Pan Xuexian, Deputy to the NPC and Chairman of the Supervisors of the Shanghai Stock Exchange (SSE), said in an interview with Xinhuanet.com during the 2015 NPC and CPPCC sessions on March 9 that 2015 would be a crucial year for all-round regulatory transformation in the securities regulatory system. With the promotion of innovation and reform, the capital market’s function of serving the real economy will be further enhanced, thus fulfilling its role as a “barometer” for the real economy.
The SSE will improve its regulatory efficiency in 2 aspects during the regulatory transformation: first, it will take the opportunity of launching the registration system reform of stock issuance to establish a market-participant-featured exchange and keep improving self-regulatory rules and regulatory mode; second, it will take the regulatory transformation as a driving force to establish a responsibility-oriented exchange, urge market participants to fulfill their responsibilities, and reduce market costs and enhance market efficiency.
Pan pointed out that the SSE would adopt 4 measures to enhance the governance of listed companies. As a frontline regulator, the SSE’s “big data” tool has played an important role, and it will realize a transformation from “human-judgment-based” regulation to “technology-supported” regulation. The delisting system reform will adhere to the direction of being “market-oriented, law-based and normalized”. “Some companies have already applied for delisting voluntarily, and I believe there will be companies that are forced to be delisted due to their serious violations. So, stay tuned,” said Pan.
Interview
Topic 1: Real Economy
Q: Among many hot economic topics during the NPC and CPPCC sessions each year, the capital market, which works as the “barometer” of China’s economy, will also attract great attention. We know that the SSE and the Shenzhen Stock Exchange have held press conferences last weekend to respond to hot topics that are most concerned by the netizens. Today, we are honored to invite our distinguished guest, Pan Xuexian, Deputy to the NPC and SSE Chairman of the Supervisors. Welcome, Mr. Pan.
President Xi Jinping mentioned the “New Normal” of China’s economy during his visit in Henan Province in 2014. What will be the capital market’s role in this “new normal”? Could you introduce some new reform measures that will be adopted by the SSE in supporting the development of China’s real economy?
A: I’m very glad to receive the online interview organized by Xinhuanet.com, and I also appreciate the netizens’ concern for the SSE and me. I joined the SSE at the end of last year and for certain aspects, I’m in the process of getting familiar with. It happened to have this opportunity to learn together with the netizens. Mr. Gui Minjie, SSE Chairman of the Governors, had a press conference in the afternoon the day before yesterday, and he elaborated on the new situations and major issues of the SSE’s development. Let me follow the host and answer this question.
The “New Normal” of China’s economy is a major strategic judgment made by the CPC Central Committee on China’s current economic development. It is actually a new stable status with comprehensive optimization of economic structure, industry transformation and upgrading, as well as a development mode featuring high efficiency, low cost and sustainability. In this process, the capital market will be further consolidated as the subject in macro-economy, and its “barometer” function in adjusting the real economy will be gradually shown.
It is demonstrated in the following aspects: first, we should promote economic structure optimization by enhancing the capital market’s financing function. Efforts should be made to improve the financing environment of enterprises and increase the direct financing proportion in the market, so as to inject dynamics directly into the economy. Second, we should enhance national wealth effect through serving investors. Specifically, we should standardize investment behaviors and complete the return mechanism so that investors could share the dividends of economic reform through the capital market. Third, we should promote the industry structure adjustment through the market selection mechanism. Pains should be taken to gradually improve listed companies’ market capitalization management, enhance investor education, introduce professional institutional investors and standardize market investment behaviors. Furthermore, we should guide social capital to emerging industries and innovative industries through effective capital allocation in the market, in a bid to promote transformation and upgrading of industry structures.
In recent years, the SSE has been devoting itself to enhancing its ability in serving the real economy and has made achievements in various aspects. In the 2015 work deployment of the “Government Work Report”, Premier Li Keqiang stated clearly that we should enhance efforts in such areas as building a multi-layer capital market system and adopting the registration system reform of stock issuance. We will earnestly carry out these requirements by adopting the following measures: first, we should implement the registration system reform of IPO; second, we will explore to build a multi-layer capital market by introducing the board of emerging industries on the basis of the SSE’s existing blue chip market; third, we will gradually perfect the delisting system of listed companies; fourth, we will attract long-term funds into the market through all the possible channels.
Topic 2: Regulatory Transformation
Q: We know that the securities and futures regulatory meeting is held each year. Xiao Gang, Chairman of the China Securities Regulatory Commission (CSRC), has taken the regulatory transformation as the theme of the meeting for 2 consecutive years. What are the moves of the SSE in this regard, and how could the SSE increase the efficiency of regulatory transformation?
