Hu Kaihong:

Good morning, ladies and gentlemen, welcome to the State Council’s policy briefing. On Dec 23, the State Council executive meeting reviewed and passed policy measures concerning optimizing financial structure through significantly increasing the proportion of direct financing. Today we have Mr. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, here to give us an introduction about the issue. Mr. Huo Da, director of CSRC’s market department, is also at today’s meeting.

Now, Mr. Fang, please.

Fang Xinghai:

Good morning, I’m very glad to participate in this policy briefing.

On Dec 23, the State Council reviewed and passed policy measures on optimizing financial structure through significantly increasing the portion of direct financing. The document on this issue will be published in a few days. This will be an important document to promote the development of direct financing. Today, my colleague Mr. Huo and I will give an introduction about this issue.

The central government pays great attention to the development of direct financing, which is regarded as a long-term strategic mission. This March, together with the National Development and Reform Commission, People’s Bank of China, China Banking Regulatory Commission, and China Insurance Regulatory Commission, the China Securities Regulatory Commission started the draft work of the document and re-edited it several times before submitting it to the State Council.

Fang Xinghai:

There were news reports on Wednesday’s State Council executive meeting, but details about the policy measures have not been made public. In the next 10 minutes, I will briefly introduce the main idea and measures of the policy.

The policy is set to tackle three problems. First, lowering financing costs for the real economy. Second, lowering the leverage ratio for enterprises. Third, diversifying risks in the financial system.

The policy is aimed at building a healthy and well-regulated stock market that effectively protects investors’ interests through significantly developing direct financing and cultivating an open and healthy multilevel capital market.

It also aims to build a significantly improved direct financing system featuring marketization, wide coverage, multichannels, low cost, high effectiveness, and strict regulation.

The policy puts forward detailed measures in five aspects, including market system, financing tools and channels, intermediary services for direct financing, balanced development of investment and financing, and the development environment of direct financing.

Now I will briefly give you an introduction about these five aspects.

Fang Xinghai:

1. Further improving the direct financing market system. First, establish a strategic emerging industry market in the Shanghai Stock Exchange and promote the listing of startups that have special ownership structure. Second, improve the system that enables share transfers of medium- and small-sized enterprises. Third, regulate a regional stock market, carry out tests of equity crowdfunding, and expand investment and financing channels for entrepreneurship and innovation. Fourth, explore reform on the company credit bond issuing system, strengthen regulation and coordination in the bond market, and enhance interconnectivity among banks’ markets and security exchanges’ bond markets.

2. Expanding tools and channels of direct financing. First, promote innovation in the bond market and develop long-term bonds, high-return bonds, and project bonds. Second, develop a combination of stocks and bonds, promote tests of preferred stocks, and develop convertible bonds. Third, expand securitization of credit assets and promote securitization of infrastructure assets. Fourth, promote the combination of the Internet and direct financing and regulate Internet borrowing and lending. Fifth, support the “go global” direct financing, simplify the approval process, and loosen restrictions on fund recycling and settlement of exchanges.

3. Improving intermediary services for direct financing. First, establish several first-class and international competitive modern investment banks, promote securities business licenses for qualified financial institutions on the basis of risk isolation, establish technology startups’ security companies. Second, strengthen regulation on rating agencies. Third, improve the services of accounting firms, asset evaluation agencies, law firms, and financing guarantee institutions.

Fang Xinghai:

4. Improving balanced development of investment and financing. First, build high-quality modern assets management institutions and expand the range and scale of the capital market of all kinds of insurance. Second, coordinate trust, bank financing, insurance assets management, and other investment and financing tools. Third, implement provisional regulations on private investment fund management and promote development venture capital investments, angel investments, and industrial investments. Fourth, expand cross-border investment channels, improve QDII, QFII, RQFII systems, and carry out QDII2 tests.

5. Creating a better environment for the development of direct financing. Improve laws and regulations, preferential tax policies and credit system and strengthen crackdowns on illegal financial activities to prevent financial risks and protect the legal rights of investors.

For the next step, we will coordinate with other departments to carry out the measures after the official publication of the policy.

As you can see, this is a very important document that involves almost every department of the financial system. Thanks for your attention. Now my colleague and I will answer your questions regarding these issues.

Hu Kaihong:

Thanks, Mr Fang. Now, questions, please.

China Radio International:

Besides increasing the scale of direct financing, what are the other measures to promote a steady market operation and guarantee investors’ legitimate interests?

