I. Overview

On April 12, 2024, the State Council issued the "Several Opinions on Strengthening Regulation, Guarding Against Risks, and Promoting High-Quality Development of the Capital Market" (hereinafter referred to as the new "Nine Articles"). Following the first "Nine Articles" in 2004 that initiated the reform of shareholding structure and the second "Nine Articles" in 2014 that unleashed reform dividends and encouraged innovation and development, this is the third time that the State Council has introduced guiding documents for the capital market. The new "Nine Articles" focus on strengthening regulation, preventing risks, and promoting high-quality development as the main thread, reshaping the new order of the capital market, better leveraging the role of the capital market, advancing the construction of a financial powerhouse, and serving the overall situation of Chinese-style modernization.

The new "Nine Articles" continue to focus on three aspects: strictly controlling the access to listing, strictly regulating the continuous supervision of listed companies, and increasing the intensity of delisting supervision, to implement full-chain supervision of listed companies. At the same time, the China Securities Regulatory Commission (CSRC), the Shanghai, Shenzhen, and Beijing stock exchanges have intensively introduced a package of supporting policies and rules, strengthening the supervision of listed companies, improving the quality of listed companies, and aligning with the focus of the comprehensive implementation of the stock issuance registration system reform.

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II. Current Status of the Capital Market

Strict Control of the Access to Listing

According to statistics from Dealogic, Wind, and EY, global IPO activities continued to slow down in 2023, with a total of 1,347 companies going public worldwide, raising a total of $126.1 billion. Compared with the whole year of 2022, the number of IPOs and the amount of funds raised decreased by 5% and 32%, respectively. Mainland China is an important region for global IPO activities, with the A-share market's IPO fundraising in 2023 accounting for 40% of the global fundraising. The A-share capital market has developed rapidly, with a cumulative amount of equity and debt financing of RMB 8.90471 trillion from 2019 to 2023. Currently, there is a trend of decline, and the specific financing scale for each year is as follows:

According to statistics from Wind and EY, in 2023, a total of 245 companies that intended to go public in the A-share market terminated their listing applications (including withdrawals and rejections); as of May 11, 2024, a cumulative total of 568 companies have terminated their listing applications within the year, a year-on-year increase of over 132%. The increase in the number of companies terminating their listing applications reflects the regulatory authorities' emphasis on the "strict" approach, raising the listing threshold, closely monitoring the access and quality control, and promoting rational pricing of listed company values. This is a necessary move to improve the registration system at present; in the long run, it will be beneficial to enhance the overall quality of listed companies, with intermediary institutions acting as the "gatekeepers" of the capital market, fulfilling their duties and responsibilities, and consolidating the foundation for the healthy and stable development of the capital market.

Strict Continuous Supervision of Listed Companies

According to the statistical information published by the Chinese Institute of Certified Public Accountants, in the 2022 annual financial statement audits of listed companies, a total of 131 companies issued non-unqualified opinions, with the main issues leading to non-unqualified opinions including income recognition doubts, audit scope limitations, fund occupation, continuous operation, contingent matters, business rationality, asset impairment, related party transactions, and others; in the 2022 internal control audits of listed companies, a total of 57 companies issued non-unqualified opinions, with 88% of non-unqualified opinions determining that internal control is ineffective. The specific information on the audit opinions of the financial statements of listed companies and the conclusions of the internal control evaluation reports is as follows:

Strengthening the supervision of information disclosure and corporate governance, building a comprehensive anti-fraud and anti-counterfeiting system for the capital market, seriously rectifying illegal and irregular behaviors in key areas such as financial fraud and fund occupation, and urging listed companies to improve their internal control systems, effectively play the supervisory role of independent directors, and strengthen the protection and restraint of their duties, is one of the key tasks of the new "Nine Articles".According to Wind data statistics, A-share listed companies in 2023 raised a total of 1,134.4 billion yuan in financing and distributed a total of 1,763.8 billion yuan in dividends throughout the year; in 2023, 398 A-share listed companies had situations where they distributed dividends and raised funds simultaneously. In addition, according to Wind data statistics, the average annual dividend amount of A-share listed companies from 2019 to 2023 was 1,498.8 billion yuan, which is lower than the average annual dividend of 967.2 billion US dollars for US-listed companies.

According to Wind data statistics, the average number of times the upper limit of proposed reduction changes of A-share listed companies from 2019 to 2023, which accounted for more than 5% of the total share capital, was 234 times. A sound management method and regulatory system for listed companies' reduction and cash dividends will promote stable, sustainable, and predictable investment returns, better protect investors' interests, and promote the high-quality development of the capital market. Therefore, it is imperative to comprehensively improve the reduction rule system and strengthen the supervision of cash dividends of listed companies.