A: 2015 is the key year for securities regulatory bodies to carry out all-round promotion of regulatory transformation. Just like what you said, CSRC Chairman Xiao Gang had mentioned the key task of regulatory transformation in the regulatory meeting for 2 consecutive years. In the process of promoting the regulatory transformation, the SSE will enhance regulatory efficiency from the following 2 aspects: first, it will take the opportunity of launching the registration system reform of stock issuance to build a market-participant-featured exchange. Efforts should be made to enhance the awareness of responsibility, improve the market regulatory ability, actively respond to the market concerns and investors’ demands, and continuously perfect the self-regulatory rules and regulatory mode; second, the regulatory transformation should be taken as a driving force to establish a responsibility-oriented exchange. Besides, by further changing the regulatory idea, mechanism and way, the SSE will urge all market participants to fulfill their responsibilities, reduce market costs, enhance market efficiency, bring off its role in safeguarding the open, fair and just market order, and protecting legitimate rights and interests of investors, especially small and medium-sized investors, thus promoting the sound development of the capital market, and better assume its responsibility in building an open, fair, and just market.
The SSE has realized an array of breakthroughs in the building of the blue chip market with over 1,000 listed companies and more complete industry categories. Therefore, the SSE will strengthen internal management to increase its self-regulatory efficiency in the following aspects:
(1) We will keep boosting industry regulation for listed companies. First, we will gradually establish a complete indicator and guideline system of industry information disclosure. We have already made many preparations in the early stage, including making guidelines for industry information disclosure for such major categories as petroleum, natural gas and coal. Second, we will audit listed companies’ 2014 annual reports on the basis of different industries. Third, we will adopt the concept of industry regulation in our daily regulatory work.
(2) We will further improve classified regulation on listed companies. The SSE will adopt classified regulation on listed companies from more dimensions to increase its efficiency in 2015. Specifically, the SSE will adopt classified regulation and effectively allot regulatory resources on any company that has a possibility of controlling right dispute due to highly dispersed equity, that with private equity involved, or that engaged in such emerging industries as technology, media and telecom (TMT) business but with high potential operation risk, as well as any shell company with stagnant major businesses.
(3) We should further optimize the direct channel for information disclosure. Currently, excluding minority announcements that need to be processed beforehand due to their relevance to suspension and resumption of stock trading, 85% of the announcements on the SSE market have realized direct disclosure. Listed companies can release their information directly through the SSE’s platform. The portion of direct disclosure of announcements is estimated to be over 90% in 2015. After the launch of Shanghai-Hong Kong Stock Connect, investors’ demand for information disclosure at multiple time intervals is increasing. Thus, the SSE is now considering adding morning and noon sessions for information disclosure and reducing stock trading suspension to narrow the gap of the information disclosure manner between Shanghai and Hong Kong.
(4) We should enhance the quick response and transparency of regulation. The SSE adopted quick regulatory response in 2014 when handling such cases as improper information disclosure of Shanghai Prosolar Resource Co., Ltd., major asset reorganization of Guanghe Landscape Culture Communication Co., Ltd., controlling right dispute of Tibet Rhodiola Pharmaceutical Holding Co., which won positive responses from the market. In 2015, the SSE will further enhance its sense and ability of quick response to discover issues in time and provide quick and effective handling, and build a problem-oriented quick-response regulatory mechanism, with an aim to urge obligators of information disclosure to perform their duties according to law. We have made ample explorations in the preliminary stage, which have gained ideal effect and enabled us to intervene through the quick response mechanism. In addition, the SSE will make full use of its official website, micro-blog, WeChat account and press conference to timely update its regulatory standing, attitude and measures to the market, in a bid to improve its regulatory transparency. Furthermore, the SSE will enhance its research on such hot issues as “PE + listed companies” to study and develop regulatory methods in time.
Q: I want to ask a question put forward by a netizen that how the SSE will handle the situation that some listed companies deliver profits by rigging stock prices through high proportions of bonus shares and capitalized shares?
