City's 14th Five-Year Plan (2021-25) highlights role of STAR Market, registration-based initial public offering mechanism

As an indisputable global financial center, there will be more to see in Shanghai's capital market reforms, and the city's ambition is clearly manifested in its 14th Five-Year Plan (2021-25).

The groundbreaking registration-based initial public offering mechanism first attempted by the STAR Market on the Shanghai Stock Exchange should also be steadily practiced by the main board, which according to the city's 14th Five-Year Plan will be a major objective regarding Shanghai's capital market reform in the following years.

The registration-based IPO mechanism first tried on the Nasdaq-like STAR Market in July 2019 was promoted to the technology-heavy ChiNext on the Shenzhen Stock Exchange in August last year. Yi Huiman, chairman of the China Securities Regulatory Commission, said at a forum on the 30th anniversary of China's capital market held in late 2020 that the registration-based IPO mechanism will be steadily promoted throughout the A-share market.

Thanks to the higher efficiency of the new IPO mechanism, the STAR Market has managed to see at least 225 companies successfully floated since July 2019, raising more than 318 billion yuan ($49 billion) from their stock market debuts.

As the market has grown more mature after the registration-based IPO was trialled on the STAR Market and ChiNext, a wider adoption of the mechanism may be announced after the two sessions scheduled in March, said Zhongtai Securities chief economist Li Xunlei.

Tu Guangshao, former president of China Investment Corp, said that the registration-based IPO mechanism will play an important role in promoting Shanghai's position as a global financial hub to a new level by increasing the ratio of direct financing.

"For one thing, the capital market's scale will be expanded. Its structure will be optimized with the new IPO mechanism so that the real economy will be better served. More importantly, a higher weighting of direct financing in the capital market in general will help with the reform and upgrading of the commercial banking system," Tu said.

Bearing the same function of increasing the ratio of direct financing, bonds are also stressed in the city's new plan. Shanghai should thus take the lead in the country to experiment with bond issuance reform. The scale of corporate bonds should be further expanded, according to the plan.

Dong Dengxin, director of the Wuhan University of Science and Technology's Finance and Securities Institute, said that the Shanghai municipal government's focus on the bond market is aimed at releasing burdens on banks. Commercial banks have worked as a major financing channel in China over the past few years. Public information shows that indirect financing, which is mainly composed of bank loans, has long made up some 70 percent of China's overall financing.

"Therefore, the financing risks for banks are overly concentrated as the country's overall financing relies too much on banks, which also points to potential risks to China's financial system," Dong said.

On the other hand, the threshold for issuing corporate bonds is relatively high in China, which is especially true for small and medium-sized enterprises. In this sense, the Chinese bond market should be more inclusive while efforts are made to perfect binding terms and credit rating systems. These are the deeper implications of bond market reforms implied in Shanghai's 14th Five-Year Plan, he added.

Public information showed that the total value of financial products traded in the city topped over 2.274 quadrillion yuan in 2020, up 17.6 percent year-on-year. The actively traded market helped Shanghai rise to third place, up one spot in the most recent Global Financial Centers Index jointly released by the Shenzhen-based China Development Institute and United Kingdom independent think tank Z/Yen Partners in September.

But the city is not ready to rest on its laurels. More innovative asset-based securities can be expected in the next few years as the municipal government emphasized the importance of such products in its 14th Five-Year Plan. Shanghai should be the prime option for trading infrastructure real estate investment trusts in China with the Shanghai Stock Exchange playing a crucial role, according to the plan.

On April 30 last year, the CSRC and the National Development and Reform Commission jointly issued a notice to officially launch a pilot program for publicly offered infrastructure REITs. On Jan 31, the Shanghai bourse released three sets of rules for such REITs, which marked major progress in the country's REIT sector.

Xu Xianping, distinguished professor at Peking University's Guanghua School of Management, said that 4 percent of the assets can be transformed into REITs based on mature markets' experiences. At present, the total value of China's infrastructure investment exceeds 130 trillion yuan. If the Shanghai exchange issues infrastructure REIT products, the value of these products will be equal to 10 percent of the market value of the stocks currently traded on the bourse, which will be six times the size of Japan's REIT market. If REIT products can be cover the entire real estate market, the Shanghai Stock Exchange will grow into the largest REIT market in the world, he said.

The futures market is another highlight in Shanghai's 14th Five-Year Plan. Apart from futures for commodities such as petroleum and natural gas, which are in the pipeline, efforts should be made to experiment with renminbi-based foreign exchange futures.

Analysts from Galaxy Securities wrote in a note that renminbi foreign exchange futures have already become a popular product overseas but have yet to appear onshore. As the Belt and Road Initiative advances and the internationalization of the Chinese currency accelerates, the market has been seeing more demand for renminbi offshore. Hedging demand for renminbi in the foreign exchange market has also increased.

With the launch of renminbi foreign exchange futures in the domestic market, foreign trade companies can easily hedge foreign exchange risks and avoid major losses. It will no longer be necessary for these companies to seek arbitrage tools in overseas exchanges, which will help companies reduce management costs and lead to sustained development, according to the note.

More importantly, China will have the dominant right over the pricing of foreign exchange by rolling out renminbi foreign exchange futures. More parts of the world will thus more fully embrace the renminbi, which is conducive to the internationalization of the currency, said Galaxy Securities analysts.

Fintech is also underlined regarding the development of Shanghai's capital market within the next five years. A national-level fintech research and development center should be set up in Shanghai. Fintech should be more widely applied in market trading, payment settlements, construction of smart banks, smart investment management and innovative insurance products, according to the plan.

Meanwhile, a fintech industrial cluster should be incubated in Shanghai, according to the municipal government. The People's Bank of China, the central bank, will be encouraged to set up a fintech subsidiary in Shanghai, and so would the leading companies and institutions.

The development of the fintech industry is already noticeable over the past few years in Shanghai. In May last year, the Shanghai Fintech Industry Alliance was officially launched. The Investment Technology League, which aimed to integrate development of fintech and asset management, was formed in Shanghai in early September last year.

Shanghai Vice-Mayor Wu Qing said that finance and technology sectors are integrating at a faster pace, injecting new vitality into the financial ecosystem. Shanghai will ride the tide and continue to come up with more policies to provide a top-class environment for fintech development, Wu said.

(Source: China Daily)