According to Wind data statistics, the number of A-share listed companies showed an upward trend year by year from 2019 to 2023, but the market value fluctuated due to different market conditions. Market value management, which emerged with the equity division reform, has gradually become concrete from the abstract, moving from behind the scenes to the forefront. Actively responding to market value management, improving internal skills, strengthening oneself, and establishing a high-quality corporate image will promote the improvement of investment value for listed companies.

Increase the intensity of delisting supervision

In November 2020, the Central Comprehensive Deepening Reform Commission passed the "Implementation Plan for the Sound Development of the Listed Company Delisting Mechanism," establishing a normalized delisting mechanism for listed companies. From 2019 to 2023, a total of 151 A-share listed companies were delisted, with an average delisting rate of less than 1%, lower than the 3,400 delistings and 6% average delisting rate of US stocks during the same period.

At present, some A-share listed companies that should have been eliminated are trying every means to retain their listing qualifications, failing to achieve the survival of the fittest, entry and exit, and full delisting. The new "Nine National Articles" will promote the optimization of the capital market's resource allocation function, accelerate the survival of the fittest among listed companies, and help improve the overall quality of listed companies. The A-share market still has the situation of "speculating on small, poor, and new" stocks. After increasing the intensity of delisting supervision, "small and poor" companies will move towards the edge, and the "shell premium" will gradually disappear. The A-share market will further show a trend of heading, indexing, institutionalization, and specialization. In this process, companies need to focus on the continuous improvement of internal and external governance to help the development of the head.

III. Suggestions

The new "Nine National Articles" focus on three aspects: further improving the issuance and listing system, strengthening the responsibility of the entire chain of issuance and listing, and increasing the supervision of issuance and underwriting. In the future, under the test of a complete market cycle and regulatory closed loop, all market participants will gradually optimize and adapt, and ultimately form effective market constraints. In the new situation, how to deal with the governance and supervision requirements of A-share prospective and listed companies, and continuously improve corporate value and profitability?

How can companies do a good job in corporate governance under the new background?

Corporate governance supervision involves the participation of the company itself, regulatory agencies, and intermediary agencies. However, in the interest game of the capital market, under strict supervision and continuous improvement of punishment, fraud incidents still occur repeatedly, which poses new challenges to listed companies, regulatory agencies, and intermediary agencies. The new "Nine National Articles" also emphasizes "seriously rectifying illegal and irregular behaviors in key areas such as financial fraud and fund occupation, and urging listed companies to improve their internal control systems and give full play to the supervisory role of independent directors." All parties in the market should participate together, take improving corporate internal control systems and playing the responsibility of independent directors as the starting point, and jointly build a defense against illegal and irregular risks in key areas from both internal and external aspects.Improving the Internal Control System

A robust internal control system can prevent fraud from taking root at its source. Since the implementation of the departmental control standards issued by five ministries and commissions in China in 2006, more than 15 years have passed. From the actual execution perspective, listed companies and regulatory authorities have increasingly focused on the construction of internal controls. The improvement of internal control requirements is an essential part of corporate governance and supervision.

Starting from the company's own governance and supervision, listed companies should pay attention to significant and key issues in corporate internal control. They should start with the five elements of internal control environment, risk assessment, control activities, information communication, and supervision to effectively build three lines of defense in corporate internal control: operational management, compliance control, and internal audit.

From the perspective of external regulatory requirements, in December 2023, the Ministry of Finance and the China Securities Regulatory Commission jointly issued the Finance and Accounting [2023] No. 30 "Notice on Strengthening the Construction of Internal Control in Listed Companies and Prospective Listed Companies, and Promoting the Evaluation and Audit of Internal Control." It clearly proposes that all listed companies and IPO applicants must provide an internal control audit report starting from the disclosure of the 2024 annual report. As early as 2022, the Ministry of Finance and the Securities Regulatory Commission jointly issued the "Notice on Further Enhancing the Effectiveness of Internal Control in the Financial Reporting of Listed Companies," focusing on the risks of false records, misleading statements, or significant omissions in financial reporting information due to motives such as asset encroachment, illegal guarantees, insider trading, and market manipulation:

1) Strengthen the risk assessment and control of fraud in fund and asset management. Pay attention to the authenticity of fund and asset transactions, and the effectiveness of related internal control processes and control measures such as consistency between accounts, vouchers, and reality.

