will increase the quotas for the Qualified Foreign Institutional Investor and Qualified Domestic Institutional Investor programs, the State Council said. The country also plans to strengthen cooperation with Hong Kong, Macao and Taiwan to facilitate cross-border investments.

"The increase in the quotas will result in a more rational market with diversified capital," Li said. "It is an essential step for China's capital market to become mature and reach global standards."

China will lift the amount of direct financing as opposed to financing via third parties such as banks in order to curb risks, the statement said.

According to a separate statement that the China Securities Regulatory Commission (CSRC) released on Weibo on Friday, direct financing only accounted for 42.3 percent of the country's total volume of financing as of the end of 2012, much lower than the 87.2 percent rate in the US and 74.4 percent in Japan.

"The ratio of direct and indirect financing is severely imbalanced in China, so financial risks are highly concentrated in the banking sector. This increases the difficulty and the cost of seeking capital to develop the real economy," the CSRC said.

Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times on Sunday that the CSRC, the People's Bank of China and the China Banking Regulatory Commission will work on detailed guidelines following the State Council's Friday statement.

China will also complete its delisting regime, develop financial derivatives and push for amendments to the Securities Law, the statement said.

While the statement aims to solve some key problems in China's capital market, it lacks more dynamic content that could boost the country's sluggish stock market in the short run, Zhu said.

More guidelines for liberalizing interest rates and adjusting bank reserves will probably be revealed in the second half of this year, Zhu noted.