On the press conference on November 21, 2014, CSRC spokesperson Zhang Xiaojun briefed the press on the first week performance of the newly-launched Shanghai-Hong Kong Stock Connect, released the Provisions for the Administration of Asset Securitization Business Activities of Securities Firms and Subsidiaries of Fund Management Companies and supporting rules, approved the Dalian Commodity Exchange of carrying out corn starch futures (see News Update, Announcements). In addition to answering questions from the press, Zhang Xiaojun also notified the press that, following the official launch of Shanghai-Hong Kong Stock Exchange this week and in order to ensure the fairness of press release, the CSRC, after consulting the SFC, decided to hold the weekly press conference at 16:15 every Friday from this week onwards.

Q: Previously, the CSRC announced that approximately 100 companies will offer new shares by the end of this year. However, by far, only 60 odd companies have done that, will the rest of the companies offer new shares at roughly the same time in the remainder of the year?

A: To implement the Opinions of the State Council on Further Promoting the Sound Development of Capital Markets and stabilize market expectations, the CSRC has arranged new share offering at a reasonable pace, with approximately 100 companies relatively evenly scheduled to offer new shares between June and the end of the year. By far, 66 companies have offered new shares, the Commission will maintain a pace similar to that of the previous few months and will not arrange the rest of the companies to offer new shares all at the same time. It should be noted that review of the companies authorized to offer new shares in January 2015 is still based on financial data submitted in 2014 and their offering application will have been approved by the Public Offering Review Committee by the end of 2014. Therefore, such companies should still be included in the 100 odd companies within the original share offering schedule.

Q: Recently, the excessive speculation of newly-listed companies has led to heated market discussions. Some suggest a return to the market-based pricing mechanism, accusing the existing offering arrangements of protecting investors interests only in the short-term yet making investors overly dependent in the long run, thus adding on the obstacles in the follow-up market-based reform. What is the CSRC’s take on this matter?　　

A: Since June this year, the CSRC has approved 66 companies of new share offering. Of the 55 companies which have already completed the pricing process, the average P/E ratio at the IPO stood at 19.94, with Ellington Electronics Technology being the highest at 23.2 and Beijing Strong Biotechnologies being the lowest at 10.07. Only six companies have a P/E ratio above the industry average.

In accordance with the stipulations of the Measures for the Administration of Initial Public Offering and Listing of Stocks, the Measures for the Administration of Initial Public Offering and Listing of Stocks on the GEB, the Measures for the Administration of Securities Offering and Underwriting, in public offering supervision, the CSRC places its focus on the following aspects: 1. Whether the offering and underwriting plan complies with relevant stipulations of the Underwriting Measures. 2. Whether information disclosure by the issuer in raising funds complies with relevant information disclosure rules, whether the requirement for the amount of proceeds is reasonable with no signs of over-financing. 3. Whether old share transfer plan is in line with the policy which stipulates that “the shares offered at the IPO should mainly be used to raise funds for the development of the company”. 4. Companies with a higher than average P/E ratio at IPO shall release special notice on investment risks for three consecutive weeks in accordance with relevant rules.

Meanwhile, in line with the opinions on new share offering reform, the Commission has conducted spot checks on the new share offering and underwriting in respect of companies which have completed IPO, standardized checking mechanism with strengthened real-time and ex post supervision.

Q: It has been reported recently that the NEEQ system may lower the entry threshold for investors, what is the CSRC’s take on this?

A: There are some recent reports claiming that the NEEQ system may lower the entry threshold for investors. Pursuant to the Decision of the State Council on Issues Regarding the National Equities Exchange and Quotations System (Guo Fa [2013] No.49), the system, or the NEEQ, mainly serves and supports innovative, startup and growing SMEs and micro enterprises and necessitates investor suitability arrangements in line with investors’ ability in risk identification and tolerance. Micro enterprises and SMEs are characterized by dramatic fluctuations in their performance and high risks, which means strict entry criteria for individual investors should be adopted. Therefore, the NEEQ adopts relatively strict investor suitability arrangements in line with its own market positioning as well as investment risks. An individual investor is required to have more than 5 million RMB worth of securities-based assets in his/her account by the end of the day immediately preceding the admission to the NEEQ; have more than 2 years of investment experience or have relevant professional backgrounds or training in accounting, finance, investment and economics. An institutional investor is required to be a legal person with a registered capital of more than 5 million RMB ; a partnership with a paid-in capital of over 5 million RMB of; and financial products or assets managed by other institutions acknowledged by a financial institution or a relevant regulatory authority. Based on practical experience, the existing suitability management effectively controls market risk and prevents spillover risks, which in turn paves the way for smooth market launch and replication of the pilot program on a national scale, as well as ensures market stability, innovation and development with a highly professional investor base.

