Interests of retail investors key to A shares

The ongoing rally in China's A shares has underscored the importance of reform execution, and closing regulatory gaps further to safeguard market fairness and investor interest is vital to sustaining the bull run, said Liu Jipeng, a senior expert on the capital markets.

"A slow bull trend has taken shape. The goal should be making it steady and long-lasting so that the capital market can serve as a platform for common prosperity, where the majority of investors can share returns, rather than only a few getting rich overnight," said Liu, a professor at the Business School of China University of Political Science and Law.

While the divergence between China's economic slowdown pressures and its rising stock market has triggered discussions about the rally's stamina, Liu said that reform measures to better protect investors have provided a rational basis for the market upswing and will be key to its future course.

"The current bullish trend is hard-won and reflects valuable lessons learned from the past 18 years," Liu said in an exclusive interview with China Daily. "The A-share market is never short of money — China's household savings have surpassed 160 trillion yuan ($22.4 trillion) — yet has long been weighed down by institutional shortcomings that limited investor confidence."

Liu said that recent reforms have made a difference. Regulators, especially after Wu Qing took office as the chairman of the China Securities Regulatory Commission early last year, have been more determined to close regulatory loopholes — including tightening rules on large shareholder share sales and enhancing investor protection.

These reforms have improved market fairness, Liu said. "Ultimately, the market will only thrive if it protects the interests of millions of retail investors while serving the financing needs of enterprises."

In May 2024, the CSRC issued new rules seen as the toughest yet on share reductions by major shareholders in the A-share market, prohibiting them from circumventing stake reduction regulations through means such as negotiated share transfers, short selling or other irregular practices.

To make the rally long-lasting, Liu said more should be done to close remaining regulatory loopholes to further enhance market fairness and investor protection, including in areas such as IPO review and pricing, quantitative trading and large shareholders' stakes.

"Capping the stake of the largest shareholder in listed companies is key to ensuring that the current slow bull run remains sustainable," Liu said. Otherwise, if major shareholders focus on off-loading stakes, the market will struggle to maintain momentum.

He suggested that for new listings, the stake of the largest shareholder could be limited to around 30 percent, so that any further significant reductions would risk loss of control, thus encouraging controlling shareholders to concentrate on strengthening the company rather than pursuing quick cash-outs.

On quantitative trading, Liu urged transitional rules to maintain fairness.

"Just as automobiles once faced strict limits in their early days to protect horse-drawn carriages, quantitative trading also needs restrictions to safeguard traditional investors," he said, adding that proposals could include brief pauses in high-frequency trading and higher transaction fees for algorithm-driven strategies.

"We must avoid polarization," Liu said, as the market should help generate wealth for the majority so that broader participation is encouraged and sustained.

According to Liu, ensuring the rally's steady and long-lasting momentum is of strategic importance for China's economic transformation, as finance and technology are like two legs supporting a nation's rise — one cannot move far without the other.

Looking at the 15th Five-Year Plan period (2026-30), Liu stressed that China must further leverage the capital market as the strategic pivot to drive economic transformation and raise the role of capital finance — defined by him as an equity investment and financing system led by investment banking and rooted in the capital market.

Proposals for formulating the 15th Five-Year Plan for national economic and social development are expected to be studied at the fourth plenary session of the 20th Communist Party of China Central Committee, scheduled to be held in Beijing in October.

At present, commercial banking still dominates financing in China, while the capital market plays a minor role. Rebalancing or even reversing this structure, Liu said, will be essential to spur technological innovation and expand household wealth.

As China's per capita GDP surpassed $13,000, boosting property-based income has become increasingly important, underscoring the role of capital finance.

"The A-share market will eventually shift from a retail-dominated market to one led by institutional investors, as in developed markets, allowing households to build wealth through the market via institutional investors such as corporate annuities, the social security fund and mutual funds."