If there is not enough capital in the market, the regulatory authorities need to reduce the financing volume of companies in the stock market. In that case, it is more appropriate to reduce the scale of listed companies' follow-on financing rather than the IPO scale. Moreover, compared to suspending or reducing IPOs, the A-share market should increase the delisting efforts.
In 2023, China's GDP (Gross Domestic Product) grew by 5.2%, which is a quite remarkable achievement, indicating that the Chinese economy is on a normal development track. The stock market is usually considered a barometer of the economy, but our stock market has not responded in line with economic development. The Shanghai Composite Index and the CSI 300 Index fell by 3.70% and 11.38% respectively in 2023.
Entering 2024, overseas stock markets continued the upward trend of 2023. On January 22, the Dow Jones Industrial Average closed at 38,001.81 points, breaking through the 38,000-point milestone for the first time; the S&P 500 Index closed at 4,850.43 points, both recording the highest closing prices in history. The Nikkei 225 Index also set a 34-year high on January 23, closing at 36,546.95 points. On January 30, the Dow Jones Industrial Average, the S&P 500 Index, and the Nikkei 225 Index closed at 38,467.31 points, 4,924.97 points, and 36,065.86 points, respectively.
In stark contrast, the Shanghai Composite Index went from "retaking 3,000 points" at the beginning of the year to "losing 2,900 points," and then to "losing 2,800 points." The call to save the market has once again resounded among investors, and suspending IPOs (Initial Public Offerings) is one of the highly advocated measures to save the market.
The reason investors call for a suspension of IPOs is that newly issued stocks will occupy capital within the stock market. If there is no new capital inflow, it may trigger a stock market decline, and suspending IPOs is a way to reduce the occupation of capital within the stock market. However, IPOs are an important exit channel for PE/VC investments. Suspending IPOs would increase the risks faced by strategic investment industries such as PE/VC, making strategic investors more cautious in making investment decisions, reducing the scale of strategic investments, which is not conducive to incubating high-tech companies and the development of China's high-tech industry.
In addition to IPOs, follow-on financing by listed companies also occupies capital within the stock market, and the scale of follow-on financing in A-shares far exceeds that of IPOs. Moreover, follow-on financing by listed companies may dilute the company's profits, thereby reducing earnings per share. Therefore, if it is necessary to reduce the financing volume in the stock market, it is more appropriate to reduce the scale of follow-on financing.
Compared to the U.S. stock market, the delisting rate in A-shares is too low. Too few delistings mean that the quality of companies in the stock market is mixed, with poor companies dragging down the performance of the entire stock market and occupying scarce market capital. Therefore, A-shares should also increase delisting efforts.
A-shares have used methods such as reducing or suspending IPOs to save the market, trying to stabilize the market and alleviate downward pressure, which may be effective in the short term, but in the long run, the effect is not good because it only postpones the outflow of capital in the market and does not solve the fundamental issue of the stock market's vitality.
Now, A-shares are valued at a historical low, and the government has introduced a series of favorable policies, but the stock market is still not improving, indicating a lack of investor confidence. In this situation, we believe that saving the market cannot be solved by technical measures such as suspending IPOs. It may require real money, and the intervention must be quick and heavy to be effective. Drawing on the experience of financial markets in the United States, Japan, and other countries, the central bank should inject a large amount of liquidity into the financial market to prevent the stock market from drying up, reduce interest rates and reserve requirements; the government and funds influenced by the government should directly enter the market, including but not limited to Central Huijin increasing its holdings of stocks, Central Huijin subscribing to ETFs, and insurance funds entering the market; and encourage listed companies to repurchase stocks to stabilize investors' confidence in the stock market.A-share earnings per share growth does not match company profit growth
Secondary Public Offerings (SPO) can bring new capital to listed companies, but also increase their share capital. If the profitability of the new capital brought in by SPO financing is not as strong as the existing capital, then although SPO financing increases the company's profits, it will reduce the company's earnings per share.