2) Strengthen the rationality of revenue recognition policies, sales management processes, and the assessment and control of revenue fraud risks. Pay attention to the effectiveness of internal control processes and control measures such as the change procedures for revenue recognition accounting policies, customer management, sales management, pricing management, contract management, accounts receivable management, bad debt provision, and write-off.

3) Strengthen the risk assessment and control related to cost and expense. Pay attention to the effectiveness of internal control processes and control measures such as research and development management, procurement management, fund management, asset management, contract management, and accounting.

4) Strengthen the risk assessment and control of fraud in investment activities. Pay attention to the risks of financial statement embellishment and other influences on the authenticity and fairness of transactions, conducted under the guise of investment activities for the purpose of achieving performance bets, performance commitments, satisfying equity incentive exercise conditions, or meeting market performance expectations. Pay attention to the effectiveness of internal control processes and control measures regarding the authenticity of transaction targets, the fairness of transaction prices, and the truthfulness and completeness of transaction information disclosure.

5) Strengthen the assessment of fraud risks in related party transactions, and the assessment and control of the risks associated with the disclosure of related party transactions. Pay attention to the authenticity of the commercial background of transactions, the authenticity of fund and asset transactions, the rationality and fairness of sales models, and the compliance of the upper limit of related party transaction amounts with internal control processes and control measures.

6) Strengthen the risk assessment and control of significant risk businesses. Enhance the construction and implementation of early warning and emergency response mechanisms for significant risk factors and events.7) Strengthen the risk assessment of financial reporting processes and the risk assessment and control of information systems related to the preparation of financial reports. Focus on the significant risk of financial reporting misstatements caused by fraud by the "critical few" and establish effective anti-fraud mechanisms.

Enhance the supervisory role of independent directors

At the current stage, the lack of business integrity and doubts about the authenticity of the financial situation have attracted high attention from investors and regulatory authorities in the securities market. In the absence of an audit report from external auditors and in response to inquiries from regulatory authorities triggered by anonymous reports, the role of independent directors is crucial. In September 2023, the "Administrative Measures for Independent Directors of Listed Companies" further clarified the responsibilities of independent directors and strengthened the supervision and management of their performance:

1) Clarify the qualifications and appointment and removal procedures for independent directors. Listed companies should make specific provisions on the professional knowledge, work experience, and good character that should be possessed by those serving as independent directors. The appointment and removal of independent directors should be optimized throughout the entire chain, including nomination, qualification review, election, ongoing management, and dismissal, and establish a nomination avoidance mechanism, an independent director qualification certification system, etc. In principle, independent directors should serve on the boards of no more than three domestic listed companies.

2) Clarify the responsibilities and performance methods of independent directors. Independent directors fulfill three responsibilities: participating in board decision-making, supervising potential significant conflicts of interest, and providing professional advice on the company's operation and development. They also exercise special powers such as independently hiring intermediaries when there are signs of violations or fraud. To address the situation where independent directors hold positions without actually fulfilling their duties, it is required that independent directors spend no less than fifteen days per year working on site at the listed company and maintain relevant work records.

3) Clarify the performance guarantees. Listed companies should provide the necessary working conditions and personnel support for independent directors to fulfill their duties. Improve the relief mechanism for independent directors whose performance is restricted, and when independent directors encounter obstacles in performing their duties, they can explain the situation to the board of directors, request cooperation from directors and senior management personnel, and if the obstacles still cannot be eliminated, they can report to the China Securities Regulatory Commission (CSRC) and the stock exchange.

While emphasizing the importance of the performance of independent directors, it also means that the responsibilities of independent directors have become heavier. The "Administrative Measures for Independent Directors of Listed Companies" adds a special chapter on "Supervision, Management, and Legal Responsibility," and if the company, independent directors, and related entities violate the provisions of the measures, the CSRC can take regulatory measures such as ordering corrections, regulatory talks, issuing warning letters, ordering public explanations, and ordering regular reporting. If administrative penalties should be imposed according to the law, the CSRC will impose penalties in accordance with relevant regulations. According to statistics of disciplinary actions and regulatory measures taken against listed companies on the Shanghai Stock Exchange, since the implementation of the regulations, more than 10 independent directors have been disciplined and regulated, mainly involving violations such as irregularities in performance forecasts and financial fraud. This has focused on solving prominent issues such as "independent directors not being independent" and "decorative independent directors," playing an important role in effectively ensuring the supervisory functions of independent directors and protecting the legitimate rights and interests of listed companies and their small and medium shareholders.

How can enterprises further enhance value under new circumstances?

