In a recent interview with the press, the China Securities Regulatory Commission (CSRC) spokesman made the following remarks on hot issues such as operation of the stock market, lessening holding of non-tradable shares, improvement of supply and demand, shareholding increase and repurchase by listed companies as well as crackdown on violation of securities laws and regulations:

Q: China’s stock market has seen continuous slump and dramatic fluctuations recently. What’s the CSRC’s opinion?

A: Since mid-October of last year, China’s stock market has seen continuous falling due to multiple factors such as internal adjustments, increasing uncertainties in global economy and finance, and serious natural disasters at home. Meanwhile, the imperfect systems and structures on the capital market led to more dramatic fluctuations, to which the CSRC has paid close attention. This year, the national economy has kept its steady and rapid growth under the anticipated macro-economic control, while the whole capital market has remained sound. In the principle of long-and-short-term planning and overall consideration, the CSRC will foster a healthy stock market by timely studying new problems, pertinently establishing fundamental systems, adjusting supply and demand, optimizing financing structure, intensifying market supervision and perfecting internal stabilizing mechanism of the market.

Q: What kind of detailed policies and measures will the CSRC adopt for ban-lift and lessening holding of non-tradable shares? Chairman Li Rongrong of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) said in a recent press conference that they will, together with the CSRC and the China Securities Depository and Clearing Corporation Limited (SD & C), build a real-time monitoring system to ensure legitimacy of the transfer and shareholding lessening. Could you brief us about this?

A: China’s stock market has changed from an equity-divided market to an all-floating one upon completion of the equity division reform. Since then, both the non-tradable shares and other shares with sales limit become floating stocks, only with different sales limit periods. On the all-floating market, a new supervision problem is how to regulate the block transfer of shares. This year, regulatory authorities have, regarding the ban-lift and lessening holding of non-tradable shares, improved related systems to guide the transfer of the stock shares without sales limit in an orderly way. Firstly, the “Guidance Opinion on Listed Companies’ Stock Shares without Sales Limit” has been issued to regulate the block sale of excessive stock shares without sales limit by shareholders of listed companies. Secondly, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) have issued the business operation guidance or related detailed rules to specify the standards, and imposed public criticism, trading restriction and repurchase within stipulated time limit upon illegal shareholding lessening. Thirdly, the SD & C began to disclose information about lessening holding of non-tradable shares every month since July 2008.

Next, we will improve the block trading with an eye on the actual market conditions. For instance, we are introducing the secondary offering through securities dealers and intermediaries and improving the regulation, buffering and information disclosure of block shareholding lessening. Meanwhile, we are developing market liquidity management tools such as exchangeable bonds to improve the internal stabilizing mechanism. Besides, we will cooperate with the SASAC to establish a real-time monitoring system for the state-owned shares transfer. At present, the SASAC is working on the application, verification and confirmation of state-owned shares and their holders, while the SD & C is also doing technical preparations. The system will facilitate related authorities to monitor the account opening, account transfer and trading by holders of state-owned shares.

Q: The recent IPO of China South Locomotive & Rolling Stock Corporation (CSR) is seen as re-issuance of large-cap stocks. So, what are the CSRC’s arrangements in controlling the speed of large-cap stocks’ issuance and refinancing?

A: An important function of the securities market is to optimize resource allocation. In overseas mature markets, the capital restraint works during downturn, and market participants often adjust their issuance scale and speed according to the market changes. However, China's capital market is an emerging and transitional one with imperfect market-oriented regulation. Currently, many enterprises want to get listed for fund-raising, while the large-amount capital goes after new shares. Take CSR’s A-share IPO as an example, the frozen subscription capital has reached a total of RMB2.276 trillion, of which RMB1.919 trillion came from online public investors, with the online lot-winning rate up to 0.273% and the over-subscription over 300 times after claw-back.