Unlisted companies, especially in the high-tech industry, have limited tangible assets that can be used as collateral, making it difficult to finance from traditional channels such as banks. Typically, to obtain the necessary funds for development, companies first seek financing from angel investors, and then from private equity (PE) or venture capital (VC). After a period of development, in order to raise more funds and to provide an exit opportunity for angel investors and PE/VC, the company may be acquired by another company or go public through an Initial Public Offering (IPO).
Compared to unlisted companies, listed companies have more financing channels. In addition to refinancing in the stock market, listed companies can also raise funds through debt financing, such as issuing bonds or borrowing from banks. Moreover, unlisted companies need more funds than listed companies. First, because listed companies have already raised a large amount of funds through their IPO; second, listed companies are relatively in a more mature stage of development and do not need as much capital.
Therefore, if there is not enough capital in the market and the regulatory authorities need to reduce the financing volume of companies in the stock market, it is more appropriate to reduce the refinancing scale of listed companies rather than the IPO scale.
One of the major exit strategies for strategic investors such as angel investors and PE/VC is through the IPO of the invested company. If the IPO is suspended, companies that could have gone public temporarily cannot do so, and a large part of the strategic investment funds will be stuck in these companies waiting to go public, unable to be reinvested in other promising projects that urgently need funds, reducing the efficiency of the use of these strategic investment funds. Additionally, the suspension of IPOs also exposes strategic investment funds to additional policy uncertainties, making strategic investors more cautious in their investment decisions and reducing the scale of strategic investments, which is not conducive to incubating high-tech companies.
There have been a total of nine IPO suspensions in the history of A-shares, the most recent three being: September 16, 2008, to July 10, 2009; November 3, 2012, to January 17, 2014; and July 4, 2015, to November 6, 2015. During the three IPO suspension periods, the Shanghai Composite Index's change in value was: 56.7%, -5.3%, -2.6%, respectively. This means that suspending IPOs does not guarantee a rise in the stock market. After the resumption of IPOs on July 10, 2009, the Shanghai Composite Index fell by 20.6% within one year and by 30.3% within three years. That is to say, compared to the start of the IPO suspension on September 16, 2008, the Shanghai Composite Index only rose by 9.2% three years after the resumption of IPOs. Similarly, after the resumption of IPOs on November 6, 2015, the Shanghai Composite Index fell by 12.9% within one year and by 25.9% within three years. Only after the resumption of IPOs on January 17, 2014, did the Shanghai Composite Index rise by 68.4% within one year and by 54.8% within three years. Therefore, suspending IPOs may be effective in the short term, but in the long run, the effect is not good.
In fact, companies waiting to go public will adjust their own listing pace according to market conditions. When the stock market plummets and valuations are low, companies going public through IPOs are essentially selling their shares at a low price, which is not cost-effective for shareholders, so they will choose to postpone the IPO, and the financing demand in the market naturally decreases. On the contrary, when the stock market soars and valuations are high, companies can sell their shares at a good price at this time, so many companies will choose to go public at this time, increasing the financing demand in the market.
The delisting efforts must be intensified
The registration system is an important measure in the reform of China's capital market, aimed at gradually improving the basic market system and market-oriented reforms, enhancing market efficiency and transparency, and promoting the long-term development of China's capital market. Under the registration system, the regulatory authorities are only responsible for reviewing whether the materials submitted by the issuer comply with the disclosure obligations, regardless of the quality of the company, and do not prohibit the issuance of securities. Companies are required to disclose information truthfully, comprehensively, and in a timely manner, and the stock market judges the risks, with investors themselves assessing the quality of the company and making investment decisions. Suspending IPOs is obviously inconsistent with the registration system.Looking at the number of companies in the stock market, the A-share market has seen a year-on-year increase from 1,247 companies in 2001 to 5,153 in 2022. Although the number of IPOs in the U.S. stock market exceeds that of A-shares, the number of listed companies in the U.S. market has actually declined. Starting from 2001, the number of listed companies decreased year by year, remaining between 5,500 and 5,600 from 2011 to 2019, and only recently began to rise again to 6,527 in 2022. This contrast is due to the fact that the delisting efforts in the U.S. stock market are much greater than those in A-shares.
