Reforming China's capital markets
October 17, 2013 | BY
clpstaff &clp articles &David Fu spent four months at the CSRC as part of their Strategy and Development Committee. Fu shared with David Tring his thoughts on China's capital markets and what tasks lay ahead for the country's top securities regulator
When did you start your legal career?
I received a BA in English language from Anhui Institute of Education. I then went on to get a Master of Law degree from the Shanghai Institute of Foreign Trade and finally an LLM from Columbia University. I joined Global Law Office in 2010 and before that I worked at the Beijing, New York and Toronto offices of Shearman & Sterling. Back in 1993, I started my legal career at Shanghai Science & Technology Investment Corporation, a state-owned investment company affiliated with the Shanghai municipal government and a founding shareholder of China Unicom. During that time, I worked on the agreements for the first “Chinese-Chinese -foreign” investment project of China Unicom.
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What was your role at the CSRC?
| "As a result of the IPO freeze on IPOs, the Chinese private equity and venture capital markets have faltered and have been reluctant to enter into any new investments" |
From February 2013 to May 2013, I worked as a staff member at the Strategy and Development Committee of the CSRC. My main duties included research and creating proposals for solutions to top regulatory issues in China's capital markets. One of my research reports addressed the issues raised by the overseas red-chip listings by domestic private companies and proposals for effective supervision and regulation of these listings. I found working at the CSRC rewarding as well as challenging. The working style is quite different and the transition from a private practitioner to a regulator also came with challenges. But at the same time you feel a sense of self-achievement when your research papers and proposals are taken into consideration in formulating new rules by CSRC. Daily tasks included meetings with relevant departments within and outside the CSRC to discuss issues facing the Commission and preparing research reports on these issues.
|What are some of the latest trends in China's capital markets?
Definitely the market structure is becoming more balanced. Previously, the bond market lagged behind the equity markets, but in the past two years, equity financing has lowered, while the bond market has increased. The futures and derivatives market also continues to develop.
The investor structure is being improved. At the end of 2012, retail investor holdings dropped from 26.5% to 25.3%. Institutional investors have experienced rapid growth, along with a rising trend in the number and amount of funds established by institutional investors. There is a wider range of investment products that are being introduced. More and more investment products, like corporate bonds, local government bonds and stock index futures were launched in the past few years to meet the growing demands of the market.
|How has the departure of Guo Shuqing and the arrival of Xiao Gang changed the dynamics at the CSRC?
It is believed that Guo's appointment as governor of Shandong Province is aimed at promoting him for a more important position in the hierarchy in future. Since taking over as Chairman of the CSRC in late 2011, Guo took significant measures to deepen capital market reform. He wanted to further loosen direct governmental control to shift 
focus from market access control to supervision on behaviour and operation. He increased the dividend payout by listed companies and built a multi-layered capital market to develop an over-the-counter (OTC) market (the so-called New Third Board and the regional equities trading exchanges). He wanted to encourage more institutional investors, such as social security funds, insurance companies, trust schemes, private equity funds and other professional institutional investors to invest in the markets. Lastly, he really tried to strengthen law enforcement in the market.
Guo wanted to transform the regulator, shifting it away from controlling access to the market and moving it to a more conventional supervisory role. He earned the respect and confidence of most institutional and retail investors, who believed the reform measures could lead to the healthy growth of the market in the long term.
Xiao comes from a banking background and could be more sensitive to preventing systemic risks and promoting the healthy development of the capital markets. Since taking over as Chairman of the CSRC in mid March this year, Xiao took significant measures to crack down on illegal acts and violations, such as the financial fraud of Wanfu Biotechnology. He wanted to refocus on CSRC's regulatory and supervisory role to strengthen law enforcement in the market and protect the lawful interests of investors. I would say that Xiao's top priorities are to:
- deepen the IPO system reform to improve the stock offering and pricing mechanisms;
- strengthen the supervision of law enforcement and the protection of investors;
- prevent systemic risks and promote the healthy development of the capital market;
- accelerate the construction and development of a multi-tiered capital markets;
- launch reforms to facilitate mergers and acquisitions of listed companies.
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How is the IPO freeze affecting the market?
China's IPO market has been frozen since October 2012 and the pipeline of pending applications for the Shanghai and Shenzhen exchanges has risen to 746 companies as of August 1, 2013 (excluding 270 companies whose IPO applications have been terminated by the CSRC during its review in 2013). In part, the freeze is a response to investor concerns that new issues would put downward pressure on existing share prices. It is also a result of orders from the CSRC last year that underwriters and accountants for all IPO applicants review financial statements for accuracy and completeness and submit those to the CSRC. The self-review process was completed at the end of May and the CSRC is conducting its own review of applicants.
In early June this year, the CSRC issued draft new rules on the IPO system reform for public comments. The rules are aimed at boosting protection for investors. The CSRC plans to resume IPOs after the new rules go into effect. However, the plan to restart IPOs has taken a hit as a result of the stock market meltdown following the interbank liquidity crisis. Since it is already August now, it is likely that the applicants would be asked to supplement financials for the past six months in 2013 for CSRC review, which could further delay the timetable for restarting IPOs. As a result of the freeze on IPOs, the Chinese private equity and venture capital markets have faltered and have been reluctant to enter into any new investments.
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What do you think the tasks ahead are for the CSRC?
China's capital markets have gone through accelerated reform and development in the past few years. The CSRC has been very proactive and responsive in navigating this reform and development. Since the global financial crisis and despite world economic growth remaining sluggish and financial deleveraging still underway, the CSRC has implemented a series of proactive and targeted policies and measures to ensure the sound development of China's capital markets. We expect the CSRC will continue to play an essential role in carrying out reforms as well as maintaining the sound development of the capital markets. I would say some of tasks for this year for the CSRC are to:
- reform the IPO system and restart IPOs;
- continue to build up a multi-layered capital market with the New Third Board being the main focus of development;
- build up an integrated bond trading market and to launch treasury futures (approved by the State Council in early July and to be launched in September);
- encourage long-term capital to invest into the market;
- strengthen law enforcement in the market and crack down on illegal acts and violations.
After leaving the CSRC David Fu returned to Global Law Office as managing partner.
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