China's market reform

Q&A: China Renaissance's Bao Fan calls for greater investor protection on STAR Market

As an investor and underwriter for companies listing on Shanghai's Nasdaq-style tech board, China Renaissance's chief executive Bao Fan urges China to allow for large-scale class-action lawsuits to boost investor confidence.

Broad class-action lawsuits resulting in big fines would boost investors' confidence in China's newly established Sci-Tech Innovation Board (STAR Market) said Bao Fan, chief executive of China Renaissance during an interview with FinanceAsia.

China does allow class-action lawsuits but claimants generally number in the hundreds, whereas in the US investors may have thousands or even millions of members in a class of claimants and could seek damages of billions of dollars. 

China's capital markets are still gradually opening up to international investors and becoming more market-oriented after forty years of reform. The STAR Market is the latest step in this stop-start process of liberalisation as it has adopted a more US-style disclosure-based IPO system, instead of the CSRC vetting system for IPOs which controls the timing and quality of IPOs seen on China's other exchanges.

The move is a "major step in the right direction" said Bao. 

The Shanghai Stock Exchange launched the STAR Market on July 22 with 25 stocks listed on the first day. Despite a robust start (the debutants' stocks gained 140% on average during the first day of trading), some STAR Market investors still have a wait-and-see attitude towards the Nasdaq-style board.

The listed companies on the STAR Market are mainly from high-tech and strategic emerging industries.

Many investors are worried about the extreme volatility seen during the first three weeks of trading on the exchange – even though all of the 25 stocks are trading above their IPO prices –– as well as corporate governance issues. Companies are allowed to list even if they are still posting losses for the first time in China.  

Bankers say that foreign participation in the STAR Market, via the qualified foreign institutional investors (QFII) channel, has been extremely low to date. 

While Fan believes that reform of China's markets is progressing, he also thinks that it is prudent that liberalisation is accompanied with penalties for those that take advantage of a lighter regulatory touch, hence his support of class action lawsuits.  

As a financial advisor focusing on China's new-economy sector, China Renaissance benefits from the government's on-going support of innovative companies including the launch of the STAR Market. 

China Renaissance’s funds invested in two medical equipment suppliers that listed on the exchange, including Shanghai MicroPort Endovascular Medtech and Micro-Tech (Nanjing). China Renaissance’s subsidiary Huajing Securities was the underwriter for Endovascular.

Bao is one of the 48 members of the STAR Market's advisory committee

On Thursday, China Renaissance said that it had hired Ou Wang as a strategy consultant and a board director of Huajing Securities, its mainland China-focused investment banking subsidiary. Wang was previously head of private equity investment for China Investment Corporation (CIC) and before that he worked for China's securities watchdog, the China Securities Regulatory Commission for 13 years. 

Bao Fan, China Renaissance
The following conversation with Bao has been edited for brevity and clarity

Q Has China’s STAR Market debut benefitted from a lighter regulatory touch? 

A The initial volatility of the STAR Market is as expected. The amount of money raised is still relatively small and you don’t have a whole lot of supply to the market. It drives an imbalance between supply and initial enthusiasm.

One key thing about this stock exchange market reform is that regulators have said that there will be less intervention. That should give the market more room to operate by itself.

The initial volatility is understandable, as the STAR Market is entirely new. It takes time for investors to find the basic value of these companies. I would be more worried if I had seen more heavy-handed [supervisory] measures. So far, the regulator has demonstrated tolerance towards market volatility, which should be admired.

Q What does the advisory committee do for the STAR Market?

A There are quite a lot of people on the committee. There are scientists and scholars, obviously a lot of people from academia. There are people from other professions, and also people that represent investors. The committee's job is to comment on the general quality of the companies coming in, whether they are truly innovative, their technology, market position, and to provide a general consultation, quantitative measurements and also comments. We aren't involved in the process of guiding company applications. 

Q Is corporate governance an issue for some of the companies listing on STAR Market?

A This is the first time that the disclosure-based IPO process has been used in China and its regulations are stringent. We have a comprehensive disclosure requirement involving goals for the companies. It is a good trend, but things can always improve. 

When you move from an approval-based IPO process to a disclosure-registration system, you have to make the penalties severe. If you fail to disclose what you are required to do, people have to pay the price [of ignoring regulations]. Then, [in the US there is] the whole litigation and class action mechanism but in China, we don’t really have that, so a lot of the measures are handled by the regulators themselves.

What needs to change from a legal perspective is that China should allow more class-action cases. [Then] you can tell people who breach the law that there is a meaningful penalty to pay.

Q Given that many Chinese investors have access to markets in Hong Kong and the US, why do investors need the STAR Market?

A For retail investors, it is still difficult to open an account and trade US stocks, because capital requirements are pretty restrictive. In Hong Kong, Stock Connect is working, but the bar is sometimes pretty high – in Hong Kong liquidity is critical.

The STAR Market is creating a venue for companies to list which doesn't have stringent profitability requirements. That will draw attention from some public investors.

Q What is the difference in waiting time for issuers hoping to list between Shanghai's mainboard and the STAR Market?

A The mainboard in China doesn't have a specific reviewing timeline. Some companies get feedback from the China Securities Regulatory Commission within six months, but that is an exception.

Companies that want to list on the STAR Market just need to apply, and the stock exchange will let them know if they are eligible within three months. 

Q Why are investors still sceptical about the STAR Market? 

A There have been a lot of experiments in the capital markets in China. Some of them have worked, most of them have failed, so I understand the scepticism. There is a significant difference here that people fail to appreciate.

So far, this experiment [the STAR Market] is working effectively. In China, we have talked about [reforming the] registration IPO mechanism for so long, and it finally gets done. I feel that was a major step in the right direction.

Some of the reforms are still under-appreciated. Let’s not rush it and give the market some time.

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