Recently, the market participants and investors have been concerned about the operation of the listed companies. In this regard, the regulators of the Shanghai Stock Exchange (SSE) have made a serious analysis. In general, the quality of the SSE-listed companies has been stable and improving. Focusing on the main businesses and carrying out management in a regulated manner, the vast majority of the companies have served as the ballast for the operation of the capital market. In practice, the regulators of the SSE have resolutely implemented the idea of classified regulation, always given top priority to the regulation of the risky companies, and strived to identify problems early and correct them while they are nascent. Going forward, the SSE will continue to implement the arrangements of the China Securities Regulatory Commission (CSRC), focus on the quality of the listed companies, adhere to dialectical thinking and bottom-line consciousness, make effective efforts in preventing and defusing risky matters, and maintain the stable operation of the market.
1. As the economy is shifting from a high-speed growth to a high-quality development, the listed companies have seen their growths in performance slow down, but the overall quality of the companies is stable and improving, with no major changes in this regard.
By August 16, there were 1,487 listed companies in total on the main board of the SSE with a total market capitalization of about RMB31 trillion. From the perspective of industry distribution, a number of outstanding leading enterprises have been concentrated, covering the major national economic fields such as finance, real estate, iron and steel, coal, medicine, chemicals, automobiles, materials, and information and communications. Maintaining a stable growth in performance, the enterprises have served as the foundation, top players and main force for the economic development and the SSE blue-chip market, as they have been active in adaptation and focused on their main businesses in the economic restructuring. According to the analysis from multiple angles, although the overall performance of the listed companies has slowed down somewhat, the quality of operation has maintained the basic uptrend based on stability, with no major change in the overall quality.
In terms of the absolute figures of performance, in 2018 the SSE-listed companies recorded an annual operating income of RMB33.5 trillion, accounting for 37% of the GDP in the same period, with the net profit at RMB2.8 trillion. Therefore, the SSE market has been much more expanded and deepened than before, with the capacity for tolerating and preventing market risks greatly enhanced. With regard to the relative figures of performance, the SSE-listed companies saw their operating income and net profit increase by 11% and 4% respectively, with the profitability weakened somewhat compared with 2017, but the main business still grew relatively fast, especially for the entity companies, which extended the good momentum in the previous year. From the perspective of the key indicators of operation quality, there were 1,194 SSE-listed companies with positive operating cash flows, accounting for 80% of the total; 1,117 companies recorded positive net profits with non-recurring gains and losses deducted for three consecutive years, accounting for 75% of the total; with the companies in the financial industry excluded, the overall asset-liability ratio was 61.59%, and the indicator remained at around 61% on the whole in the past three years. In terms of the returns for the investors, the distributed dividend amounted to about RMB901.7 billion in 2018, a record high; there were 475 companies with their dividend distribution ratios exceeding 30% for three consecutive years, including 70 companies with a ratio of more than 50%.
2. The risk factors for the listed companies were concentrated for a period of time, and with the reasons diversified, it is necessary to dialectically consider different actual situations.
At present, the risk factors of the SSE-listed companies are deemed to be in two aspects. First of all, the risks of pledge, bonds and goodwill still need to be closely watched, but they have been alleviated. There were 178 companies with the pledge proportions of their first majority shareholders exceeding 80%, and the balance of the pledged market capitalization was about RMB1.62 trillion, which declined from the peak. There are still 78 bonds and 50 resale bonds with the repayment due this year, and with the total balance at about RMB197.86 billion, most of the bonds are expected to be repaid on time, with only a small number of them facing some risks in redemption. At the end of 2018, the amount of goodwill was about RMB514.3 billion, and the total amount of depreciation provision stood at about RMB38.3 billion, with the large amounts of depreciation provision mainly concentrated in more than 20 small-cap companies. Therefore, the risks are controllable on the whole. Secondly, the cases of vicious violations such as financial fraud and capital occupation increased, but they were still accidental in a small range. Since the beginning of this year, some companies have damped the market confidence by conducting the financial fraud, losing control within the company and failing to reach the performance target for restructuring. It is necessary to pay special attention to and take a tough stance in investigating and dealing with such cases. In general, these cases were still accidental in a small range, and they must be punished severely and quickly to purify the market ecology. At the same time, it should also be noted that the vast majority of the listed companies are still high-quality enterprises that focus on management and attach importance to compliance.
It is also necessary to rationally analyze and dialectically consider these cases on the basis of the actual situations. First of all, as currently the macroeconomic growth is slowing down, it is a natural rule in economic development for some listed companies to record fluctuations in performance and even meet with difficulties in operation, which should not be simply summarized as the collapse of the “white horse stocks” (top-performing funds staked large bets in blue-chip companies, which Chinese investors like to call white-horse stocks). In addition to some understanding given to these companies, we should also vigorously take measures to help them transform and upgrade as well as solve problems. Secondly, there were indeed some companies that lost their integrity and were seriously out of control, and with the external money supply tightened, their problems hidden earlier were difficult to cover up. In particular, the “key few” in some companies such as the controlling shareholders, actual controllers and directors, supervisors and senior officers breached the bottom line to seriously damage the interests of the listed company and the small and medium-sized investors; some intermediaries were slack in performing their duties, and even colluded with the listed companies to violated rules. It is imperative to pay close attention to, investigate promptly and seriously impose accountability on such cases.
