Strengthen the stability mechanism and purify the capital market ecosystem

Securities Times Two Sessions Reporting Team

The steady and healthy development of the capital market relies on strong, orderly, and effective regulation. Wu Qing, Chair of the China Securities Regulatory Commission (CSRC), recently stated at the Fourth Session of the 14th National People’s Congress during the economic-themed press conference that the CSRC will continue to focus on risk prevention, strengthened regulation, and promoting high-quality development. They will better coordinate development and security, adhere to strict legal enforcement, consolidate fundamentals, and strive to enhance the trust and confidence of investors and all market participants.

National People’s Congress delegate and Peking University honorary professor Tian Xuan said that strengthened regulation is closely tied to the demand for high-quality development of the capital market. From building mechanisms to stabilize the market, to consolidating and improving the comprehensive deterrence against financial fraud, and to strengthening industry institution responsibilities and regulation of new types of business, all these measures aim to optimize the capital market ecosystem, create a fair, transparent, and just trading environment, and safeguard the reform of the capital market.

Strengthening Market Stabilization Mechanisms

In recent years, faced with complex and severe situations of intertwined internal and external risks, and overlapping conflicts of old and new issues, the capital market has prioritized stability. Significant breakthroughs have been made in constructing a market stabilization mechanism with Chinese characteristics and in attracting long-term funds into the market, continuously reinforcing the market recovery and positive trend.

Regarding the market stabilization goals for this year, Wu Qing introduced that the CSRC will comprehensively enhance market risk monitoring, pay close attention to cross-market, cross-period, cross-border risk transmission, and consolidate and strengthen strategic reserve forces and stabilization mechanisms. They will further improve the long-term funds entry mechanism, prepare and utilize tools effectively, and make every effort to maintain stable market operation.

Tian Xuan stated that China’s market stabilization mechanism has officially entered a normalized operation phase. The pilot “equilibrium fund” completed in 2025 will be fully operational by 2026, transforming from a “firefighter” during abnormal market fluctuations to a “ballast stone” in daily market activities, playing a greater role in guiding market expectations and stabilizing trading sentiment. In tandem, the operation mechanism of the central bank’s swap facilitation tools has been optimized, forming a complementary function with the stabilization mechanisms, jointly strengthening the stable foundation of the capital market.

“Construction of the stabilization mechanism is expected to unfold across multiple dimensions,” said Li Qiuso, Chief Strategy Analyst at China International Capital Corporation (CICC). Promoting long-term funds into the market is a key part, including pension funds, insurance funds, and sovereign wealth funds, which can serve as long-term drivers for steady market growth, help smooth short-term volatility, and act as “stabilizers” and “ballast stones” for the capital market. Strengthening regulatory tools, improving risk hedging instruments, and continuously refining dividend and buyback systems, as well as investor protection mechanisms, will enhance the fundamental stability of the market.

Many NPC and CPPCC representatives also proposed removing barriers to long-term funds entering the market to increase their willingness and stability in asset allocation. Zhang Qiaoliang, Partner and Chief Counsel at Shandong Kangqiao Law Firm, suggested further relaxing restrictions on equity investment ratios and concentration limits for insurance, pension, and wealth management funds, supporting long-term strategic shareholding. He also recommended optimizing accounting measurement and risk regulation rules to reduce the impact of short-term stock price fluctuations on long-term funds’ financial indicators, solvency, and regulatory ratings. Standardizing the treatment of various long-term institutional investors in corporate governance, private placements, and voting rights, and supporting their deep participation in corporate governance.

Breaking the Financial Fraud “Ecosystem”

Financial fraud is a “cancer” eroding the foundation of the capital market. Under the comprehensive system of deterrence and punishment, by 2025, 16 listed companies were delisted due to serious fraud, far exceeding previous years. The courts nationwide accepted 25,600 financial fraud disputes, a 67.2% increase, and concluded 23,800 cases, up 58.1%.

