China State Council recently issued the “Several Opinions on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market,” colloquially referred to as the “new ‘National Nine Articles’.” This directive marks a significant milestone, arriving a decade after the last issuance in 2014 and following the inaugural set in 2004. As a specialized directive from the State Council aimed at guiding the capital market, these new guidelines are crucial amidst China’s current economic landscape.

China’s financial markets are grappling with a range of challenges, necessitating decisive action through the new guidelines. Economic growth has slowed, exerting downward pressure on macroeconomic fundamentals and fostering increased uncertainty in economic operations. Recent volatility in the real estate market raises concerns about further deterioration in market sentiment, while the specter of international capital market contagion looms, threatening to trigger domestic turmoil. Furthermore, a significant decrease in land transfer revenue has spurred a rapid expansion of local government debt, heightening the risk of defaults.

In this context, the issuance of the “new ‘National Nine Articles'” signals the Chinese government’s commitment to stimulating sluggish financial markets and addressing systemic risks. By fortifying supervision, preventing risks, and promoting high-quality development, these guidelines aim to instill confidence, enhance stability, and foster sustainable growth in China’s capital market.

This revised introduction aims to provide a more detailed context for the issuance of the “new ‘National Nine Articles'” while emphasizing the urgency and significance of addressing the challenges facing China’s financial markets.

The highlights of the “National Nine Articles” policy

The policy encompass several key strategic initiatives aimed at fortifying China’s capital market. Firstly, there is a concerted effort to promote policy coordination at the central level, particularly following the “Two Sessions” in China. This emphasis on central coordination underscores the government’s commitment to aligning various regulatory efforts and fostering a cohesive approach to market oversight.

Secondly, the “National Nine Articles” signify a substantial increase in the cost of illegal activities and the proportion of equity funds. This measure seeks to deter illicit behavior while incentivizing compliance and responsible investment practices, thereby bolstering market integrity and investor confidence.

Thirdly, the policy zeroes in on critical areas such as Initial Public Offerings (IPOs), de-listings, and dividends. By focusing attention on these pivotal aspects of market operation, the aim is to ensure transparency, efficiency, and fairness in the capital market ecosystem.

Fourthly, there is a concerted effort to enhance relevant evaluation standards, reflecting a commitment to continuous improvement and adaptation to evolving market dynamics. This iterative approach builds upon the historical legacy of previous iterations of the “Nine Articles” policy while addressing the unique challenges and opportunities of the current state of the capital market.

In contrast to previous iterations that prioritized “stable development” and “healthy development,” the new “National Nine Articles” pivot towards an emphasis on “strict supervision and management.” This strategic shift underscores a proactive stance towards risk mitigation and regulatory oversight, reflecting the imperative of safeguarding market stability and integrity.

The implementation of the new “National Nine Articles” involves a comprehensive approach, encompassing measures such as closed-loop management of issuers from listing to delisting, heightened supervision over market institutions, and enhanced regulation of algorithmic trading activities to uphold market fairness.

To operationalize these directives, the China Securities Regulatory Commission (CSRC) has issued draft rules, while exchanges have revised their business regulations, laying the groundwork for a robust regulatory framework. This collaborative effort underscores a commitment to establishing a cohesive and effective policy ecosystem. 

Chairman Wu Qing’s assertion that the “National Nine Articles” adhere to systematic thinking, integrate short-term and long-term goals, and implement comprehensive strategies underscores the strategic vision underpinning these policy initiatives. The ongoing expansion of policies under the ‘1+N’ framework, ‘1’ refers to the ‘Opinions’ itself, while ‘N’ represents various supporting institutional rules that further underscores the commitment to strengthening the foundation and governance of the capital market.

To implement the new “National Nine Articles,” CSRC has issued several draft rules, while exchanges have concurrently revised their business regulations, gradually establishing a “1+N+X” policy system. 

Currently, the scope represented by ‘N’ is expected to expand continuously. At present, it mainly focuses on areas such as post-listing supervision, issuance supervision, listed company supervision, securities firm supervision, trading supervision, listing review, review of major asset restructuring, and reduction of shareholdings by shareholders and directors. This highlights the principles of “strengthening the foundation and governance.” The CSRC has solicited opinions on six policies, while the Shanghai, Shenzhen, and Beijing Stock Exchanges have solicited opinions on 19 institutional rules simultaneously, totaling 25 policies.

