I assume it may not be necessary for me to brief you on the basic situation of the Shenzhen Stock Exchange. Without further ado, I’d like to share with you our views on issues of common interest.
21CBH: Chairman Chen, you mentioned the amendments to the ChiNext Market rules during a previous interview. We would like you to expound on what these changes are mainly about, and what are expected of them. And when do you anticipate they will become effective?
Chairman Chen Dongzheng: It seems that the ChiNext Market is still the focus of interest. There has been extensive discussion about specificity of possible amendments to the ChiNext rules. This is, in fact, no longer a secret. From SZSE’s perspective, first its scope should be expanded and the threshold lowered. Thus the ChiNext Market may be able to attract more high-tech enterprises with real growth conditions and good growth potential. Why do we need to further expand its scope? At its initial stage, some thought, it might be a little too much to establish such a volume of standards for the ChiNext Market, as it only covered six industries. As a matter of fact, it is a necessary course of development.
Why? It took the ChiNext Market a decade of hard work to become what it is today. And at the beginning, there was heated debate about whether it should even be launched. So it is inevitable that it must undergo a process of development and gradual perfection. As to what changes were made specifically, no consistent common understanding hasn't been formed. We must understand that difficulties with capital market reform lie in reaching a significant degree of consensus. Without a consensus, there is no way to accomplish anything.
A consensus requires cohesion. And building cohesion requires a process. Again, for the specific timing and the specifics of rules, we don’t need to aim for perfection. The best plans may not always be feasible in reality. Things always move from imperfection to perfection. The development of the capital market is also, a gradual process one of consensus building.
China Securities Journal: Chairman Chen, how can we make an effort to deepen the construction of the multi-tiered capital market? Are there any new directions as to what kind of services will be provided for small and medium-sized enterprises? Will there be some new products available? Thank you.
Chairman Chen Dongzheng: For small and medium-sized enterprises, private placement bonds are a very important channel to finance their growth. As is a direct means of fund-raising, IPO has stringent requirements. Only a limited number of companies have been admitted for IPOs. Now private placement bonds have been offered to small and medium-sized enterprises. The bonds are listed and transferred on the stock exchange. Transsolar may be on everybody’s mind. Transsolar has trouble meeting its debt obligations. How do we view the defaults? I have learned a lot and have received some extremely useful insights from several of my friends in economic and financial circles. Most of them said that this specific event is the first of its kind, but it broke the implicit guarantee for bond instruments. It's a part of the progress in the development of the bond market.
From the perspective of the SZSE, I believe the greatest concern should be how to properly handle the debt risk of Transsolar. Though the debt market is moving forward on broad road, we will inevitably encounter problems of one kind or another. In appropriately handling of the case may negatively affect the path direction for the debt market and exacerbate SMEs from the perspective of overall economic and social development.
This should remind the market, especially the vast number of investors, of risks in any financial product. How can we prevent and dissolve the risks? This is what the regulators and the SZSE are exploring. In this process, a certain price must be paid. But are we able to ensure that it will be within an affordable range, and to avoid repeating it? I think, in this process, the exchange should also maintain an attitude of being completely responsible. If any risk occurs due to less than fulfillment of duty by the exchange, it should also take the corresponding responsibilities like any other market entity.
Xinhua: You have made a proposal to make it a national strategy to vigorously develop small and medium-sized enterprises. Can you tell us more about this in the context of the SME Board and the ChiNext Market of the SZSE. As mentioned by the Chairman of the SSE yesterday, the emerging strategic industries board may overlap with the ChiNext Market. What are your thoughts about this? Here is my second question. The country is now vigorously developing mixed ownership. What opportunities will this bring to the capital market?
Chairman Chen Dongzheng: Two great questions indeed!
First, I would like to talk about the strategic emerging industries board of the SSE that Chairman Gui Minjie introduced to you yesterday. The construction of China's multi-level capital market is being carried out under the leadership of the Central Committee of the CPC, the state council and the China securities regulatory commission (CSRC), involving participation from all walks of society. The SZSE and SSE are of course two important participants. And more and more parties will get involved in the development of the equity market including the New Third Board, and the Fourth Board markets. So let’s review history. The SZSE received much support from the SSE in the process of building the SME Board and the ChiNext Market.
During the preparatory process of the SME Board and the ChiNext Market, the SSE and the whole of society have put in a lot of effort. Now the SSE is proposing a strategic emerging industries board. As to what this board will be like, perhaps we need to have a consensus. You still remember the ten years of review and study, don't you? I think it may take less than 10 years now given that we have better conditions available nowadays. But we must give it careful deliberation.