Since the beginning of this year, the growing market scale and popularity has prompted an increasing number of individual investors to participate in the NEEQ. The system devotes itself to cultivating and expanding a solid institutional investor base, encourage and guide securities firms, fund firms and other financial institutions to launch privately-placed investment products and cross-market investment portfolio, in order to allow individual investors failing to meet the threshold criteria to participate in the trading in NEEQ. 

Recently, a large number of lead sponsors, NEEQ-listed companies, investment institutions and individual investors have voiced their concern about the “5 million securities-based assets” being too high as the threshold criteria and suggested that the investor suitability standards should be lowered to a certain extent in order to meet developing needs of the market. The NEEQ attaches great importance to all market opinions and feedbacks, and will carry out in-depth research in this regard while taking into account the functional positioning, service methods and regulatory system of the market.

Q: Shanghai-Hong Kong Stock Connect further improved the two-way accessibility of China’s capital markets, aligning it more effectively with international markets and raising the general expectation for the inclusion of A-share index into MSCI and other mainstream international stock indices. What is the CSRC’s take on the matter?

A: By far, the CSRC has already carried out close communication and multiple rounds of consultations with MSCI regarding the inclusion of A-shares into MSCI, exchanged ideas on the opening up of China’s capital markets, major concerns of international investors, and updates on including A-shares into MSCI Emerging Markets Index. Moreover, the CSRC has also maintained close communication with the State Foreign Exchange Administration, the Ministry of Finance and the State Administration of Taxation regarding QFII and RQFII policies, promoted the effective implementation of such policies and measures so as to tackle major concerns of foreign investors.

As a solid step in implementing the decisions made at the Third Plenum and the Opinions of the State Council on Further Promoting the Sound Development of Capital Markets, a major measure in promoting two-way capital market accessibility, and a key institutional innovation in the capital markets, Shanghai-Hong Kong Stock Connect is of great significance and long-lasting influence. The launch of the program will provide foreign investors with more flexible choices in their investment in domestic capital markets, complement the existing QFII and RQFII arrangements and propel the further opening up of China’s capital markets. Recently, the Ministry of Finance, the State Administration of Taxation and the CSRC jointly issues the Notice on Temporary Exemption of Enterprise Income Tax on Gains Derived by QFII and RQFII from Transfer of Stocks and Other Equity Investment  Assets in China, setting forth clear income tax policies for QFII and RQFII to further reinforce QFII and RQFII arrangements.

In the future, we will maintain close communication with competent authorities in gradually improving QFII and RQFII arrangements to facilitate foreign investors in their securities investment activities in the domestic markets; meanwhile, we will consult with relevant indice companies in order to include A-shares into major international benchmark indices and further promote two-way accessibility of China’s capital markets.

Q: According to the previous press conference, the CSRC is checking on the case of the public Zhangzidao Group. Could the CSRC provide us with an update on the case?

A: The CSRC is still looking into the matter. 

Q: According to the previous press conference, the CSRC has received whistleblowers’ alerts on PKU HealthCare Corporation and started looking into the matter. Could the CSRC provide an update on the case?

A: We have already initiated official investigation into the fraudulent information disclosure by PKU HealthCare Corporation, Peking University Resources (Holding) and Beijing Zenith Holding Corporation Limited. Meanwhile, we are aware of the alerts submitted by whistleblowers regarding Founder Group and Beijing Zenith Holding Corporation Limited. 

Q: The Public Offering Review Committee of the CSRC has already approved the IPO application of Guosen Securities, which some interpret as a sign that the Commission is further encouraging securities firms to step up speed in going public for capital replenishment. What is the CSRC’s take on this interpretation?

A: While ensuring total compliance with applicable laws and regulations, the CSRC has always encouraged securities firms to replenish their capital via various approaches and channels, thus laying a solid ground for industry innovation and development. Recently, to ensure effective implementation of the “Opinions on Further Promoting the Sound Development of Capital Markets” by the State Council and the “15 Opinions on Innovation” released by the Commission in May, we have adopted a series of measures to encourage securities firms to establish and improve capital replenishment mechanism via IPO and follow-on offering, and align capital strength with business scale, and risk exposure with risk tolerance capability.