This year, regulatory authorities have been more meticulous towards the large-cap stocks’ issuance speed, upon considering new circumstances and various opinions on the market. In the meantime, quite a few enterprises, underwriters and inquires are more meticulous in issuance prices, because of adjustments to the market. From January to July, only 4 companies’ large-cap stocks (including CSR, with over 100 million shares issued by each company) have been listed, with RMB64.319 billion raised funds in total, a year-on-year decrease of 64% and 49% in issuer quantity and financing amount, respectively.

Followed by that, we will continue to improve supply and demand, reinforce market-oriented mechanism as well as guide various market forces and intermediaries to give full play in culling, pricing and adjustment of supply and demand.

Q: The CSRC mentioned in its recent mid-year conference that it would stipulate measures on listed companies’ repurchase and major shareholders’ shareholding increase, and urgently consummate a few systems such as listed companies’ dividend payment system. So, what’s the idea behind the above decisions?

A: Recently, some listed companies expressed repurchase intentions as they think their shares are undervalued, while controlling shareholders want to increase holding of floating shares. The shareholding increase and repurchase indicated that the management and major shareholders have confidence in their companies’ intrinsic value, on the other hand, the shareholding increase and repurchase, as major components of the market’s internal stabilization mechanism, stabilized the market and restored investors’ confidence. We will, in view of problems in the shareholding increase and repurchase as well as market feedbacks, conduct procedural adjustment to regulations of shareholding increase in the “Administration Measures on Takeover of Listed Companies” according to current laws, improve the repurchase system based on the “Administrative Measures on Repurchase of Public Shares by Listed Companies (Trial)” to enhance flexibility in the shareholding increase by controlling shareholders, and simplify repurchase approval procedures. Moreover, to prevent listed companies and major shareholders from using information to buy shares in advance during the shareholding increase and repurchase, we have established a sales limit system during sensitive periods by detailing regulatory rules to restrict short-term trading and prohibit insider trading or market manipulation. Besides, the shareholding increase and repurchase have been conducted according to laws by establishing a prompt reaction mechanism to discover and punish such market behavior and further specifying compliance supervision responsibilities of intermediaries.

As for the dividend payment of listed companies, in mature markets, enterprises at a steady growth stage have sound dividend payment policies. In China, a lot of listed companies are in a phase of rapid growth, while they focus on capital accumulation and expansion, with less initiative and weak control in the dividend payment as well as imperfect corporate governance. In recent years, to protect investors’ legal rights and interests, regulatory authorities have been encouraging and urging listed companies to lay more emphasis on the dividend payment. Specifically, positive achievements have been made by linking the approval of listed companies’ refinancing with their cash dividend payments in recent 3 years and proportions of cash dividend to distributable profit. In 2007, a total of 779 listed companies on the SSE and the SZSE (accounting for 50% of all listed companies) paid RMB275.7 billion cash dividend in total, with a sharp increase compared with those of previous years, and 148 listed companies (accounting for 9.5% of all listed companies) paid bonus shares. Next, we plan to improve the dividend payment system by guiding listed companies to specify dividend policies in their "Articles of Association" or annual reports. We will also confirm the dividend payment as a prerequisite of listed companies’ refinancing and urge state-owned listed companies to take the lead in the cash dividend payment.

Q: What measures will the CSRC take in guiding long-term capital’s investment in the stock market?

A: The “Opinions of State Council on Promoting Reform, Opening and Stable Growth of Capital Market” has nailed down the strategic deployment of bringing institutional investors, who mainly are fund management companies and insurance companies, into a dominant force on the capital market. In recent years, a great deal of work has been done to develop security investment funds and diversify the investment of long-term capital (such as insurance funds, social insurance funds, enterprises’ supplementary pension funds and commercial insurances) on the capital market. Thus, the diversified institutional investors have become a major force. By the end of June 2008, the market capitalization of the shares held by institutional investors (including funds, insurances, social insurances, annuities, securities companies’ self-dealing, pooled wealth management, collective funds trust and general institutions) had reached 51.54% of floating market capitalization.