Fang Xinghai:

The question has much to do with the current situation of the financial market. Generally speaking, we must stick to the strict and practical regulation. Some officials sometimes tend to leave problems to their successors. They do not have a long-term plan before doing something. In other words, the things they did cannot stand the test of time. However, it is our requirement that plans must be practical, and businesses must be down-to-earth. In other words, plans should solve practical problems, produce practical effects and withstand the test of history. We must not do anything that overdraws on future economic growth. By sticking to that guiding ideology, we will easily find the answer to your question about how to protect investors’ legitimate interests. A key to that is how to manage investors appropriately. For example, the current bond market is growing fast. In fact, the bond market is not suitable for small and medium-sized investors. So, as we know, only investors with over 3 million yuan can invest in the corporate bond market of the Shanghai Stock Exchange, and only investors with over 5 million yuan can invest in the National Equities Exchange and Quotations. If we keep the entry conditions under control, we will complete most of the so-called protection of investors’ legitimate interests. As the economy is changing, once you have bought bonds, no one can guarantee that each issuer of the bonds can make a timely payment. Investors with certain capabilities have certain risk analysis capabilities and can take certain risks. If a risk event occurs, the problem will have to be solved by following the rules of the market. If the market were full of investors without risk-taking or risk-analyzing capabilities, and the government gets involved once a risk event occurred, then no market would be formed.

Fang Xinghai:

Of course, there are many complaints that the account-opening requirements of 3 million yuan and 5 million yuan are not being enforced. If many people borrow money to open accounts and then take the money away, what should we do? It is not a matter of whether we can stick to the requirement, but whether we will stick to the requirement. We can manage to do that if we really want to. In practical work, some authorities give too much account to short-term interests. They focus on promoting the business volume of the market, whereas their risk control capabilities are relatively weak. If risk control is really regarded as a basic condition for long-term development of the market, regulation will not be difficult. For the authorities that complain about the difficulties of regulation, you can check if they have really punished those with inauthentic accounts, how many such people they have punished and if they have imposed strict punishment, and then you will get a general idea.

So, I believe, if we really stick to the requirement of strict and practical regulation, while increasing the scale of direct financing, we will be able to promote a steady market operation and protect investors’ legitimate interests.

Reuters：

It was said recently that the government will reform the Shanghai stock market next year, is there a timetable for the reform? Reports also said that Chinese companies that are listed overseas will be required to re-list in the domestic stock market. Which companies will be involved? Could you tell us how many companies and what difficulties there are for the government to carry out this work?

Fang Xinghai:

The question is, what is the future plan on the strategic emerging board in the Shanghai stock market and how will Chinese variable interest entities (VIE) companies with special share structures be listed in China? And whether the strategic emerging board is proposed for the listing of such companies? I invite Huo Da to answer the question about the strategic emerging board.

Huo Da:

The plan laid out by the State Council put forward the strategic emerging board for Shanghai stock market, and actually, it is not the first time for such a proposal. The document for mass innovation and entrepreneurship this year said that the aim of the strategic emerging board is to help domestic innovative, emerging enterprises get support from the capital market, not just the overseas-listed enterprises or VIE companies. The strategy is also proposed for the implementation of an innovation-driven development plan, serve mass innovation and entrepreneurship, support strategic emerging industries and push the transformation and upgrade of traditional industries.

Many in the media are wondering why the government put forward the strategic emerging board as there already exists the growth enterprise board in the stock market. During the research process, we found that there are many small and VIE enterprises in China, and the growth enterprise board is not enough, so we will add the strategic emerging board in the Shanghai stock market.

Preparation work for the strategic emerging board started right after the document on mass innovation and entrepreneurship was released this year. For the main issues such as listing requirements, exchange system and supervision work, we will learn from the experiences and lessons of the growth enterprise board, and carry out a system innovation for the new strategy.

The development route for the strategic emerging board differs from the growth enterprise board, and the two boards will have moderate competition with each other and together serve the real economy. Now the detailed standards and system arrangement are still under discussion, and we believe that the wok on strategic emerging board will make substantial progress next year with the strengthening and implementation of the registration system reform.

Fang Xinghai:

As I am in charge of international businesses in the China Securities Regulatory Commission, I want to talk about the domestic listing issues of overseas-listed companies. China has a large number of tech-type enterprises listed overseas. It is understandable that at the start of China’s capital market, with little room for development in China, companies sought opportunities to list overseas for their long-term development. And the government supported their decisions.

However, as China’s capital market grows, we have to create conditions for them to come back. It is rare that a nation’s large and influential companies are listed overseas. In terms of the Securities Regulatory Commission, we will create conditions to solve this problem. We will make sure the companies that have removed their VIE structure could be listed domestically within a short time. To do that, we should make plans that combine the registration system reform and strategic emerging board.