A: The SSE will regulate price manipulation and profit delivery through high proportions of bonus shares and capitalized shares in 2 aspects. On the one hand, the SSE will require listed companies to make information disclosure of dividend distribution, bonus shares and capitalization from capital public reserve more specific and effective. For example, the SSE will require listed companies to provide complete disclosure of the decision-making process after receiving a proposal of dividend distribution from shareholders, and give full disclosure of the uncertainty on whether the shareholders could submit the proposal and have it approved by the directorate. Among all the listed companies, there are state-owned enterprises, private-owned enterprises, enterprises with absolute controlling shareholders and those with relative controlling shareholders as well as enterprises with dispersed controlling rights. How to carry out the bonus shares plan suggested by major shareholders without high controlling proportion? We will require detailed disclosure for that.
On the other hand, the SSE will enhance quick response by strengthening aftermath regulation on information disclosure of high proportions of bonus shares or capitalized shares as well as abnormal fluctuations of stock prices. For example, the SSE will require shareholders who put forward the proposals of high proportions of bonus shares or capitalized shares to give clear commitment to affirmative vote during the discussion of this proposal at the shareholders’ meeting. Shareholders initializing the proposals should give affirmative vote to realize their commitment, and should give supplementary disclosure to tell whether they plan to lessen holding of shares before the proposal is approved at the shareholders’ meeting; if yes, they should give supplementary remarks on the shareholding lessening plan. After the disclosure, will the major shareholders take the chance to lessen holding of their shares? It is the greatest concern of small-and-medium investors. So, we will require disclosure of this part of information to let the market know. In addition, the SSE will cooperate with relevant departments to cement linkage between information disclosure regulation and secondary market monitoring for this type of cases, reinforce punishment on such violations as insider trading and stock price manipulation. We will cooperate with relevant departments as long as problems are detected, and strict punishments will be imposed on these violations to safeguard the “openness, fairness and justice” of the market.
Topic 3: Inspection and Law Enforcement, Frontline Regulation
Q: I remember that the CSRC has inspected some rat trading cases since last year, during which it has used big data. As we are not very clear about it, could you make some introduction? And can you reveal the plans of the SSE in strengthening the regulation?
A: The SSE has taken the initiative to explore and apply big data in facilitating the regulation since 2003. Relying on the massive amounts of data stored in the exchange’s data warehouse, the SSE started to use the “mass data statistic analysis” method to identify insider trading at the very beginning of the establishment of its supervisory system, thus successfully solving the problem of searching associated accounts. In 2013, the SSE used the big data’s “rat-catching” model and discovered a rat trading case that a former fund manager of Bosera Funds made illegal profits through undisclosed information, thus kicking off the activities of cracking down on rat trading cases. During the series activities, the SSE has always adhered to the principle of combining initiative and fairness. While taking the initiative to discover clues of cases, it has always fully scanned on all fund companies and fund managers, making sure that no case will be treated unjustly and each and every case will be reported and not indulged. The SSE has successively reported over 20 cases concerning rat trading of funds, involving the sum of over RMB10 billion.
In 2014, the SSE reported 133 pieces of clues to various cases to the CSRC, among which 88 were concerned with insider trading, 38 market manipulation, 3 rat trading, 2 undisclosed over-proportional shareholding, and 2 others. Next, the SSE will continue to make full use of big data excavation technology, develop and use various models detecting illegal transactions, and screen and lock in valuable clues, so as to realize the transformation from human-judgment-based regulation to technology-supported regulation, and thus enhance the regulatory efficiency. In the future, the SSE will do a better job in the following aspects in terms of frontline regulation:
First, the SSE will implement all the arrangements about streamlining administration and decentralizing power as well as transforming regulation made by the central authority and the CSRC. It will further enhance the SSE’s initiative in frontline regulation, strengthen the monitoring on securities trading behaviors, and crack down on behaviors violating laws and rules in securities trading, especially those concerning speculation and price manipulation by spreading various topics, which is a very important aspect, as well as the new illegal behaviors like listed companies’ “fake market capitalization management”. Besides, it will strengthen in-process intervention and aftermath clue reporting, further optimize big data’s function in discovering clues, enhance inspection on information of traditional media and we-media, and expand the sources of illegal cases.
Second, the SSE will further improve the risk prevention and control mechanism for abnormalities in market trading, and particularly make efforts in monitoring, preventing, and controlling the market risks of new businesses and mechanisms (like program trading). And it will further study to improve the mechanism of dealing with market risks, and fully implement the CSRC’s arrangement on coping with major trading abnormalities in the market.
Third, the SSE will further improve the cross-border supervision and cooperation mechanism for Shanghai-Hong Kong Stock Connect. Shanghai-Hong Kong Stock Connect has realized the cooperation between the two markets. Therefore, it needs to strengthen the supervision and cooperation with Hong Kong Exchanges and Clearing Limited, so as to jointly crack down on illegal cross-border securities behaviors, prevent regulatory arbitrage, make sure the steady operation of Shanghai-Hong Kong Stock Connect, and maintain the legitimate rights and interests of domestic and overseas investors.
