Opinion: Seizing the Opportunity to Build a Robust Regulatory Framework for the Stock Market

Recently, spurred by a series of economic stimulus policies, China’s stock market has seen increased activity. Notably, after the National Day holiday, the Shanghai Composite Index experienced a notable uptick, rising by 4.6%. This surge required brokerages to work overtime to manage new account openings. Yet, by October 9, a decline in the three major A-share indices was observed, highlighting the volatility and challenges facing investors and regulatory bodies alike [para. 1].

The stock market is vital to a country's financial health, serving functions like financing and equity transfer, with its performance impacting consumption through the "wealth effect." There is a pressing need to revitalize China's capital market to align with economic fundamentals and bolster investor confidence. This situation presents a prime opportunity for enhancing institutional development, creating solid regulations, and improving market infrastructure [para. 2].

The recent market upswing results from both domestic and international influences, with crucial contributions from policy stimulation. Notably, the People's Bank of China issued monetary policies on September 24, focusing on stabilizing real estate and stocks. Following this, major policy announcements were made by the Central Politburo and other government bodies, aiming to bolster domestic demand and the capital market. These policy moves have been essential in shaping investor expectations positively [para. 3].

While stimulus policies are essential, a sustained market resurgence also relies on strengthening economic fundamentals and prioritizing quality companies. China's stock market has encountered challenges, including the "3,000-point curse," attributed to regulatory weaknesses. Enhancing the regulatory framework is key to unlocking healthy market development, especially given that small to mid-sized investors often bear the brunt of market fluctuations [para. 4].

A mechanism to differentiate successful companies from failing ones is critical. A rise in the number of listed companies has not necessarily correlated with quality, pointing to the need for a stringent delisting system. Recently, more than 50 companies have been delisted since 2024, an encouraging sign of regulatory improvement. A robust delisting framework is crucial for the effective implementation of a registration-based system, making the normalization of IPOs a crucial next step [para. 5].

Tightened regulation against financial malpractice, including fraud and insider trading, is necessary to rebuild market confidence. Major cases of misconduct have eroded trust significantly. Protective regulation and prosecution of illegal activities are crucial for restoring market discipline and fostering confidence. The China Securities Regulatory Commission's focus on decisive regulation reflects its commitment to these principles [para. 6].

Moreover, attracting long-term and patient capital is vital. Encouraging funds from sectors such as social security and insurance could potentially bolster the capital market. Globally, these funds are critical market stabilizers. Enhanced evaluation and regulatory mechanisms are required to facilitate the entry of such funds into China’s market. This is coupled with the necessity for the capital market to offer significant investment opportunities [para. 7].

China's stock market reforms are a long-term process. Over the past few decades, perspectives on the market's identity have evolved, emphasizing integrity as essential for growth. Adherence to the rule of law remains the best way to protect investor rights. With over 30 years of experience, China stands at a crossroads where enhanced regulations could significantly benefit the market's future [para. 8].