Most impressive market innovation
They took things a step further in 2019 with the launch of the Shanghai Star Market, initially dubbed the Shanghai Sci-Tech Innovation Board. It was a bold reform, and an innovation that has had – and will continue to have – a deep impact on the future of China’s stock market.
For starters, the Star market adopts a registration-based system for the first time in Mainland China.
In the standard approval-based system, listing hopefuls have to endure a long and often unpredictable period during which the China Securities Regulatory Commission (CSRC) approves each application. But on the Star market, candidates only need to register their applications with the Shanghai Stock Exchange and answer enquiries from both the exchange and the CSRC, typically requests for detailed disclosures of a firm’s financial information and risks.
Additionally, the CSRC scrapped the 23 times earnings ratio cap for IPO pricing on Star — in contrast to the rules on the country’s main Shanghai board. This means that securities houses can take a market-driven approach to pricing flotations on the Star Market, again a first for China.
Both innovations were long overdue measures to bring the domestic market close to international standards.
Unsurprisingly, the board appeared to open in something of a bubble but it has since calmed down. Despite their lofty valuations — in some cases within 30 times to 60 times P/E and at other cases over 60 times — the share prices of the first 25 listed companies rose to 140% of their IPO prices on their debut. However, after the initial frenzy slowed, some firms slowly started to see their opening price below their IPO price.
The launch of the Star Market showcased how efficient the Chinese regulators can be — if they want to be. Chinese president Xi Jinping first mentioned the idea in his opening speech in November last year during the first China International Import Expo. It took the Shanghai Stock Exchange and the CSRC only eight months to transform the Star from an idea into a fully-functioning stock market for new-economy companies.
It is an experiment, but one China is taking seriously. The regulator has even gone as far as to call out irresponsible behaviour by companies and their IPO sponsors, including not disclosing enough information and faking financial statements.
There are still many hurdles until the Star market can become a serious threat to the Hong Kong Stock Exchange or the Nasdaq. But a solid foundation has been laid, and looks set to only grow stronger.
Person of the year
This time around, GlobalCapital China has highlighted a person who has worked hard to make the Chinese financial system fit for purpose. In 2019, Yi Gang, governor of the People’s Bank of China, has delivered some of the most crucial and boldest reforms the onshore market has seen in recent years.
Under Yi, the central bank bailed out troubled Baoshang Bank in May, the first time the state had taken control of a financial institution in two decades.
This led to a series of other rescues and state takeovers of beleaguered city-level commercial banks such as Bank of Jinzhou. It also triggered a reaction among Chinese investors, who became risk-averse amid fears around the next bank to fail. However, such a process was considered necessary if the Chinese regulators are serious about making the onshore financial system more robust in the long run.
Yi also engineered a long-overdue interest rate reform in August. The new interest benchmark rate — called the loan prime rate (LPR) — is benchmarked on the central bank’s medium-term lending facility (MLF) rate. A group of 18 quoting banks will report their LPR prices to the National Interbank Funding Centre in the form of basis points added to MLF rates. LPR, although still not entirely decided by the market, effectively connects monetary policies with the real economy. This is in stark contrast to the old one year lending rate, which had been unchanged since October 2015.
Yi became the governor of the central bank in March 2018. He obtained his doctoral degree in economics from the University of Illinois and was an associate professor with tenure at Indiana University – Purdue University Indianapolis. He also had a brief stint as a professor at Peking University.
He is a far more open Chinese central bank governor than his predecessors. In his free time, Yi writes articles in both party-owned magazines and academic journals. He has also given interviews to international media in English, a rarity for a high-level Chinese regulator.
Yi has made it his mission to bring stability and improvement to China’s financial industry. He has already introduced some much-needed, and bold, reforms, while taking a prudent monetary policy approach as economic growth in the country slows.
He will have big challenges in 2020, including expectations of more defaults by state-owned firms, as well as a slump in GDP growth. Whether he will rise to the occasion and deliver again remains to be seen. For now, however, he has been one of China’s top leaders of change.