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The resurrection of growth—moving away from involution
In 1963, the American anthropologist Clifford Geertz popularized the term “involution” when studying agricultural practices in Indonesia. The term refers to society’s increasing complexity without necessarily generating productive change, resulting in social stagnation. With little doubt, “involution” describes developments everywhere around the world in 2020.
China has the world’s third largest capital pool, with the shares of 4,100 listed companies traded publicly each day. Yet the open markets facilitate only an infinitesimal fraction of businesses that operate in the country, leaving growth potential unattended to. To cut through the noise of involution, China has piloted the new “registration-based” reform throughout2019 and 2020 in its domestic A-share capital markets.
As 2021 beckons, here are our top ten predictions for what lies ahead.
Prediction 1: Full-scale launch of registration-based reform
Registration-based reform will be the standard in China’s entire capital markets system in2021, covering main boards as well as medium-sized markets. Previously, these reforms were limited to the Shanghai Stock Exchange’s Sci-Tech Innovation Board (Star Market) and theShenzhen Stock Exchange’s ChiNext Board.
Reforms in 2021 will be market-wide rather than sector specific. These changes will increase access to direct financing for Chinese enterprises. In all, this will help China’s bourses edge closer to their counterparts in Hong Kong and the United States.
Prediction 2: Another bullish year of IPOs
Even though China is home to the largest number of new economy unicorns in the world, still, many of these companies have chosen overseas markets for their public listings, forgoing their domestic exchanges in Shanghai and Shenzhen.
One of the key reasons behind these choices is that, under the conventional A-share IPO approval system, a company’s eligibility to sell shares to the public is determined by regulators rather than by market forces. Instead of considering expectations for future growth, this system focuses heavily on the company’s history of profitability. This has limited growth opportunities for deserving companies in dire need of capital infusions. Tightened requirements for key financial indicators introduced by CSRC in November 2017, for example, slashed the number of A-share IPOs in 2018 to 111, less than one-third of the 380 offerings in 2017.
To continue reading about our top 10 predictions for China’s capital markets next year, click here.