Fourth, the SSE will deepen the cross-product and cross-market regulation and cooperation, closely trace the mutual influence between stock spots and stock options, strike illegal behaviors like speculation and manipulation crossing spots and options, and strengthen the interactive regulation between securities spots and stock index futures. At present, as the coverage of the market is increasingly wider, there exists the grey space for the interaction of futures and spots. Therefore, we should further strengthen the prevention and striking efforts in this regard.
Fifth, the SSE will further promote the openness and transparency of its frontline regulatory work, publicize its frontline regulatory situation in time through traditional media and such new media as micro-blog and WeChat, and take the initiative to respond to hot issues and doubts in the market. We have started to make some attempts in this regard and achieved good results. Recently, we’ve encountered some problems concerning information disclosure. Through the SSE’s active and timely regulation as well as the timely intervention of the regulatory departments, the discovered illegal behaviors have been timely put on record and cracked down on, with desired effects achieved.
Sixth, the SSE will further enhance the technological level of its frontline regulation, optimize the supervisory function of such new products and businesses as Shanghai-Hong Kong Stock Connect and stock option, and improve the analyzing function of the market’s big data, so as to provide greater technical guarantee for the SSE to perform its frontline regulatory function. We have mentioned at the very beginning the way we discover illegal behaviors and accounts among the massive amounts of trading data. Now, we need to strengthen our efforts in this aspect, and the technology is of great significance.
Finally, the SSE will do a better job in entrusted law enforcement. It is known that apart from regulation on members, listed companies and securities trading, entrusted law enforcement is a new regulatory responsibility endowed by the CSRC to the exchange as approved by the State Council. It is also a newly-added important function of the SSE under the background of strengthening the investigation and law enforcement efforts, and bringing off its role in safeguarding the open, fair and just market order, and protecting the legitimate rights and interests of investors, especially small and medium-sized investors, thus promoting the sound development of the capital market. The SSE will take all things into consideration, make comprehensive planning, and earnestly implement all work items in line with the unified arrangement of the CSRC. Thank you!
Topic 4: Dividend Distribution and Delisting
Q: I’d like to ask Mr. Pan a question concerned by netizens. With regard to dividend distribution, can you briefly work out the accounts of cash dividend of listed companies on the Shanghai market? As for delisting, we know that *ST Changyou (Nanjing Tanker Corporation) is the first delisting state-owned central enterprise last year, which has attracted wide attention. Can you make some introduction about it?
A: In terms of cash dividend, I’d like to share a set of data with you. After the unremitting efforts made by the SSE and all market participants in recent two years, listed companies’ awareness of rewarding investors with cash dividend has been obviously increased and the dividend amount has reached a high level on the whole. Judging from statistics, the number of companies distributing dividends and the total dividend amount on the SSE have both repeatedly hit new records. In 2014, a total of 674 listed companies on the Shanghai market (70.43% of the totals) implemented the cash dividend distribution program, with the total cash dividend reaching RMB670.7 billion. The amount of cash dividend took up 34.62% of the total net profit of listed companies’ shareholders, which was a relatively high proportion. With regard to specific measures, the SSE has adopted many effective measures in mainly two aspects to keep guiding listed companies to reward investors with cash dividend. On the one hand, it has adhered to the correct guidance of public opinion, organize and guide news media to publicize benchmarking companies with cash dividend on the Shanghai market, and advocate positive and healthy equity culture; on the other hand, it has intensified the aftermath regulation for cash dividend distribution by requiring companies not reaching the cash dividend standard to provide online voting means, bringing convenience for small and medium-sized investors to exercise their shareholders’ rights. In other words, the collective decision-making is realized with the participation of small and medium-sized enterprises, instead of the final say of only major shareholders. Besides, the SSE has also urged listed companies to hold briefings for investors, so that small and medium-sized shareholders can know why listed companies don’t distribute dividend. In this way, we offer them the convenience to participate in major shareholders’ decision-making process, which might influence their decision-making. In addition, the SSE has required major shareholders to hold briefings for small and medium-sized investors to clearly explain to them the usage of funds. It can be said that all these measures have achieved good results.
