How to Improve the Market Mechanisms and Ecosystem for "Long-Term Capital, Long-Term Investment"?

Recently, CSRC Chairman Wu Qing attended the “Two Sessions” press conference and clearly stated when asked about “the main considerations and key measures to promote high-quality development of the capital market over the next five years” that we will continue to promote the effective role of all parties, improve the market mechanism and ecosystem for “long-term funds and long-term investments,” enhance the construction of a stable market mechanism with Chinese characteristics, enrich cross-cycle counter-cyclical adjustment methods and mechanisms, and further strengthen the market’s inherent stability.

“Long-term funds and long-term investments” has been a frequently mentioned topic by the management in recent years. So, it was not surprising that Wu Qing once again brought up this topic when answering questions about the key measures for high-quality development of the capital market in the next five years. After all, the healthy or high-quality development of the capital market depends on the protection of long-term capital and long-term investments. Therefore, “long-term funds and long-term investments” constitute the backbone of China’s capital market.

However, how to improve the market mechanism and ecosystem for “long-term funds and long-term investments” is a practical issue that the capital market must face. Wu Qing mentioned the importance of improving the construction of a stable market mechanism with Chinese characteristics, which is indeed very important. But regarding the construction of a stable market mechanism, concrete measures are needed.

Currently, China Investment Corporation (CIC) plays a crucial role in stabilizing the market. But the construction of a stable market mechanism cannot be limited to this alone; it requires efforts from multiple sides to form a joint force. For example, during special periods, it is necessary to halt significant shareholder reductions, promote increased holdings by major shareholders, encourage share buybacks by listed companies, stop various short-selling measures, and suspend new stock issuances. Public funds, social security funds, insurance funds, and others need to become the main force in stabilizing the market. Besides building a stable market mechanism, there are several other points that require high attention.

First, to establish a market mechanism and ecosystem for “long-term funds and long-term investments,” it is essential to curb short-term speculative behaviors in the market, especially to restrict institutional investors from engaging in short-term speculation. After all, the purpose of developing institutional investors is to maintain stable market development, not to turn them into speculative forces. Therefore, encouraging “long-term funds and long-term investments” requires restricting institutional investors from engaging in quantitative trading, especially prohibiting public fund institutions from participating in such trading. If institutional investors can make huge profits through high-frequency quantitative trading in the short term, who would still want to invest long-term?

Second, to establish a market mechanism and ecosystem for “long-term funds and long-term investments,” it is necessary to improve the shareholder reduction system and prevent original shareholders from turning the stock market into an ATM. If, after a company goes public, the motivation of shareholders is solely to reduce holdings and cash out, such a company is not worth long-term investment. If “long-term funds and long-term investments” face major shareholders rushing to cash out, the result will inevitably be significant losses for these long-term investors.

Therefore, to improve the market mechanism and ecosystem for “long-term funds and long-term investments,” constraints on major shareholders’ reductions are necessary. For example, major shareholders are not allowed to reduce holdings if the stock price falls below the issuance price; if the company’s performance suffers losses or declines significantly, major shareholders should also be restricted from reducing holdings; if the company’s cash dividends to the public do not exceed the company’s financing amount, major shareholders should likewise be restricted from reducing holdings. Through various constraints, the focus of major shareholders should be on the company’s development and investor returns. In fact, when shareholders concentrate on growing and strengthening the company, it also benefits long-term investment.

Third, to establish a market mechanism and ecosystem for “long-term funds and long-term investments,” it is necessary to improve the equity structure of listed companies. This not only helps to improve corporate governance but also fundamentally addresses the issue of major shareholders turning the stock market into a cash machine. If major shareholders treat the stock market as a cash cow, it is clearly detrimental to “long-term funds and long-term investments.” Therefore, encouraging “long-term funds and long-term investments” requires fundamentally solving this problem—namely, improving the equity structure of listed companies.

Of course, for already listed companies, improving the equity structure is more challenging. Without the courage for a “second share reform,” strictly controlling shareholder reductions is the only feasible option. Therefore, improving the equity structure of listed companies should start with IPO companies. First, the equity structure of IPO companies should be improved: only those that meet certain requirements can apply for an IPO.

So, how to improve the equity structure of IPO companies? The key is to reduce the shareholding ratio of controlling shareholders. Except for companies that require absolute state control, non-state-controlled companies should have controlling shareholders holding no more than 30% of the total shares, and the proportion of circulating shares at IPO should be no less than 50%. Such a shareholding structure allows controlling shareholders to enjoy the benefits of going public while avoiding turning the stock market into a cash machine. Especially for some excellent companies, controlling shareholders must cherish their shares; large-scale reductions could cause them to lose control of the company. Only when more companies’ controlling shareholders value their holdings can the market mechanism and ecosystem for “long-term funds and long-term investments” be better established.

Author’s note: These are personal opinions and for reference only.