Personally, I want to give my support and approval to it because the market develops through innovation. The SSE may now be under some pressure, most notably in terms of trading volume since last year. As a matter of fact, there has been a recent shift in attitude. GDP is not the only measure from a larger perspective. There may be certain inevitability in the ups and downs in trading volume. But there may also be incidental elements. How can we solidly improve the blue-chip market? You may have your own unique views on this. I appreciate this kind of explorative spirit. But we must have a clear understanding of our priorities in our exploration and consensus building with reconciliation of China’s reality and current stage of development. First, we should have whole-picture view. We mustn’t just look at part of the picture from partial standing point; we must see the overall situation. Second we must take a long-term view rather than being short-sighted. In terms of trading volume, the SZSE was only 1/10 of SSE's in the past. If we judge the two exchanges only by trading volume, we may lose sight of the real situation. Moreover, SZSE’s mainboard index recorded the same performance as that of the SSE. The ChiNext Market demonstrated the most salient rise, followed by the SME Board. This involves a lot of inevitability. We cannot conclude that the higher the index, the better the market performance. Index spikes also involve concern of hidden risk.
Therefore, in order to solidly improve the multi-tiered market in China to serve SMEs, we must not only look at the present, nor too concerned with gains or losses in short periods. We must ensure sustainable long-term development. This is my personal opinion and I am willing to be supportive, especially for such pioneering work. However, that will be a gradual process, and we must take it easy.
The second question relates to mixed ownership. Personally, I believe this is a matter of critical concern. In this respect, I feel that the securities media has not paid enough attention to mixed ownership.
I noticed that mixed ownership is the most talked-about subject during this year's NPC and CPPCC sessions. As far as I know, both Chairman Gui Minjie and former MIIT Minister Li Yizhong have talked about it during the NPC and CPPCC sessions. Li Yizhong is also a CPPCC member now. On March 4, when Prime Minister Li Keqiang was hearing a report made at the economic and agricultural groups, Li Yizhong was the first to speak, and he talked about the issue of mixed ownership. I was then sitting beside Chairman Gui Minjie.
When Communique of the 3rd Plenary Session of the 18th CPC Central Committee was up for public comment, I was convinced that it would be a boon for China's capital market to establish mixed ownership as a basic economic system. Why is that? Think about it. Mixed ownership will be diversified in form in the future. The most feasible and reliable mean of realization is via the capital market. Despite the various problems faced by the capital market, it is a relatively open and transparent market. In this market, both the state assets and the private assets are taken into consideration, and the probability of problem occurrence is relatively low.
During the approximately 20 years of operation of the market, we have paid a dear price. But a very effective exploration in mixed ownership has been carried out, paving the way for mixed ownership to become a basic economic institution for the Chinese economy. I hope that we can blaze a path of success with concerted effort and continued attention.
CNR: As I heard yesterday, Chairman Gui Minjie noted that the T + 0 mechanism was already mature. I’d like to hear your opinion on that. Two years ago, you told reporters that the T + 0 did more harm than good to small and medium-sized investors. Do you still think so?
Chairman Chen Dongzheng: I did say that two years ago, and I still hold that idea. However, I'm not against the implementation of T + 0 in blue chips. I am actually supportive of it as an attempt to revitalize blue-chip stocks. We’ve always highlighted the importance of protecting small and medium-sized investors, as they are a more vulnerable group compared with institutional investors, in terms of research capacity or many other aspects. As for T+0, I am also aware that many small and medium-sized investors are in favor of this proposal.
I will simply make my point. But should we adopt the T + 0 mechanism, are there any necessary supporting arrangements available? I’ll give you an example. We have been playing basketball according to local rules. Suppose that we suddenly switched to the NBA rules. What would happen? Though Chinese basketball might learn and improve, we would imminently have no choice but to lose. The rules must be formulated in accordance with the maturity of the market.
The SSE believes it is appropriate to carry out pilot projects, especially in the big blue chips. I agree.
CCTV Finance Channel: Since last year, Main Board and the ChiNext market have diverged sharply in performance. The ChiNext index has been rising very high, and as you said, there was certain concern about it. I am not sure what the concern really is. After listing on the ChiNext Market, many companies have changed. What do you think? Thank you.
Chairman Chen Dongzheng: You have already made it clear what the concerns are for to me. I hope that all of us may look at the ChiNext Market with a calm mind. The P/E ratio of the ChiNext Market is the highest in the world, and there is a huge gap between the ChiNext Market and the SME Board. Our market does not need this volcanic style of development. We need gradual, continuous and stable development. However, the market has its own way. So I hope that we can develop a path of stable and sustainable development by drawing lessons from past experiences after the IPO reform, especially of ChiNext market.
