A shares continue to attract foreign interest

Domestic bourses have seen new sectors stand out in crowded space

While the A-share market has pulled back for nearly two months on concerns over policy tightening, many foreign investors are actually seeing through the short-term volatility to capture strategic opportunities brought by the improving quality of domestic listed companies, market experts said.

Since its recent intraday peak of 5930.91 on Feb 18, the benchmark CSI 300 index has slipped 16.6 percent to 4947.75 as of close on Monday, as investors dumped expensive high-profile growth stocks and worried about any monetary policy shift amid global reflation.

During the period, however, net foreign inflows into the A-share market via northbound links with Hong Kong remained above water at 24.81 billion yuan ($3.79 billion), despite registering net outflows on some recent trading sessions, according to market tracker Wind Info.

Robust fundamentals were behind the sustained foreign interest. As of March 26, a total of 536 A-share listed firms have disclosed their 2020 financial reports. Though hit by COVID-19, the majority－510 in total－achieved positive annual net profits with an average profit margin, or profit-to-revenue ratio, of 13.67 percent.

The structure of listed firms has also been improving as more technology-related firms went public. Up to 32 of the total 102 new A-share listings this year as of March 26, for instance, were from information technology and medical care sectors, according to Wind Info.

Chia Chin-Ping, head of business strategy and development for China-A investments at Invesco, a global investment management company, said China's capital market reforms have helped improve the quality of listed firms by bringing in more new-economy industry leaders while winnowing out the weak.

"We have observed good progress in China's capital market reform, especially in the past few years. The launch of the STAR Market in 2019 played a strategic role in facilitating new-economy companies, particularly those in technology and healthcare sectors, to tap into China's fast-expanding capital market for funding," Chia said.

Meanwhile, companies with poor fundamentals or those that were loss-making for extended periods saw consistent valuation declines, Chia said.

China launched registration-based reform of the initial public offering system in 2019 to strengthen the market's role in IPO processes and pricing and make listing standards more friendly for tech firms. The registration-based IPO system was first piloted on Shanghai's STAR Market in 2019 and then on Shenzhen's ChiNext last year.

The STAR Market has overtaken Shanghai's main board to lead IPO activities across the A-share market by both deal volume and proceeds last year. The tech board saw 145 new listings in 2020, including those from high-profile tech firms like chipmaker Semiconductor Manufacturing International Corp, vaccine company CanSino Biologics Inc, and cybersecurity service provider Qi An Xin Technology Group Inc.

While implementing the registration-based reform that ushered more quality names into the A-share market, the country also toughened delisting standards and punishment against market misbehavior to weed out companies that are weak in fundamentals or indulge in fraud.

The revised Securities Law, for instance, took effect in March 2020 and hiked fines facing firms that indulge in fraudulent public offerings from between 300,000 yuan and 600,000 yuan to between 2 million yuan and 20 million yuan.

Governance and disclosure of A-share companies have seen steady improvements as well, experts said, with particular progress seen on environmental, social and governance fronts, or ESG.

Accelerated regulatory efforts have made listed companies' ESG disclosures more readily available to investors, Chia said. "We hope that the overall quality of Chinese companies can continue to improve as having a market with institutional quality is a critical factor in attracting international capital flows."

Eddy Gan, vice-president of BlackRock Investment Stewardship in Greater China, said the asset management giant has seen China's stepped-up efforts to lead on matters related to ESG and will leverage this momentum to continue engaging Chinese companies in its clients' portfolios.

Jay Wang, China director of risk proposition performance at Refinitiv, a global provider of financial market data and infrastructure, said the series of reforms to lift the quality of listed firms have combined to magnify the appeal of the A-share market for both quality firms seeking floats and foreign investors.

"Overseas listed companies that look for a new listing venue have started to consider the A-share market as an option, in parallel to Hong Kong and other more developed markets," Wang said.

Recognizing China's progress in improving the quality of listed companies, the three major global index providers such as MSCI Inc have all included A-shares into their investment benchmarks, Wang said.

By the end of last year, foreign capital registered a net inflow into A-shares for the third consecutive year, with A-share assets held by overseas investors surpassing 3 trillion yuan, according to official data.

Despite the progress in strengthening company fundamentals and governance, experts said more efforts are needed to further elevate the quality of listed firms in terms of enhancing operational efficiency, strengthening information disclosure and ensuring accounting compliance.

The A-share market has recently seen a number of withdrawals of listing applications upon on-site regulatory inspections, for instance, and raised concerns over the quality of information disclosure in the IPO process.

Yi Huiman, chairman of the China Securities Regulatory Commission, the country's top bourse regulator, said at a forum in March that the withdrawals were mainly due to the incompetence of sponsors. The commission is looking further into the issue and will take targeted measures when necessary, including vigorous action against any misconduct.

China has made improving the quality of listed firms a key financial reform in the coming five years. The outline of the 14th Five-Year Plan (2021-25), the country's development blueprint for the period, has pledged to implement the registration-based system across the whole stock market, establish a regular delisting mechanism and improve the quality of listed firms.

Yi elaborated the road map for China to improve the quality of listed firms in the coming five years in an article published in November. Regulators will continue to improve mechanisms for refinancing, mergers and acquisitions, and provide equity incentives to support listed companies' upgrade and development, while improving the delisting system and encouraging listed firms to improve corporate governance and information disclosure transparency, the article said.

To fulfill these commitments, the State Council, China's Cabinet, released a guideline in October that detailed 17 sets of measures to improve the quality of listed firms and prioritized the task of enhancing governance levels. The CSRC accordingly announced in December that it had kicked off a special project to improve corporate governance.

The commission has vowed to urge listed companies to address weak links in governance through on-site checks and self-inspections, and perfect related rules to further clarify the duties of shareholders with controlling stakes, actual controllers, directors, supervisors and senior management teams of listed firms.

Thomas Fang, head of China global markets at investment bank UBS, said he hopes that A-share listed firms will strengthen communication with international investors and improve the transparency of accounting practices.

From global investors' point of view, there has been a steady improvement in corporate governance for A-share listed companies, Fang said. Yet global investors still hope that newly listed small to mid-cap companies can provide better access to management teams and become more receptive to video calls to keep investors updated.

Meanwhile, global investors are looking for more transparency in accounting treatment that is more in line with global standards, as well as more enforcement cases if some companies are not up to regulations, Fang said.

Wang from Refinitiv said he expects regulators to tighten oversight of information disclosure of IPO applicants. Regulators and exchanges may strengthen information disclosure standards of IPO applicants and even require mandatory ESG reporting, while toughening punishment against management teams and intermediary institutions who fail to ensure the disclosure quality of IPO deals.

Increasing foreign participation in the A-share market will go together with regulatory efforts to catalyze improvements in listed firm quality, he added, as foreign investors pay heed to the quality of information disclosure and corporate governance, propelling listed firms to make improvements in this regard to attract foreign investors.

"Since access has no longer been an impediment for foreign investment, improving the quality of listed firms has become crucial for attracting further foreign investment and opening the capital market wider," Wang said, adding that there remains considerable room for listed State-owned enterprises to improve governance by enhancing operational efficiency and disclosure quality.

zhoulanxv@chinadaily.com.cn