“Market discipline will be further enforced, and multiple measures will be taken to improve deterrence and punishment,” Wu Qing said. On one hand, efforts will be made to strengthen governance and prevention, including implementing regulations on listed company supervision, tightening oversight of sponsors, accelerating the establishment of fraud tip-off centers, and third-party monitoring and early warning mechanisms. On the other hand, severe punishment for fraud will be intensified to deter misconduct, including stricter enforcement of delisting requirements for fraudulent companies and resolutely eliminating “bad apples” to break the financial fraud ecosystem.

Fong Yidong, General Manager of Zhongtai Securities and a CPPCC member, suggested increasing penalties for major shareholders and responsible persons involved in financial fraud. For companies involved in fraud, responsibility should be traced back to relevant individuals, with increased penalties for controlling shareholders, actual controllers, directors, supervisors, and senior management, especially in severe cases with significant social impact, including punitive fines and criminal liability. Strengthening intermediary institutions’ responsibilities and improving investor compensation mechanisms are also necessary. Additionally, responsibility should be clearly distinguished, and involved listed companies should be handled prudently to prevent innocent losses to small investors.

Regarding investor compensation, the Nanjing Intermediate Court handled the third nationwide securities false statement representative lawsuit, ruling in favor of Jin Tongling to compensate 77,000 investors for 770 million yuan in losses. Cases involving Meishang Ecology in Shenzhen and Jinzhou Port in Shenyang are progressing steadily.

Zhou Lunjun, Deputy Head of the Civil Trial Second Division of the Supreme People’s Court, pointed out that these cases better demonstrate the effect of special representative lawsuits, which can “gather sand into a tower and collect fragments into a coat,” using large civil compensation to lawfully increase the cost of violations and create a strong deterrent.

Promoting Industry Norms

The healthy development of the capital market requires the joint efforts of all market participants, especially industry institutions. Wu Qing emphasized guiding industry institutions to focus on their core businesses and develop in a regulated manner. For securities firms, support will be given to leading institutions to grow stronger and larger, while promoting differentiated development among small and medium-sized firms. For public funds, supervision and guidance will encourage long-term, professional investment. For private funds, the “1+N+X” regulatory framework will be improved, including rules on access, fundraising, custody, and disclosure, with strict crackdowns on illegal fundraising and misappropriation.

“Under the broader context of supporting technological innovation, new requirements are also being placed on the securities industry,” said Yang Jingdong, Executive Committee Member of Ping An Securities. Intermediary institutions must fulfill their gatekeeper responsibilities, improve compliance awareness and professional quality, and jointly create a fair and orderly development environment. Market pricing efficiency should also be enhanced to provide reasonable valuations for high-quality, core-competitiveness, and genuinely growing enterprises. Investment banks need to shift from traditional financing services to value discovery, cultivation, and empowerment.

Market expectations generally foresee continued strengthening of the link between public funds and investors, with faster rollout of products and risk management tools suitable for long-term investment. While improving private fund regulation, authorities are expected to vigorously support early-stage, small-scale, long-term, and hard-tech private equity and venture capital funds, better leveraging private funds to cultivate patient capital and serve the development of new productive forces.

“This aligns with the government work report’s call to ‘expand exit channels for private equity and venture capital funds and increase the proportion of direct and equity financing,’” said Zhang Yichen, Chairman and CEO of CITIC Capital and a CPPCC member. He noted that venture capital exits are not limited to IPOs; mergers and acquisitions should also be important exit channels. Currently, private equity funds with over 10 trillion yuan in assets are entering an exit cycle, holding many high-quality targets, including niche leaders. M&A funds can support listed companies’ acquisitions and expansion, optimize industrial layouts, and effectively address exit difficulties.

Zhang Yichen recommended further clarifying and encouraging M&A funds holding valuable industrial resources to collaborate with upstream and downstream listed companies for mergers and restructuring. He also suggested improving and promoting tools like S Funds and continuation funds to provide compliant and smooth exit channels for matured M&A funds, ensuring that exits do not hinder long-term industrial integration plans of listed companies.