The ChiNext market may have seen a sharp rise in a short horizon. But it has both ups and downs. The crux of the issue is whether the ChiNext market can sustain future development with corporate performance of its issuers. The future of the ChiNext must never be ruined by a minority of poor-performing companies. The market should provide rational pricing with room for rational expectation. Our market is in an “emerging plus transitioning” period. Market capitalization held by institutional investors account for roughly 40% of the ChiNext. Institutional investors are assumed to be more rational than individual investors. But in reality, they are not. And sometimes they appear to be speculating as much as retail investors. This reflects the market in the process of becoming mature. A child has to stumble a lot along the way and even leave scars to become an adult. In the same way, we can only hope that our child can endure less pain and grow up in a better environment.
China Business News: It was formerly proposed that a mechanism be established between the New Third Board and the ChiNext Market or the SME Board, and this trend of linking various markets is increasingly evident nowadays. I would like your opinions on how the linkage between different boards is going to work. Another question is about the pre-requirement of holding SZSE shares for subscription to new stocks. What's your take on this? Thank you.
Chairman Chen Dongzheng: Interconnection between markets is no doubt a trend. The subscription of market value is a technical issue, as technically we haven't established a full linkage between any two markets. And efforts are being made in this regard, such as in registration and settlement. I believe that a complete linkage between markets is an inevitable trend in the future. But no timetable could be unveiled at the moment.
Economic Daily and China Economic Net: The government work report has put forward the concept of building a multi-tiered capital market and accelerating the reform of registration-based IPO system. Some people hold the opinion that the examination and approval of IPOs should be left to stock exchanges. What’s your attitude towards such a proposal? In addition, how can we carry out the reform of the registration-based IPO system, should the same reform be promoted in the New Third Board (National OTC Market) or in other fields, and what are the bottlenecks and problems to be faced in the process?
Chairman Chen Dongzheng: No matter what form the registration-based IPO system will take in the future, the exchange will certainly bear increasingly greater responsibilities. Throughout the development of the capital market over the past 20 years, the positions, responsibilities and burdens for stock exchanges have witnessed gradual changes towards maturity. But with the reform of the registration-based IPO system, the exchange will definitely experience a significant change in its responsibilities. Will the SZSE be able to meet this change? This is one of the concerns requiring our attention.
Where should the examination and approval be located? I am firmly against putting the authority of examination and approval in the stock exchanges because they are not able to carry out the duty.
Then where exactly should the registration-based IPO system be placed in the future? I am confident that with the advance of registration system reforms, the answer will become clearer. It is natural that people had diverse views on the market. And I hope that we can reach a basic consensus. In this way, it will become much easier. So it is possible to carry out the examination anywhere. But if the exchange were to put in charge, the exchange would face huge challenges and great pressure.
Chinese Securities Journal: You have just mentioned that there are issues that require our attention and great concern. As for the ChiNext Market, what kind measures will the SZSE take in the future?
Chairman Chen Dongzheng: To solve existing problems with the ChiNext Market, we need concerted efforts from all market participants, and we need wisdom from stock exchanges, the CSRC, and the entire society.
The problem of the market must surely be resolved by the market itself, with methods suitable for the market and through increased market discipline. Administrative means is only temporary. But we cannot give up all administrative means all together. Why? It is not that the market itself is unable to solve the problem. The truth may possibly be that the cost is too high, as from time to time the market becomes irrational. However, the market has its own way of functioning. We may also have to pay a big price, if we rely too much on administrative means. Therefore we need to know how to strike a balance.
Hexun.com: The first batch of new shares was, in general, subject to frenzied speculation on the first day they were listed on the stock market. Some even rose by two or three times. CSRC’s policy was intended to to suppress such speculative activities, isn’t it? And will this price spike have an effect on its policy?
Chairman Chen Dongzheng: As far as I know, the CSRC is already working on the problem now. On March 8, 2012, the SZSE issued a similar rule of restricting speculation on new shares on the first day of their listing, and made further minor adjustments half a year later. Back then, during media communication, I said the regulators had all good intentions in this regard. Did it work in suppressing the first-day new shares speculation? Now the result is not as good as expected. And we should not say that suppression of first-day speculation means a done deal.
Caijing Magazine: During the transition to the registration-based IPO system, what will be the role of the SZSE in the future?
Chairman Chen Dongzheng: The SZSE is not in a position to pick what role it wants to play, rather, it is actually doing an earnest job in the role assigned.
Reuters: Mr. Chen, according to what you've said just now, I'd like to ask one more question. If the big blue chips were able to realize the T + 0 trading mechanism, while other stocks were still traded T + 1, then would there be some unfairness in terms of the trading mechanisms?