The development of institutional investors has been on a normal track since this year, though it has been affected by some market changes, with the difficulties in issuance of some new funds. With constant perfection of institutional investors’ structure, we should step by step increase the publicly offered funds and bolster the assets management business for special clients as well as those for QDII and QFII. Furthermore, we should increase long-term capital supply on the capital market by propping up products with fixed income and low risks, facilitating the investment of insurance funds, social insurance funds, enterprise annuities and trust plans in the stock market and encouraging the investment of the funds in individual pension accounts. It is believed that implementation of the above measures will greatly contribute to the development of institutional investors.

Q: Under constraint by current laws, how will the securities and futures inspection system play its roles in crackdown on lawbreaking to protect investors’ rights and interests?

A: The CSRC has intensified the crackdown on violation of laws and regulations by consummating law enforcement systems, law enforcement forces and law enforcement cooperation. Firstly, a general inspection group has been established under a unified inspection system. Secondly, mechanisms and procedures of the administrative penalty have been improved to build up a new law enforcement system of securities and futures, characterized by the separation of inspection and examination and the mutual restraint between investigation and penalty. Thirdly, a quick response mechanism has, under joint inspection by the CSRC, the exchanges and their agencies, been formed for timely discovery, determent and punishment. Fourthly, efforts have been made to cooperate with public security authorities and judicial authorities in the law enforcement, timely referring cases to judicial authorities. In the first half of 2008, some major cases (such as cases of Zoje Sewing Machine Co., Ltd. and Shandong Jiufa Edible Fungus Co., Ltd. as well as those of Tang Jian and Wang Limin) have been investigated and disclosed in time, with 66 cases put on records for investigations, 83 under informal investigations, 73 concluded, 11 referred to public security authorities as well as 6 illegal futures cases investigated and 27 cases concluded (supported by public security authorities) and 47 decisions on administrative penalties and market-entry ban.

In view of current market situation, the inspection should focus on the following aspects:

Firstly, insider trading should be strictly investigated and punished, especially insider trading and interests transfer by utilizing M & A and restructuring information.

Secondly, we should crack down on manipulating the market price, fabricating and spreading false information or disturbing the market order.

Thirdly, emphasis should be put on punishment on capital occupation of listed companies and illegal shareholding lessening by their major shareholders, actual controllers as well as directors, supervisions and senior management.

Fourthly, punishment on illegal securities consultation and entrusted wealth management on the Internet should be reinforced.

Q: Some listed companies have implemented restructuring or assets injection recently, while disputes occurred in their asset evaluation. How will the CSRC regulate them?

A: The restructuring or assets injection will contribute to adjustment to listed companies’ structure. According to related regulations in the “Administration Measures for Significant Asset Restructuring of Listed Companies”, the listed companies that plan to conduct significant asset restructuring should announce restructuring pre-schemes, and then disclose reports on significant assets restructuring and submit applications to the CSRC after their shareholders’ meetings. At the restructuring pre-scheme stage, listed companies and their directorates should ensure authenticity, accuracy and integrity of the disclosed information, while financial consultants should make due diligence and give opinions. And the CSRC will strictly verify the submitted applications according to related laws and regulations.

With high concern about the asset evaluation in the restructuring and asset injection, the CSRC issued the “Circular of Administration on Asset Evaluation Institutions Engaged in Securities and Futures Businesses” with the Ministry of Finance in April, 2008. The circular, giving higher standards for the management of the asset evaluation institutions, has improved practice rules of self-regulatory departments and ensured independence of the institutions. In addition, the CSRC has recently promulgated the “Administration Measures on Financial Consultant Business in Mergers & Acquisitions and Restructuring of Listed Companies” to urge independent financial consultants to examine restructuring issues in a self-regulatory way. Besides, the CSRC, by on-the-spot inspections on the asset evaluation institutions and prevention from fraudulent asset evaluation, has protected the interests of listed companies and investors. What’s more, the CSRC will emphasize supervision over the whole process in the asset evaluation, and punish lawbreaking by both asset evaluation institutions and asset evaluators as well.