Under the registration system, it is essential to strengthen the supervision of listed companies' information disclosure, promote the survival of the fittest among listed companies, and facilitate multiple exit channels such as mandatory delisting, voluntary delisting, mergers and acquisitions, and bankruptcy reorganization. Companies in need of financing through listing should be able to go public quickly, but those that perform poorly after listing should also be swiftly eliminated. A large number of companies should have the opportunity to finance through listing, but only the high-quality ones should remain in the market, given the chance for further financing and sharing in the fruits of the company's development.
From 2001 to 2019, except for the years 2013, 2014, and 2018, the number of delisted companies in the U.S. stock market exceeded the number of IPOs. From 2001 to 2022, the U.S. stock market saw an average of nearly 430 companies delisted per year, with an average delisting rate of 7%.
The fundamental reason for the difficulty in delisting in A-shares lies in the lack of a rigorous and strictly enforced delisting system. On one hand, the interests of listed companies are intricately intertwined, and delisting involves the vital interests of creditors, company employees, and thousands of investors. Moreover, the delisting of some large state-owned enterprises often encounters various forms of obstruction and intervention from local governments and vested interests. In addition, the destinations for delisted companies are singular. Currently, companies in A-shares that are forcibly delisted have only one destination, which is to move to the illiquid New Third Board market. In contrast, the European and American stock markets have established a multi-level capital market system and flexible transfer mechanisms, providing multiple exit channels for delisted companies.
Although the number of IPOs and listings in A-shares is less than in the U.S. stock market, the delisting rate in A-shares is significantly lower than in the U.S., hence the number of listed companies in the A-share market has been continuously increasing. With too few delistings, the market is filled with companies of varying quality, where poor companies drag down the performance of the entire stock market and occupy scarce market funds. Therefore, compared to suspending or reducing IPOs, A-shares should increase delisting efforts.
If regulation is lax, leading to widespread financial fraud, the profits of listed companies will be "inflated," and thus the A-share market may only have a low valuation corresponding to the "inflated" profits, while the actual valuation is not low. On the other hand, the prevalence of illegal activities such as financial fraud in the stock market will also cause investors to lose trust in the stock market, thereby reducing the valuation of listed companies. To promote the healthy development of the stock market and restore investors' trust in listed companies, regulatory efforts must be intensified.
Another common criticism of A-shares is the lack of cash dividends. From 2018 to 2023, for every dollar of financing in the U.S. stock market, the market received dividends (including buybacks) of $3.98; in the A-share market, for every yuan of financing, the market received dividends (including buybacks) of 0.86 yuan.
Cash dividends have three main benefits: firstly, they can confirm that the company has real cash on hand, and the net profit is not just a number on paper; secondly, when the company does not have better investment channels, returning money to shareholders for their own management is a beneficial choice for shareholders; and finally, for long-term holders of stocks, there is cash inflow without having to sell the stocks. Moderately increasing the proportion of cash dividends, especially for those listed companies that have only raised funds for many years without ever paying dividends, can reduce the possibility of financial fraud and bring actual cash inflow to shareholders, helping to enhance shareholders' trust in listed companies.