Chairman Chen Dongzheng: From an objective point of view, this problem does exist. But the so-called fairness is actually a relative thing. For example, in the NBA rules, the free-throw line is drawn further and further, and the area is made larger and larger. But why is that? It is at so high a level that it can only be expanded, and the whole world is now actually following it. We used to play basketball in 2 halves, while now we are following it and playing 4 quarters. From what I have learned, the CSRC is working on the T+0 mechanism now, hoping to make it as fair as possible. Its original intention was to protect the small and medium-cap investors. So I am hoping that, when the CSRC solicits comments on the specific implementation process, we can all offer our pieces of mind. To some extent, there is no absolute fairness in practice. For example, access threshold has been set for the ChiNext Market and the same is true the New Third Board. However, as long as the rules are open and subject to public comment and scrutiny, such a pilot program can be carried out with maximum fairness. One important point about fairness is to be open and transparent. Rules are established and we all know about it. And every one of us must act accordingly.
Tencent: What are the difficulties, do you think, that the urban commercial banks now face in listing? Are you concerned that some of their bad debts may have an effect on the quality of the assets?
Chairman Chen Dongzheng: I support the listing of not only urban commercial banks, but also rural commercial banks. Last year I made a special proposal in this regard. As stated in the report of the Prime Minister this year, we should turn the world of financing into a pool of flowing water, to irrigate small and micro-sized enterprises as well as agriculture, rural areas and farmers. In this sense, to support the listing of a small financial institution is of far greater importance than to support the listing of an ordinary company. In our country, there are only small proportions of enterprises which can meet the listing standards and are able to gain direct support through the capital market. Most small and micro-sized enterprises are still relying on indirect financing as a major means of getting funds. For the micro, small and medium-sized enterprises, as well as for rural enterprises to really have access to substantial support, it is very important to revitalize financial support for the small and medium-sized municipal commercial banks and rural commercial banks to grow bigger and stronger.
From America to Japan, the proportion of small and medium-sized financial institutions listed is very high. The urban commercial banks in Beijing are the most representative. Now the assets of Bank of Beijing have already exceeded RMB 1 trillion. There are now quite a variety of small and medium-sized financial institutions, including financial guarantees, small loans, pawning and etc. Relatively speaking, the urban commercial banks and rural commercial banks are more mature. Though not free from risks in their listings, they have made efforts to improve the control of financial risks after they listed. For example, the Bank of Nanjing, Bank of Ningbo, Bank of Beijing and Shanghai Pudong Development Bank listed in the SZSE, and the Bank of Chongqing listed in Hong Kong. Their listing is indeed of great help to improve their own level of risk control. Therefore, in order to truly enliven the water in the pool of finance, and to genuinely support the development of the Chinese economy, this is where to break through. It is more than worth doing, and will surely do more good than harm. What's more, it is also an option to make risks controllable.
For reporters who pay close attention to the contents of Chairman Chen Dongzheng's proposal, here is a brief introduction by him.
Chairman Chen Dongzheng: My proposal for this year is to elevate SME development to a national strategy. It focuses on three aspects in general. The first is about its significance. Why should we make it a national strategy? When it comes to the core of the decision of the Third Plenary Session of the 18th CPC Central Committee concerning comprehensively deepening reform, in my opinion, each of us may have our own understanding. Well, as for me, I believe that what we should do is to maximize and make the most of the enthusiasm of the general population, and to establish and take measures in all aspects. As stressed in the Prime Minister's government work report, we must rely on reform bonuses, mobilize the broad masses, and solve the greatest concerns of the masses. Small and medium-sized enterprises have, in fact, already fully contributed more than 50% on various economic indicators. SMEs are increasingly engaged in independent innovation. From the perspective of the ChiNext Market and the SME Board, we must give fair weight to their significance. The second point is about “urgency”. And I will not go into details.
The third is about “concrete suggestions”. To begin with, we should undertake law amendments. What made it possible to launch the SME Board in the first place? Legislators enacted a law entitled Law of Promoting Small and Medium-sized Enterprises. It has been in force for 12 years, and now is in need of modifications and improvements. Furthermore, the country has now begun to work on the Thirteenth Five-year Plan. This should also be made a part of it. Last but not least, we should speed up the process of improving the financial service support system for small and medium-sized enterprises. Included are several points: the first is that large commercial banks should further intensify special credit support for small and medium-sized enterprises. The second is to advance the differentiated development of small and medium-sized financial institutions such as rural commercial banks, urban commercial banks, etc., to enable them to focus on serving the local micro, small and medium-sized enterprises, supporting them to grow bigger and stronger through the listing platforms, thus promoting indirect financing by means of direct financing. The third point is to accelerate the development of a multi-tiered market, to enable the SME Board, the ChiNext Market, the Third Board and the Fourth Board (regional equities trading centers) to highlight their respective characteristics according to their unique orientation, and to push forward the registration system reform actively yet prudently by following the general plan of the CPC Central Committee. And the fourth suggestion is to establish a joint inter-ministerial meeting system, to further strengthen the support for the small and medium-sized enterprises.
Thank you very much.