To encourage the companies to list domestically, we should also solve another problem of market access. Companies sought overseas listing not only because of difficulties of listing at home, but also because of market access problems. Some fields in China are not accessible for foreign investment, so many foreign funds let a Chinese citizen help them register a company to be managed in China and listed the company overseas with the VIE structure, and then transfer the money through the listed company and then to the one in China. Only solving this market access problem can the overseas listed companies come back, especially those in media and Internet business industries. The Securities Regulatory Commission cannot solve this problem independently, so we will cooperate with other departments according to the requirements of the State Council.

Our long-term goal is to let the influential companies, whether in Internet business or technology fields, be listed in China, and make the Chinese stock market their first listing place, but of course, they can also be listed overseas. Let the Chinese stock market be their main listing board, that is our final goal.

China News Service:

My question is about supply-side reform. The Central Economic Work Conference held recently attached great importance to it. What influence will this opinion have on the reform?

Fang Xinghai:

Thank you for your question. Carrying out structural reform on the supply side is a main task for the Chinese economy in the next few years. The opinion to be issued by the State Council serves structural reform on the supply side in many aspects.

Five tasks will be completed in the next year. First, cut excessive industrial capacity. This includes tackling zombie companies. Second, destocking, mainly the housing inventory. Third, deleveraging, which is essential to resolve financial risks. Fourth, lower corporate costs. Fifth, improve weak links and expand effective supply.

This opinion will help lower corporate costs, and just as I said in the opening remarks, it will help corporations lower financing costs. We all know that bond costs are much lower than bank loans, and if we further develop the bond market, the costs of debt financing will be significantly reduced.

In terms of improving weak links, this opinion will also play a big role. If the opinion is well implemented, the financing environment in our country will be changed greatly. There will be more direct financing channels, such as private equity, venture capital and equity crowdfunding. Furthermore, the new Third Board will be expanded and a strategic emerging board will be launched. These are all effective supplies for the capital market. As a result, it will benefit supply-side reform.

This opinion will help prevent risks, because direct financing can spread risks and lower the possibility of systematic and regional financial risks. For example, the bond market can help spread risks through the whole financial system. As there are many investors, if everybody assumes fewer risks, there will be fewer risks in the entire system. However, if everyone chooses rigid repayments, the risks cannot be spread out. Then we should gradually reform the rigid payments mechanism. In our financial market, the rigid payments mechanism is broken in the stock market, and this is a great contribution to the entire financial system.

Phoenix Satellite TV:

I’d like to ask a question concerning enterprises coming into second-board market from the new Third Board. Does the opinion put forward any measures to regulate this kind of behavior?

Huo Da:

Media has paid much attention to this problem. Currently, there have been some enterprises on the new Third Board entering the Shanghai or Shenzhen stock exchange through IPO (Initial Public Offerings) procedures. Such practices must pass the qualification examination before being listed on the market under current laws.

Now we are exploring whether there is any other way to realize this practice, and the National People’s Congress is also examining a proposal to promote a stock issuance registration system by adjusting some regulations of the Securities Law.

I hope enterprises won’t regard the new Third Board as a springboard to get listed on the Shanghai or Shenzhen stock exchange market, as there is still much room for them to grow on the new Third Board market.

China Daily:

The State Council document covers many aspects of the capital market. What might be the policy focus or breakthroughs for the next year, especially in terms of stocks, securities and over-the-counter markets? Also, do you have a timetable for the registration system?

Fang Xinghai:

I will say something about our focus next year and leave the registration question for Mr Huo later. It will take several years to implement such an enormous policy, but next year will be very crucial. We would like to do the following:

First, develop the stock market in stock exchanges. We will create more market layers by establishing the strategic emerging industries board at the Shanghai Stock Exchange next year.

Second, improve the National Equities Exchange and Quotations (NEEQ) by increasing the number of listing companies. We will support small and medium-sized financial agencies and high-tech enterprises to be listed on NEEQ.

Third, regulate the development of regional equity markets, approved and established by various provincial regions. When I was working in Shanghai, there was a local equity market then. From now on, such markets will be subjected to unified supervision standards, which will be framed by the China Securities Regulatory Commission (CSRC), but local governments are in charge of the execution, risk prevention and daily management of the markets. This model should be widely promoted. We should take gradual steps to build such markets, especially focusing on examining the suitability of investors. Not any participant can enter the market, nor any products can be traded in the market. In this way, we can manage risks.

Fourth, develop tests for equity-based crowdfunding. We will take steps and not rush into it.

Fifth, enhance the bond market. We will support innovative development and strengthen supervision coordination toward bond markets, especially between interbank bond markets and stock exchange bond markets. Closer connection of the two markets means bonds can be transferred between them. The ultimate aim is to form a unified bond market.