Strict governance of capital market 

The “National Nine Articles” encapsulate a fundamental commitment to stringent governance, embodying five imperative principles essential for fostering high-quality development in the capital market. These principles include unwavering adherence to the leadership of the Party, the implementation of financial practices that prioritize the welfare of the people, comprehensive strengthening of supervision and risk prevention mechanisms, further deepening of reforms, and dedicated service to the construction of a resilient real economy and modern industrial system.

One of the focal points of the “National Nine Articles” pertains to the establishment of strict entry requirements for issuance and listing on the capital market. This strategic direction aims to elevate the standards for companies seeking to list, with a focus on several key dimensions. Firstly, there is a concerted effort to enhance the listing standards for both the main board and the ChiNext board, alongside a refinement of evaluation criteria for the science and technology innovation board. Notably, the National Development and Reform Commission released specific measures on March 15th aimed at elevating listing standards and enhancing evaluation criteria. These measures instruct the Shanghai and Shenzhen Stock Exchanges to revise listing rules, moderately increase certain financial indicators, enrich comprehensive evaluation criteria, and facilitate the listing of companies across different developmental stages, industries, and scales onto appropriate boards.

Secondly, the “National Nine Articles” underscore the importance of strengthening the full-chain responsibility of issuance and listing. This entails a renewed emphasis on the accountability of exchanges in the review process, coupled with reinforced primary responsibilities for issuers and the gatekeeping obligations of intermediary institutions. Intermediary institutions are mandated to employ rigorous methods such as verifying cash flows, conducting comprehensive checks on customer-supplier relationships, and conducting on-site inspections to ensure the accuracy of financial data and the faithful representation of operational realities. These requirements are deemed critical areas of scrutiny during the review process, ensuring the integrity and reliability of information disclosed during the listing process.

Thirdly, the “National Nine Articles” prioritize enhancing the effectiveness of supervision mechanisms. This includes bolstering supervision at every stage of Initial Public Offering (IPO) pricing and allocation, augmenting information disclosure practices, addressing various market irregularities, enhancing cross-sectoral supervision and regulatory coordination, and implementing stringent measures to crack down on all forms of violations. These efforts are geared towards instilling confidence in market participants, safeguarding investor interests, and maintaining market integrity and stability.

The “National Nine Articles” underscore a commitment to fostering a capital market environment characterized by transparency, accountability, and integrity, essential for facilitating sustainable and high-quality development in the Chinese financial landscape.

Cash dividends 

In pursuit of bolstering investors’ investment returns, the “National Nine Articles” lay out explicit provisions aimed at incentivizing high-quality dividend-paying companies and fostering an increase in dividend yields. For companies that have either refrained from distributing dividends over an extended period or maintained a low dividend payout ratio, the articles specify that restrictions will be imposed on major shareholders’ reduction of holdings, accompanied by the implementation of risk warnings. These measures are designed to encourage companies to prioritize dividend payments, thereby enhancing the stability, sustainability, and predictability of dividends for investors.

Furthermore, the “National Nine Articles” advocate for actively promoting multiple dividends by listed companies within a year. To this end, listed companies are required to comprehensively evaluate factors such as undistributed profits and current performance when determining the frequency of dividends. When conditions permit, companies are encouraged to increase the frequency of dividends to stabilize investors’ dividend expectations. Additionally, there is a focus on clarifying the medium-term dividend profit criteria to eliminate misunderstandings regarding audit requirements for financial statements. By providing clarity and transparency regarding dividend policies, these measures aim to foster investor confidence and promote a conducive environment for sustainable dividend payouts.

The “National Nine Articles” aim to create an environment that incentivizes companies to prioritize dividend payments, thereby enhancing investor returns and contributing to the overall stability and sustainability of the capital market.

De-listing supervision

The “National Nine Articles” provide a clear policy orientation for delisting supervision, focusing on four key aspects to uphold market integrity and safeguard investor interests:

Strict Enforcement of Delisting Standards: A crackdown on financial fraud is prioritized, with companies engaged in fraudulent activities facing swift delisting. Delisting standards based on the “amount of fraud + ratio of fraud” will be further lowered to effectively combat fraudulent practices.

