Economic transformation is the main theme for the coming decade. It will inevitably be risky process, invoking people’s acute feelings. A case in point is the photovoltaic industry. Though a typical emerging industry, it has encountered industry-wide crisis. Another example is the debt risk associated with high leverage of shadow banking and local financing platforms, which has become a topic of everyday conversation nowadays. The central government requires that we resolutely guard against systematic and regional financial risks. This will indeed be a tough task for us in the years to come.
With deepening economic transformation, various economic risks will continuously occur, surface and concentrate, calling for proper risk management platforms, mechanisms and capabilities in response. From this perspective, it is of great urgency to accelerate development of the multi-tiered capital for the following reasons:
Firstly, we must take advantage of the capital market’s role in decentralizing decision-making and diversifying risk in response to high uncertainty involved in entrepreneurial activities. No a priori planning or design of the capital market guarantees success of an emerging industry. Therefore, we must allow market players to make as many trials and errors as needed at their own risk, adjust directions in economic transformation and upgrading accordingly. It helps reduce systemic risk.
Secondly, in order to deleverage in the course of transformation, we should broaden the channels of equity financing. In the past decade, several major commercial banks supplemented their capital through share offering, which has been very instrumental in stabilizing the banking system. Now, thanks to continuous expansion, the multi-tiered capital market has deeper penetration in the national economy. will It will improve the risk tolerance of the overall economic system to accelerate development of ChiNext, National OTC Market, regional equity markets and venture investment, mobilize idle funds in society and facilitate capital formation at different levels and cutting debt ratios
Thirdly, the capital market is a more transparent and standardized market, which is conducive to full exposure of risk and transfer of risk assets. After the financial crisis, we have fully realized that off-exchange opaque financial transactions involve huge risk. This is also the reason why the current shadow banking system has aroused widespread concern. For the purpose of effective management of financial risk, it is also very important to securitize certain financial activities in exchange.
Lastly, as interest rates and exchange rates will become more market-driven, almost all businesses and residents will face the risk of volatile interest and exchange rates. The development of financial derivatives markets will be a necessary requirement.
Essentially, the capital market is a risk pricing and allocation market. How this function is performed will determine how big a role the capital market is able to play in economic transformation. All the parties related to the market should perform their due responsibilities and become well-prepared. Regulators should maintain an open, fair and equitable market environment. Market participants, especially securities companies, should enhance their risk pricing and allocation capabilities. As an intermediary between investors and financing parties, securities companies have expertise in pricing, risk control, sales and client management. Their capacity and expertise are crucial in determining, to a great extent, the efficiency of risk pricing and allocation of the market.
SZSE’s practice in the last year indicates that securities companies have not fully prepared for the transformation, as evident in sponsorship of ChiNext companies, development of OTC markets, private placement bonds and other areas of product innovation. Another example is asset-backed securities (ABC) products, to which we have attached great importance. ABC products are instrumental in tapping idle assets, diversifying financing tools and reducing financing costs. However, they have high requirements on the overall capabilities of securities companies. Securities companies are required to perform due diligence on underlying assets, evaluate both the seller’s and the buyer’s needs and risk appetite when designing products. They must invest their own money upfront for pricing and market making. They can only distribute products to suitable clients in sales. As a result, securities companies even need to split, repackage products or reallocate risk. In practice, ABS products are conducted through a number of business lines, such as fixed-income products, asset management and investment banking independently without support and cooperation from one another. They are still involved in the low-level competition for “luring projects” and lack both cohesive advantages and whole-process risk control due to historical reasons. Now it is the time to make up the missed lesson, as required not only for developing the multi-tiered capital market but also economic transformation.