We will still have to work with related departments to further implement the policy. There are other things we have to do next year regarding the market that I have not mentioned. It will become clearer in the near future.

Huo Da:

About the reform of the registration system, CSRC answered similar questions on Dec 9 and 11 through news releases and public remarks. I will make no further comment here on the significance of the reform.

However, I would like to repeat some points regarding the implementation of the reform:

First is the change in the supervision departments’ examination philosophy after the implementation of the registration system, which is the core of the reform. Once the registration is implemented, investors will evaluate and judge enterprises’ value and prospects for themselves. Accordingly, we should strengthen supervision during and after to make sure the issuers fulfill obligations and agencies guard the entry. About this supervision arrangement, the State Council will release further decisions, based on which the CSRC will make plans.

Another thing I would like to say is that we will take steps to implement the registration system instead of releasing issue prices.

Fang Xinghai:

I agree with Mr Huo, and I would like to add a few points here.

First, we will lift the control on pricing eventually. It will be a gradual process, but not an unachievable goal.

Second, there are some systematic obstacles that remain to be eliminated in the development of Chinese stock markets. Looking back, since 2005, we spent two more years on the reform of non-tradable shares, which is incredible in terms of difficulty and range. After that, the only major defect left in stock markets is the rules for IPO issuance, which we will fix with the registration system. Therefore, after the implementation of the registration system, we can expect a bright prospect for China’s stock markets.

CCTV:

CSRC suspended some private equity funds, including policies concerning PE firms’ listing on the new Third Board (National Equities Exchange and Quotations). Can you tell us the reasons behind the moves? How will it influence the healthy, sustainable and sound development of the new Third Board in the medium and long term?

Fang Xinghai:

These moves indeed draw much attention.

I will make a brief introduction on the matter first. Mr Huo will have more on that later.

PE firms’ fundraising activities have been fairly frequent since the start of this year. The size and investment of the raised funds are widely of concern and being questioned, including by the media.

Therefore, we will enhance regulation on this kind of PE firms, by halting their listing and fundraising activities in the national equities exchange system. We plan to investigate their use of the proceeds in the next step.

Huo Da:

Here I have some supplementary information.

The new Third Board is a very important market. As I just said, it’s a platform to serve medium- and micro-sized enterprises, especially innovative, startup, emerging and high-tech ones. It’s also an over-the-counter market for transfers.

According to our calculation this year, the new Third Board’s fundraising capacity is not inferior to ChiNext, China’s Nasdaq-style board for growing enterprises.

The aim to establish and nurture this market is to serve the real economy. As I have mentioned earlier, it’s not a preparatory board for the Shanghai and Shenzhen exchanges, but an independent over-the-counter market. It has played an increasingly important role in supporting medium- and micro-sized enterprises, innovative companies, startups and firms with growth potential.

Quite a number of PE firms went public on the new Third Board since the beginning of this year, which raised concerns from the market and supervisory authorities.

We made the decision to halt PE firms’ listing and fundraising activities on the board, based on the original intention of the board, which is to serve the real economy as well as medium- and micro-sized enterprises.

But for sure, views vary on that. Some say PE firms will invest in medium- and micro-sized enterprises and innovative startups after fund-raisings, which will in turn benefit innovation, startups and medium- and micro-sized enterprises. We pay much attention to that opinion. So we will further investigate and analyze PE firms’ listings, and the size and investment of their raised funds, to check out whether they are channeled to the real economy. We will clarify regulations on these firms’ listing on the new Third Board after these efforts.

Fang Xinghai:

We should pay attention to a regular phenomenon on our financial market. Once a product or a service sees rapid growth over a short period of time, we need to slow down and take a closer look. There might be some hidden risks. We just need to take a look at the investors. And what kind of investors could not accept rapid growth over a short time, and what kind of investors are coming into the market? And are there any risks?

Xinhua:

Mr. Fang, what opening-up measure will be further taken in 2016? Will the Shenzhen-Hong Kong Stock Connect be launched? How is the progress of the Qualified Domestic Individual Investor program (QDII2)? Is there a timetable?

Fang Xinghai:

In 2016, there will be some new measures regarding the opening up of the securities market. About the timetable, under the current framework of the financial system, it is difficult to say that a certain product or a service will be launched at a certain date. There is only an approximate time. I think the Shenzhen-Hong Kong Stock Connect will be launched. And the People’s Bank of China has more say in whether QDII2 will be launched in 2016. According to the requirements of RMB’s joining the Special Drawing Rights (SDR) and our commitment, and international investors’ demand for RMB products or funds, the launch of QDII2 has met its requirement.

That’s all for today’s policy briefing. Thank you all. See you next time.