Donghui Shi: Analysis on Practice of Capital Market in China to Support Subject Construction of FISF

Release time：2020-12-21    

In December 1990, the Shanghai Stock Exchange rang its bell for the first time and opened the curtain of the capital market in China. Seven years later Donghui Shi graduated from Shanghai Jiao Tong University and started to work in Shanghai Stock Exchange. He took the position of the director of the fund market department and the director of the capital market research institute, and has taken part in a series of major reform measures conducted in the capital market and the solution design and implementation of product innovation. For 23 years, he has followed along with the forward development of the capital market in China.

Today, in the golden age of China’s capital market, Donghui Shi chooses to join Fanhai International School of Finance, Fudan University, transforming from a supervisor in the capital market to a professor of finance, continuing his efforts as a teacher to push the financial industry in China to march forward. Recently Professor Shi came to Fudan financial open courses for the first time and expressed his opinion on trending financial topics.

Donghui Shi

Professor of Finance at FISF

Former Director of Fund Market Department and Director of Capital Market Research Institute

The Registration System: “Four Highlights” to Demonstrate the Achievements of the Reform in the Capital Market

As if the last 30 years passed like a flash, China’s capital market has completed a historic leap forward, becoming one of the biggest capital market in the world second only to the US. It has also made its way steadily toward internationalization.

From none to some, from small to big, from monotony to multilateral forms, Shanghai Stock Exchange has witnessed various “financial footprints” created by the capital market in China. As the former director of the capital market research institute, Professor Shi exuded great pride and honor when talking of the progress that Shanghai Stock Exchange has made. The reform and innovation of Shanghai Stock Exchange is the core power to drive the development of the capital market in China. Its road of development provides an invaluable “Chinese practice” for the capital market in China or even in the world.

In recent years, the hottest innovation in the capital market should be “the launch of the STAR market and the implementation of the registration system”. Last year the STAR market was launched by the Shanghai Stock Exchange, introducing to the market the registration system called “the most profound reform in the capital market”. This year the registration system contributed its second hit, setting foot on the growth enterprises market. “The thirtieth year for the capital market and the first year for the registration system”, this is not coincidence. One year has passed since it was launched, and how should we make use of the registration system to raise the quality and effectiveness of the capital market in China?

Shi personally took part in the design and implementation of the registration system. When it comes to its achievements, he said with satisfaction that the biggest highlight of the registration system is the practice of auditing and approval process for security issuance with information disclosure as the core. In this way, the listing threshold for companies becomes more marketable and more compatible, stimulating science and technology innovative enterprises to go public in forms of red chips, dual-share structure or various others. Besides, the review process under the registration system is highly efficient. As relevant statistics show, for companies applying to China Securities Regulatory Commission for listings, it only takes 65 days or so on average to be reviewed by the stock exchange. This sharp reduction in the review process can help companies clarify their listing expectations.

The influence of the registration system on the capital market is far more extensive than this. Professor Shi added that there are three more highlights that are noteworthy besides the innovation of the review process for listings. Firstly, on the “experimental field” of the registration system, the issuing and underwriting system has also been changed. It is the market rather than supervisory institutions that controls the scales, prices and paces of companies’ issuance of stocks, which makes the system more marketable and vigorous. Secondly, the establishment of the sponsorship and a follow-up system that provides a marketable stimulation and restraint mechanism to further urge sponsors to conduct due diligence on the registering companies more deeply and responsibly. Lastly, much improvement has been performed on a series of mechanisms supporting the registration system. The market economic system is never a single system, but a combination of multiple systems in cooperation with each other. After the registration system was introduced, the Securities Law has also been modified and revised, including various supporting systems like the shareholder representative litigation system, information disclosure system, equity stimulation system and refinancing system. All these modifications and revisions can largely enhance the protection of investors.

“From the listing of the first batch of companies upon the pilot implementation of the registration system on the STAR market in July last year to the pilot implementation of the registration system on the growth enterprises market in August this year, seeing from the operation of the system, the registration system is running steadily in general, just as expected. The efficiency and fluency of the registration system has provided an effective channel for the capital market in China to link with the world.” concluded Professor Shi.

To be independent in the thirtieth year, there’s no making without breaking. Shi held that currently there are still some fundamental problems that exist in China’s capital market. First, the compatibility of the capital market needs to be strengthened. There needs to be a listing mechanism that matches China’s economic structure. For example, to implement the registration system, the market should include innovative companies to a greater extent. Secondly, the efficiency of the present pricing mechanism needs to be improved by building a market restraint mechanism. Thirdly, the market still has a heavy atmosphere of short-term unreasonable investments. therefore, education of investors needs to be emphasized and reinforced.