Bailout requires "real money and silver"
On October 23, 1929, the Dow Jones Industrial Average plummeted by 6.3%, and continued to plummet by 13.5% and 11.7% on October 28 and 29, respectively. Due to the laissez-faire economic policy of non-intervention, the U.S. government did not take substantive intervention measures when the stock market crashed. The U.S. government relied solely on verbal statements to stabilize the market and did not intervene in time for the selling triggered by leveraged trading or the chain of bank failures. From 1929 to 1933, there were four major bank panics, and the U.S. financial credit was almost completely paralyzed. The Federal Reserve did not release liquidity in time, did not take any substantive action to address the liquidity crunch during the 1929 stock market crash, and did not increase the money supply in time to ensure sufficient liquidity. The bank failures led to unmet loan demands from industrial and commercial enterprises, especially small and medium-sized ones, causing them to fall into difficulties or go bankrupt, resulting in more bad debts for banks, forming a negative cycle of credit contraction, and severely impacting the real economy. The U.S. GNP (Gross National Product) index reached its lowest point in the first quarter of 1933 at 53.2, equivalent to only 50% of 1928, and lower than the 59 points in 1921, which means that the U.S. economy had regressed by at least a decade.When the COVID-19 pandemic erupted in 2020, the U.S. stock market suffered consecutive heavy declines and experienced four circuit breakers. The Federal Reserve acted decisively to intervene in the market. On March 9th, the U.S. stock market had its first circuit breaker, and the Federal Reserve injected $1.5 trillion into the repurchase market on March 12th; on March 15th, it announced a zero-interest rate policy and initiated QE4. The U.S. stock market then experienced three more circuit breakers, and the Federal Reserve continued to introduce market rescue policies, such as: on March 23rd, it introduced unlimited QE and supported CMBS, among others. The policy storm took effect between March 23rd and April 9th, and since April 9th, the stock market stopped falling and rebounded, returning to a reasonable valuation range.
The Nikkei 225 index reached its historical peak of 38,915 points on December 29, 1989. The Gulf War in 1990 plunged Japan, which was entirely dependent on oil imports, into panic, causing stock prices to plummet. Although there were rebounds in between, the Nikkei index still fell to 14,304 points on August 18, 1992. Before 1995, the Japanese government addressed the problems of financial institutions in the traditional crisis management manner, continuously lowering interest rates and increasing the money supply, but with little effect. The Japanese government also adopted expansionary fiscal policies to stabilize the stock market and economy, but the efforts were too small and yielded almost no results. It was not until 1997, affected by the Southeast Asian financial crisis, that the Japanese financial system collapsed, and the Japanese government changed its attitude, seriously facing the crisis management of financial institutions, and adopted rescue methods such as direct capital injections for troubled financial institutions. The market responded positively to the rescue plan, with bank stocks rising by 20% after three months and by 80% after a year. However, since the stock market plummeted at the end of 1989, it was not until 1998 that the Japanese government introduced large-scale market rescue policies, with the overall cost of the rescue finally accounting for 13% of the total economic GDP.
In 2010, when the Nikkei index continued to be sluggish, the Bank of Japan began to buy ETFs of the Tokyo Stock Exchange and the Nikkei index in December. The original plan was to set a purchase limit of 450 billion yen, with a deadline set for the end of 2011. Since then, the central bank has extended the deadline and increased the limit several times. It was not until the "bull market" basically took shape in 2021 that the central bank gradually stopped buying.
Abnormal fluctuations in the stock market can trigger panic emotions, leading to large-scale selling by investors and a significant loss of market funds, which in turn forms a vicious cycle. As the ultimate rescuer of the financial market, the government needs to intervene in a timely manner to stabilize market prices, reverse market sentiment, thereby alleviating market panic and pressure, rebuilding market confidence, and preventing stock market crashes and excessive damage to the financial system and the real economy. Intervention in the market under extreme conditions helps to prevent the occurrence of systemic risks, boost investor confidence, and ensure the stable operation of the stock market.
From the experience of A-shares, postponing IPOs is not a good market rescue measure. If it is necessary to reduce the financing volume of the stock market, it is more appropriate to reduce the scale of secondary financing.
Drawing on the experience of the U.S. and Japanese financial markets, market rescue requires substantial funds, and the intervention must be swift and significant. The central bank needs to inject a large amount of liquidity into the financial market to prevent the stock market from running out of liquidity, lower interest rates and reserve requirements; the government and funds influenced by the government should directly enter the market, including but not limited to increasing holdings of stocks by Central Huijin, Central Huijin's ETF subscriptions, and insurance funds entering the market; encourage listed companies to repurchase stocks to stabilize investors' confidence in the stock market.
Comments