Editorial: To Revitalize the Stock Market, Deepening Registration System Reform Is Crucial

Short-term juicing will only help so much as restoring investor confidence requires making progress on the tougher capital market reforms

Beyond introducing necessary short-term and specific policies, regulators should still focus their main efforts on mapping out the long-term development of the capital market. Photo: VCG

Recently, regulatory authorities have taken a series of actions to lift China’s sluggish stock market, such as reducing the stamp duty on stock trades, tightening IPO regulations to limit the number of offerings, and lowering margin financing ratios. These bundled measures aim to meet the call from the Chinese Communist Party’s Politburo meeting in July to “revitalize the capital market and boost investor confidence.” At a time when stock market performance has been lacking, these initiatives are an attempt to break the negative feedback loop of investor pessimism and market decline. However, these measures still might fall short of truly bolstering investor confidence as they fall into the category of short-term or specific policies.

Take the closely watched policy of halving the stamp duty on stock trades. Since China established its capital market in the early 1990s, the stamp duty has been raised twice and cut seven times. Reducing the stamp duty helps lower investor costs and promotes market transactions in the short term, but its impact over the long term is limited. On the day this policy was implemented, the domestic shares experienced a “one-minute opening shock,” with major indices surging before dropping like a stone. Previous reductions in the stamp duty showed similar diminishing marginal effects, though not as extreme as this latest go-around.

Any regulator or policymaker can only act within the constraints of reality, and the recent actions taken by the regulators regarding the stock market have to be viewed in this light. Beyond introducing necessary short-term and specific policies, regulators should still focus their main efforts on mapping out the long-term development of the capital market. The fundamental approach is to continue refining rules and mechanisms. Currently, it’s crucial to stay true to the original intention of the registration system reform and take the bull by the horns in terms of enhancing information disclosure. It is imperative, as stated at the mid-year China Securities Regulatory Commission conference, to “deepen and solidify the registration system reform.”