3. In the regulation of the risky companies, the regulators of the SSE have always adhered to frequent investigations, prevention in advance and prompt disposal, so as to effectively safeguard the rights and interests of the investors.
The regulation of the risky companies has always been an important task for the regulators of the SSE. In this regard, it is necessary to take the basic approach of classified regulation to enhance the effectiveness of regulation and prevent major risks from breaking out. According to the summarization and analysis of the major risk cases on the SSE market that the media have paid much attention to in the past two years, most of them were subject to the SSE’s concerns, inquiries, and even disciplinary action earlier. In fact, a large number of the risky companies and risk issues that the market was concerned about were revealed with the inquiries and supervision by the regulators of the SSE. These risks were also gradually discharged through information disclosure, risk warnings and transactions on the secondary market. Taking the review of this year's annual reports as an example, based on the comprehensive review by the SSE, more than 770 annual reports were audited specially, with the public inquiry letters issued 252 times. After reading the inquiry letters and the replies of the companies, the investors could more adequately and deeply understand the actual situations and risk factors of the companies, gaining useful reference in making their investment decisions. These efforts have been made to cover all risky companies, so as to identify problems early and correct them while they are nascent as well as help the investors detect and avoid risks as early as possible.
In the regulatory practice, the regulators of the companies at the SSE have formed some effective approaches, which will be adopted consistently and persistently in daily supervision, and will also be continually improved. First of all, the risks will be screened dynamically. Screening the risks for the listed companies is an important part of the SSE’s efforts in implementing the classified regulation. In general, the risks of the listed companies mainly include financial risks, business risks, internal and external governance risks, capital occupation or non-compliance guarantee risks, risks related to merger and acquisition or refinancing, and secondary market risks, etc. The regulators of the SSE will classify the companies’ risks according to the actual situations and significance of the risks for different companies, and adopt relevant regulatory arrangements accordingly. Adjustments will also be made dynamically based on the specific circumstances of the companies. Secondly, the in-process regulation will be highlighted. With regard to the significant risks and hidden dangers in the listed companies, the SSE will make great efforts in in-process regulation and prevention, so as to avoid irreparable losses after the outbreak of major risks. In this regard, we have paid special attention to the issues that may seriously damage the companies’ interests such as cash asset transactions, related party transactions, and the restructurings with the “three high levels (of valuation, goodwill and performance commitment)”. Since last year, through the in-process regulation, more than 20 cases of inappropriate cash transactions involved in the suspected profit delivery have been prevented, and a total of more than RMB20 billion has been kept from improperly flowing out of the listed companies. Thirdly, the violations will be severely punished. Adhering to the principle of “effective administration”, the SSE has severely cracked down on the violations that damaged the interests of the listed companies and investors and aroused the great concerns in the market. In the first half of 2019, public condemnations were issued in a total of 11 cases, notices of criticism were circulated in 32 cases, regulatory concerns were implemented in 46 cases, and 2 persons liable were publicly identified. In addition, there are also disciplinary actions in the process. The punishments have covered the violations that stirred the market significantly at present.
4. To prevent and control major risk events from the source, it is necessary to deepen the market constraint mechanism and urge all market players to diligently perform their duties.
The emergence of the companies with major non-compliance risks is ultimately caused by the listed companies failing to be honest, seeking quick success and instant benefits, and violating the laws and rules. In particular, the behaviors of fabricating performance and hollowing out the listed companies have been caused by the misconduct of the “key few” at the listed companies. From the perspective of the source, reducing or even avoiding the emergence of risky companies requires the joint efforts of all market participants, as it is necessary to continue to strengthen regulatory constraints and improve regulatory efficiency, as well as constantly enhance the market constraint mechanism and urge all market participants, especially listed companies and intermediaries, to fully perform their duties, so as to jointly foster a sound and healthy market ecosystem. Specifically, the listed companies should assume the direct and primary responsibility for self-regulation, self-improvement and self-enhancement, resolutely implement the "four awes (stand in awe of the market, the rule of law, the professionalism and the risks)", defend the "four bottom lines (not disclosing fake information, not conducting insider trading, not manipulating stock prices and not damaging interests of listed companies)", consciously stay away from risks, improve the quality of operations, and prevent the risks from the source. The intermediaries should also be diligent and conscientious, truly assume the statutory duties such as inspection and verification and professional checks, and fully serve as the “gatekeeper” for the market.
In terms of institutional arrangements, the SSE will continue to implement the arrangements and requirements of the CSRC, adhere to innovation and reform, and vigorously foster the market-based supply and demand mechanism and incentive and constraint mechanism. Regarding whether it is conducive to enhancing market constraints as the main yardstick, the SSE will focus on advancing the institutional reforms in delisting, mergers and acquisitions and reorganization, refinancing and other areas. The improvement of these systems will stimulate the listed companies to focus on the quality of the companies and concentrate on their main businesses and regulated operations. At the same time, the SSE will coordinate the internal unity of the diversified regulatory objectives, give equal priority to standardization and development, implement the requirements of “sustaining the advanced and helping the backward so as to encouraging the vast majority to move forward” from the source, increase the violation costs of the risky companies, guide them in energetically improving their operations, defuse potential risks, and effectively protect legitimate rights and interests of investors.