The Capital Market: “Three Circulation” to Support the “Double Circulation” Economic Pattern

In the beginning of this year, a sudden and unexpected epidemic of COVID-19 hugely affected the global economy, and also brought new challenges and opportunities for both the internal and external environment in economy, trading and finance in China. Faced with such a changing condition unprecedented in the past century, various industries including the financial industry have more or less met some bottleneck problems and felt confused and lost. “Aim High and Stick to It”, as a witness of the changes in the capital market for over 20 years, Professor Shi was adamant that the financial industry, no matter individuals or institutions, must undertake the mantle of promoting the high-quality development of real economies.

To deal with short-term impacts and long-term challenges, China has proposed to build a new dual-circulation development pattern, one with the domestic market as the main part and the other of the global market-both of which help each other forward. “The new ‘dual-circulation’ economic pattern is the core strategy of China’s economic development in the next 5 to 10 years, where the capital market will play a critical role. For this, the capital market needs to establish a corresponding capital circulation system.” Professor Shi noted that the capital market has to build “three circulations” in order to support the new “dual-circulation” economic development pattern in China.

The first circulation is the one between the capital market and the real economy. At present the capital market in China is dominated by the traditional indirect financing system, a system that mainly relies on indirectly financing banks. Due to their intrinsic feature of capital risk preference, banks are difficult to play a leading part in supporting science and technology innovative companies. Through improvement and innovation, the capital market continues to provide guidance for the upgrade of China’s high-end industrial chains. As we can see from the development of the STAR market, an agglomeration effect has gradually been formed among the semiconductor, biochemical and other science and technology innovative industries.

The second circulation is the self-circulation within the capital market itself. The capital market needs to sustain a certain activity, to make sure the financing function of the whole market and to better utilize the function of optimized resource allocation. On this basis, the capital market can achieve a benign self-circulation by further enriching the investment products, improving trading mechanisms, perfecting mergers and acquisition, as well as, the refinancing system.

The third circulation is the dual circulation between the two capital markets in China and the world. In 2020, the two-way opening-up between both capital markets has been expanding, and the financial services industry has introduced a number of fund and securities companies held or wholly owned by foreign investment; Meanwhile, the threshold for foreign capital to invest in Chinese market is becoming looser and thus the scale of foreign investment is increasing. By achieving the two-way circulation at home and abroad, the capital market is more likely to develop the new “dual-circulation” development pattern.

Financial Education: “Chinese Practice” to Support Financial Talent Construction

“I have always dreamed of being a teacher.” After twenty-three years’ of exploration and reflection in the capital market, Professor Donghui Shi has accumulated fruitful research findings by extracting the precious practical experience corresponding with the development of China’s capital market. However, to make actual and revolutionary changes to China’s capital market, to improve the maturity of the market participants and to build a sound market comparable to international financial centers and the global capital market, we need to start from the most fundamental part: investor education.

In the capital market, there are a lot of investors with irrational investment concepts like getting rich overnight or rigid repayments. Irrational investments and abnormal transactions occur repeatedly. Shi pointed out that the reinforcement of investor education ultimately comes down to doing well with elementary financial education.

So far China is still in a huge shortage of financial talents. As once reported by PwCC, the gap of fintech talents might reach 1.5 million. There is a long way for financial education to go.

Shi believed that with the development and innovation of China’s capital market, it is even harder for the traditional financial education to supply enough talents for financial institutions and regulatory departments. Financial education needs to suit the practical development of the current financial industry and gradually march towards internationalization.

The new business school mode is aimed at breaking barriers set by traditional financial education, to strengthen the education of the most advanced financial knowledge and to cultivate the vision of globalization. Shi emphasized that the financial education in China should also be closely related to “Chinese practices”. Only by studying cases of “Chinese practices” can the operating mechanism working particularly in China’s capital market be grasped. And the integration of “a global vision” and “Chinese practices” is required for the cultivation of future leading talents in finance with corresponding professionalism and skills.

Additionally, Shi stated that with the main focus of the present financial education on micro-financial fields like the pricing of financial assets, he would continue his research in macro-financial fields like financial market policies and would be devoted to integrating the academic research with micro-finance, so as to further understand the inherent laws between macro market development and micro financial activities.

Referring to the reason why he chose to join Fanhai International School of Finance, Fudan University, Shi disclosed that he appreciates the international teaching team, the multilateral academic environment, the profound research atmosphere and the deep cultural and historical deposits of the school, which were major attracting forces.

Upholding the ingenuity and devoted to pushing forward the academic research of China’s capital market; Sticking to the original aspiration and determined to imparting knowledge and solving doubts for next generation of financiers. In the future, Professor Donghui Shi will embark on a new journey of education in Fanhai International School of Finance, Fudan University.