Puzzle-solving: Multiple departments collaborate to build a new ecosystem of survival of the fittest in the A-share market

Can AI—multidisciplinary coordination—improve stability in the A-share market?

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Enlightening Mind

Researcher at the Institute of Public Policy, Zhejiang University

Professor of Finance at Zhejiang University of Finance and Economics; Ph.D. Supervisor

Recently, five departments—including the Ministry of Justice, the People’s Bank of China, the National Financial Regulatory Administration, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange—have jointly drafted the “Financial Law of the People’s Republic of China (Draft)” and are now soliciting public comments.

The author believes that the Ministry of Justice, grounded in top-level legal design, works with financial regulators to promote the improvement of foundational legislation in the financial sector. It focuses on addressing gaps in legal bases for punishing violations and misconduct in the capital market, protecting investors’ rights, and handling risks and crises. This will bring the entire capital market fully onto a rule-of-law track, directly targeting the pain points of financial legal governance lagging behind market reforms and the generally low costs of violations and misconduct. This legal-policy coordination echoes the “Provisions on Clean and Lawful Operation by Leading Personnel of State-owned Enterprises,” recently issued by the General Office of the CPC Central Committee and the General Office of the State Council. As state-owned enterprises are key participants in the capital market, their clean and lawful conduct and standardized operations are an important cornerstone for capital market stability.

The author believes that the stability of the capital market cannot be achieved without a sound monetary environment as support.

The People’s Bank of China focuses on maintaining reasonably sufficient liquidity to create a stable funding environment for the capital market, preventing violent market disruptions caused by large liquidity fluctuations.

The National Financial Regulatory Administration coordinates the flow of funds across financial institutions and focuses on promoting standardized market entry by medium- and long-term funds such as social security funds, insurance funds, and pension funds. It will relax restrictions on the proportions for entering the market, simplify entry procedures, and guide professional institutions’ funds to take root in A-shares for the long term—optimizing the market’s funding structure and changing the market pattern in which short-term funds dominate through speculation.

The China Securities Regulatory Commission focuses on its frontline regulatory responsibilities, and implements targeted measures around key areas such as improving the quality of listed companies, reforming the delisting system, controlling and curbing improper share reductions, cracking down on insider trading, and strengthening oversight of information disclosure. These efforts directly tackle long-standing governance problems in investor protection in the A-share market. In combination with the ongoing advancement of standardized delisting in A-shares and the rollout of the new rules for the National Equities Exchange and Quotations (NEEQ) “old third board,” the CSRC will further improve a market “admit and exit” system with “survival of the fittest.” It will strengthen investor compensation safeguards in the delisting process, prevent the infringement of interests during delisting, and ensure that the delisting system truly becomes a tool for purifying the market.

The State Administration of Foreign Exchange will steadily promote high-level opening of the capital market to the outside world. It will optimize the QFII and RQFII regimes, lower the entry threshold for long-term foreign capital, attract orderly participation by overseas long-term funds, and broaden the sources of market funding.

The Ministry of Finance, meanwhile, will play its role in guiding fiscal policy. Through measures such as tax incentives and financing support, it will reduce the cost of corporate direct financing, provide tax preferences that tilt toward long-term value investment, and guide the market to return to the core of value-based investing—achieving efficient coordination between fiscal and financial policies.

Investor protection is the lifeline of the capital market. The A-share market has a high proportion of retail investors, and for a long time there have been problems such as high costs for investors to seek redress, difficulty obtaining compensation, and violations that infringe on the interests of small shareholders. Only by ensuring that investors truly feel their rights are protected and that investments can yield returns can the channel be opened for residents’ savings to transform into capital-market investment. This will create a virtuous cycle of “a stable market, increasing wealth, and stronger consumption,” which is also the core lever for expanding domestic demand.

Residents’ wealth is the main foundation for expanding domestic demand, and the wealth effect of the capital market is the key driving force behind residents’ consumption. At present, China’s large stock of residents’ savings is largely deposited in the banking system and has not been effectively transformed into investment and consumption momentum. The core reason is insufficient confidence in the capital market.

In terms of guiding medium- and long-term funds within China, the People’s Bank of China uses monetary policy tools to encourage institutions such as commercial banks and public funds to increase their allocation proportions to equity-type assets, injecting stable long-term liquidity into the market. The National Financial Regulatory Administration relaxes restrictions on long-term funds such as insurance funds and pension funds, encouraging them to hold quality listed-company stocks for the long term—activating the power of institutional investors. This will make professional funds lead market pricing and help reverse the atmosphere of short-term speculation. The Ministry of Finance will roll out long-term investment tax incentive policies that grant tax relief to investors who hold stocks for the long term. Through policy guidance, investors will be directed away from short-term games and toward value investing, addressing the challenge of how short-term profit-seeking behavior distorts market pricing.

In terms of introducing overseas long-term funds, the State Administration of Foreign Exchange will continue to optimize cross-border investment and financing processes, improve the QFII and RQFII regimes, broaden the scope of overseas funds’ investments, and lower entry thresholds. It will focus on attracting long-term funds such as overseas pension funds, sovereign wealth funds, and charitable funds. This will optimize the funding structure of the A-share market. By drawing on value-investing concepts from overseas mature markets, it will promote the A-share market’s gradual move toward becoming more mature, stable, and sound. At the same time, it will steadily advance institutional-level opening of the capital market to align with international regulatory rules, enhancing the convenience and safety of overseas funds’ investment—so that overseas long-term capital can invest with confidence and hold for the long term.

The capital market has never been an isolated trading venue. It is a hub that serves the real economy and helps drive growth in domestic demand. The real economy is the foundation of the capital market; growth in domestic demand is the driving force of the capital market. Both reinforce each other and enable each other in both directions.

The “Financial Law of the People’s Republic of China (Draft)” addresses issues of regulatory vacuum that have long plagued financial supervision. Article 8 sets out three major principles—“functional regulation, penetration-based regulation, and ongoing supervision.” It clarifies that similar financial activities should be subject to unified regulatory standards, fundamentally eliminating room for regulatory arbitrage. Article 51 further clarifies the regulatory requirement that “substance should prevail over form.” For conduct that crosses industries and markets, the central financial authorities will assume the responsibility for fallback regulation.

With the multiple advantages of rule-of-law safeguards that provide backup, concerted efforts across multiple departments, professional regulatory oversight, and support from long-term funds, the A-share market will become a regulated, transparent, stable, and dynamic mature market—truly practicing the concept of long-term value investment.

This article was first published by the author in Financial Investment News

Editors | Long Xiao

Review | Yuan Gang