Diverse Delisting Channels: The articles introduce three new types of regulatory delisting situations, including instances of internal control failures, non-operational funds occupied by controlling shareholders, and disorderly control changes. These additions aim to address a range of governance and operational deficiencies that pose risks to investors and market integrity.

Tightening Financial Delisting Indicators: Measures will be implemented to raise revenue delisting indicators for loss-making companies, with the main board planning to raise the revenue indicator to 300 million yuan. Additionally, a mechanism for internal control audit opinions on financial reports will be introduced to enhance transparency and accountability.

Improving Market Value Standards: Market value delisting indicators for main board A shares will be appropriately raised to 500 million yuan. These adjustments aim to strengthen the integrity of the capital market and mitigate risks associated with underperforming or financially unstable companies.

The “National Nine Articles” target to enhance the credibility of the capital market, reinforce investor confidence, and ensure the long-term stability and sustainability of China’s financial landscape.

Supervising and the stability of the capital markets

The implementation of the “National Nine Articles” aligns with the Government Work Report’s directive to enhance the intrinsic stability of the capital market. This involves several key strategies:

Promoting Smooth Market Operation: This entails strengthening comprehensive risk assessment, enhancing the construction of strategic reserves and stability mechanisms, and focusing on identifying risks and vulnerabilities. By addressing potential weaknesses and fortifying resilience, these measures aim to ensure the smooth functioning of the capital market.

Strengthening Transaction Supervision: Regulatory standards for abnormal trading and market manipulation behaviors will be improved, alongside enhanced supervision of high-frequency quantitative trading. The formulation of rules for the operation of private equity funds is also prioritized. The China Securities Regulatory Commission’s solicitation of opinions on the “Regulations on the Management of Programmatic Trading in the Securities Market (Trial)” underscores the commitment to robust supervision and risk management in programmatic trading.

Establishing Expectation Management Mechanisms: The “National Nine Articles” explicitly integrate the evaluation of the impact of major economic or non-economic policies on the capital market into the framework of consistency assessment of macro policies. This involves establishing a coordination mechanism for policy information release, aiming to enhance policy coordination and ensure concerted efforts. By incorporating non-economic policies into the consistency assessment of macro policies, the articles aim to strengthen policy coordination and mitigate potential market disruptions.

Through these initiatives, the “National Nine Articles” seek to enhance the stability, resilience, and integrity of the capital market, fostering an environment conducive to sustainable growth and investor confidence.

Reflections and Implications

After the release of the first two sets of “National Nine Articles,” the A-share market experienced significant increases, indicating the potential impact of these policy directives on market dynamics. In 2004, following the release of the “National Nine Articles,” the Shanghai Composite Index and the Shenzhen Component Index rose by 2.08% and 1.56%, respectively, on the first trading day. This immediate positive response set the stage for a period of sustained growth driven by subsequent reform initiatives.

The period following the 2004 release saw a series of reform documents aimed at equity division reform for listed companies. These reforms were implemented successively, leading to substantial gains in the A-share market. By October 2007, the Shanghai Composite Index reached a high of 6092.06 points, and the Shenzhen Component Index rose to 19358.44 points. Notably, blue-chip stocks in sectors such as non-ferrous metals, banking, and real estate led the market gains during this period.

Similarly, in 2014, one year after the release of the “National Nine Articles,” the A-share market entered another bull market phase. The Shanghai Composite Index surged by nearly 3000 points, reaching a high of 5166.35, while the Shenzhen Component Index reached 18098.27 points. Industries such as computer, media, and telecommunications notably performed exceptionally well during this period, contributing to overall market growth.

However, the release of the new version of the “National Nine Articles” in 2024 occurs amid a backdrop of challenges facing China’s economy. Replicating the success pattern of previous releases presents inherent challenges, given the unique context and objectives of each policy iteration. Market environments and conditions may also evolve over time, necessitating specific policy measures tailored to the current economic landscape.

Despite these challenges, the new “National Nine Articles” remain a significant policy release, providing crucial direction for the stability and development of the capital market. By emphasizing measures such as strengthening market supervision, improving corporate governance, and enhancing investor protection, the new directives aim to inject new vitality into the capital market and steer it towards a more mature and robust trajectory.