The countdown to Shanghai Stock Exchange (SSE)'s STAR Market is in its final hour. From November 5, 2018 until today, it has taken 259 days for the STAR Market to officially take off. It will bring vitality to China's capital market. It is not only an important part of China's plan to deepen the capital market reform system, but also a significant experiment in China's financial supply-side reform. The market is conducive to pushing the nation's technological innovation, which is set to be expedited by the capital market reformist drive.
With continuously updating information on the IPOs of 25 STAR enterprises, the market is enthusiastic about the 25 firms' debut on Monday. The average lot-winning rate of the 25 companies listed on the SSE STAR is 0.059 percent, higher than the online lot-winning rate of 0.036 percent IPOs since 2019. However, there are many uncertainties in operating performance and valuation of STAR companies. It is expected that stock prices will fluctuate greatly in the short term after their first listing, and they may also be differentiated. In this regard, investors should remain rational, and institutional arrangements should be prepared. In order to ensure the stable operation of STAR and to avoid becoming a hotbed of speculation, support measures are required.
The registration system was a prominent part of the establishment of the SSE STAR Market, and its core function is information disclosure. After IPO pre-audit procedure is significantly simplified, information disclosure, especially financial reports, is one of the key indicators by which investors make decisions. At present, financial fraud as well as the violation of laws and regulations of listed companies in China run rampant. Compared with the huge punishment for financial fraud in the US, the legal cost of financial fraud in Chinese listed companies is too low.
Although there were 313 administrative penalties and total fines of 10.3 billion yuan ($1.5 billion) from listed companies in 2018, the punishment for listed companies' illegal violations was deemed too lenient, which encouraged the counterfeit disclosure of information on listed companies. Even in the US stock market, financial fraud is inevitable. For example, Enron, which ranked in the top 20 of the world's top 500 companies in 2001, admitted to fabricating accounts in 2001. From 1997 to 2001, its profits were $568 million, and its huge debt was not recorded. At the end of 2001, Enron's share price fell below $1, and the market value fell from a peak of $80 billion to less than $200 million. In early 2002, the NYSE de-listed Enron stock from the exchange.
Therefore, it should prevent financial fraud from eroding the STAR Market, and should significantly increase the cost of illegal activities, to protect the rights and interests of investors. This requires speeding up revisions of some provisions of the Securities Law, relying on the supervision of financial service intermediaries and strengthened the self-discipline of the company.
The second specification is a backdoor listing. The initial stage for the development of science and technology enterprises requires a large amount of financial support, and the STAR Market allows loss-making enterprises to list, which is a major breakthrough. On the other hand, it has encouraged a large number of latecomers to start listing on the back of the board, which has removed the market's mechanism for "survival of the fittest." It also causes the primary market to squander shell resources, and a large number of stocks under special treatment in the secondary market are prone to speculation. It has fueled a surge in the secondary market, resulting in bad companies driving out good ones.
Finally, the introduction of the de-listing system is very important. It's often the case that before IPO, listed companies' performances were exaggerated. Take the Growth Enterprise Market (GEM) in Shenzhen as an example. In 2018, the net profit of 739 GEM-listed companies fell by 69.05 percent compared with 2017. A total of 354 GEM companies listed between 2009 and 2012 posted net losses of 132.45 billion yuan. The overall net profit of listed companies on the GEM showed that the earlier the listing, the worse the performance. Between 2013 and 2015, small-cap stocks represented by the GEM experienced a continuous surge. Assets that had inflated for years shrank sharply in 2018, however. It is obvious that the reason for the soaring stock price of the GEM is not fundamental.
In order to avoid the soaring and plunging of the GEM, the unprofitability phenomenon of loss-making enterprises, and frequent falsification of financial statements, the STAR Market should be accompanied by a de-listing system. In 1997, the total number of listed companies in the US was 8,851. In 2018, the number dropped to 4,397. The number of listed companies has decreased by nearly half in the past 20 years, with an average annual reduction of 212 companies, which ensures a healthy and stable stock market.
In general, the SSE STAR Market needs simultaneous implementation of supporting measures to ensure the stability and long-term development of the STAR, which will mark an important part of China's stock market reform.
本文刊于环球时报英文版（Global Times）“EXPERT ASSESSMENT”栏目，2019年7月21日