In terms of delisting, the SSE has always believed that the delisting system reform should stick to the development direction of “marketization, legalization, and normalization”, which will help to further display the market function and contain and deter major illegal behaviors. With regard to the improvement of delisting system, the SSE has organized special forces in 2014 to take part in the CSRC’s discussion and research on the delisting system’s revision and improvement. After that, it has revised its relevant supporting rules and newly added the disposal rules for voluntary delisting and delisting caused by severe illegal acts. In other words, one company may choose to be delisted voluntarily. In addition, in line with the regulations of the CSRC, the exchange has also been promoting the compulsory delisting of listed companies with severe illegal acts. In this aspect, the SSE has formulated related rules. At the same time, it has made clear the relevant arrangements for listed companies after delisting, including trading arrangements before listing termination, and re-listing arrangements after listing termination. After the new delisting system came into force, the SSE also fully sorted out the potential delisting risks of companies with continuous losses and those put on file for investigation, so as to better disclose the delisting risks of these companies.
As for the risk disposal of delisted companies, the SSE has, based on the information disclosure regulation, formulated positive and effective overall response plans for delisting risks to protect the interests of small and medium-sized investors, striving to implement the risk resolution work for delisted companies. For example, the delisting of *ST Changyou in 2014, which is the first state-owned central enterprise delisted from China’s securities market, went through complex delisting procedures and exerted great social influence. The SSE, according to the overall arrangement of the CSRC, made active response, took the initiative to respond to social concerns, and ensured the steady delisting of Changyou by comprehensively using many delisting guarantee mechanisms such as the first order guarantee mechanism during delisting arrangement period, the emergency disposing mechanism for emergencies, the response mechanism for public opinions, and the quick response mechanism. The market response to this case is very positive. It can be learnt from the public disclosure in this year that there have been companies voluntarily applying for delisting. I believe that there will be compulsory delisting cases caused by severe illegal acts before long. Let’s stay tuned. Thank you.
Topic 5: Proposals at the Two Sessions
Q: The 2015 NPC and CPPCC sessions are convening now. There must be some topics of your greatest concern and some suggestions of your own. Could you share them with us?
Q: I have the following three suggestions on the exchange’s work at the two sessions. The first is about the legislation of the “Rules on Regulation over Trading Venues”. In recent years, trading venues of massive amount and various types have appeared in China, which has generally met the economic development demand. However, some trading venues have diverted from the basic orientation of serving the real economy and presented the tendency of divorcing from the reality and no funds flowing from the market into the real economy. Various problems like damaging the rights and interests of investors have occurred frequently. So, I suggested improving the long-term regulatory mechanism over trading venues and including the “Rules on Regulation over Trading Venues” into the legislation plan of the State Council. Besides, administrative laws and rules on the regulation over various trading venues should be formulated to make clear the conditions and procedures of setting up trading venues, as well as the code of conduct, the regulatory system, the regulatory measures, and the legal liabilities of trading venues and relevant parties, so as to provide solid legal protection for the sound development of trading venues.
My second suggestion is about increasing the line for RMB Qualified Foreign Institutional Investors (RQFII) in Hong Kong. At present, RQFII is an important tool for China to further open up its capital market, promote the internationalization of RMB, and support domestic securities institutions to develop cross-border business. This pilot was launched in 2011 and at present the RQFII line of RMB270 billion in Hong Kong has been nearly used up. Therefore, it is in urgent need of increasing the line. I suggest relevant departments should make overall consideration and further increase the line for RQFIIs in Hong Kong.
My third suggestion is about optimizing the tax system for the mergers, acquisitions and reorganizations of listed companies. Under the current background of the transformation and upgrading as well as the optimization and adjustment of industry structure, “adjusting structure” and “promoting development” have been mentioned in the Premier’s report. As more and more listed companies and other enterprises have conducted mergers, acquisitions and reorganizations, the Premier specially pointed out in his report that the mixed ownership reform of state-owned enterprises should be steadily promoted. The active mergers, acquisitions and reorganizations are of great benefit for us to adjust the industries and make listed companies larger and stronger. But judging from the practices, the tax burden is very heavy for the mergers, acquisitions and reorganizations of listed companies, and the current preferential and supporting policies are not enough. Though relevant departments have made great supports and adjustments in this regard, we still believe there is a great gap compared with the actual demand. In the mergers, acquisitions and reorganizations among different enterprises inside the state-owned enterprises and those concerning the mixed ownership, the SSE has found that some companies have given up their mergers, acquisitions and reorganizations or can’t go on due to the tax issue. Therefore, it is necessary to further improve the existing tax system and give full play to the incentive function of tax revenue. And I have specially proposed a suggestion in this regard. Thank you.