How can domestic listed companies improve profitability and respond to new regulatory requirements and demands under the more complex economic and market environment? How to achieve high-quality development in the face of increasingly fierce macroeconomic and market competition?

The core and key elements of cost reduction and efficiency enhancementThe key to a company's cost-reduction and efficiency-enhancement transformation is not about cost-cutting but about increasing efficiency. Simple or even incorrect cost-cutting measures will not only fail to improve a company's efficiency but may also affect employee morale and the stability of cash flow and supply chains.

How to analyze and focus on the appropriate areas for cost reduction, and identify the best areas for cost reduction that suit the company's own situation? Cost reduction and efficiency enhancement are not solely the responsibility of the finance department. It should be achieved through close cooperation among business, finance, and operations to identify the bottlenecks that limit the company's profitability. It is not difficult to understand from the logic of profit generation that the core of cost reduction and efficiency enhancement is to orderly increase revenue, and reasonably control and reduce costs and expenses, which is one of the keys to successful transformation.

Different industries, regions, types of enterprises, and industry positions determine that there is no one-size-fits-all "cost reduction formula." The bottlenecks affecting a company's profitability can be effectively identified through specific methods, mainly considering two dimensions: high proportion and significant impact. In the process of identification and screening, it is necessary to combine rich industry and value chain experience with the actual situation of the enterprise, and conclusions cannot be simply drawn by directly comparing numerical values.

Difficulty one in cost reduction and efficiency enhancement: There are significant differences in the key leverage points across different industries.

When considering the key areas for cost reduction and efficiency enhancement, the primary element is the industry. There are significant differences in the key leverage points or focus areas for enterprises in different industries or sub-segments. Although there are still differences within the same industry, there are also clear commonalities. Based on our experience, here are some examples of common key leverage points in a few common industries.

For traditional manufacturing (discrete manufacturing), the most effective leverage point for cost reduction and efficiency enhancement is the optimization of procurement costs. Even if there are obvious differences in different sub-segments within the industry, procurement costs account for about 70-95% of the total costs of enterprises in this industry. In some primary processing industries, procurement costs even exceed 95%. Effectively reducing procurement costs is the top priority for cost reduction and efficiency enhancement in this industry.

For the energy and chemical industry (process manufacturing), the most effective measure for cost reduction and efficiency enhancement is to improve the overall operational efficiency of equipment. Since most enterprises in this industry have a large number of large and expensive heavy equipment, the structure of such equipment is complex and costly. The cost of maintenance and repair is extremely high, and the overall operational efficiency of all equipment largely determines the production capacity and output stability of the enterprise, which is the biggest potential constraint on revenue growth.

For the consumer retail industry, the most effective areas for cost reduction and efficiency enhancement are mainly divided into two parts: the revenue growth part mainly includes channels (for chain retail, it also includes store performance) and product selection, and the cost reduction part mainly includes optimization of procurement, store, and labor costs. Focus on analyzing new perspectives on the traditional "goods, place, and people" three elements.

Difficulty two in cost reduction and efficiency enhancement: There are significant differences in the scope and methods of implementation.

The second difficulty in the transformation of cost reduction and efficiency enhancement mainly lies in the fact that even if the industry and market position are very similar, due to differences in the development history, personnel composition, and corporate culture of the enterprise, there are significant differences in the scope, methods, and steps of the implementation of the transformation.How to choose the path of change implementation, whether to use business lines or regions, channels as the pilot scope, the steps and specific scope of the pilot promotion are all very testing for the change management team's industry, change experience, and data analysis and insight capabilities.

What is more challenging is that the different macroeconomic environments, industry competition, and value chains that a company is in during the change can greatly affect the specific scope and method of implementation.

The release of the new "Nine National Articles" has put forward higher requirements for the profitability, dividend distribution, and operational capabilities of listed and prospective listed companies. Cost reduction and efficiency improvement is an important means to optimize a company's profitability, which has a positive significance for enhancing operational capabilities and thus optimizing the company's competitive advantage; however, due to the dependence on professionalism, implementation difficulty, change experience, and concept transformation, the overall difficulty of successful cost reduction and efficiency improvement change is relatively high.

Under the new situation, prospective listed companies should pay more attention to their medium and long-term development, continuously improve corporate value and profitability, pay more attention to information disclosure and improve corporate governance, comprehensively enhance corporate growth while continuously developing towards high-quality economic development; at the same time, seize the opportunities of reform, more accurately determine strategic positioning and development goals, and achieve the goal of becoming bigger and stronger by finding companies that have a synergistic effect with their own business.

IV. Summary

In the context of slowing economic growth and overcapacity in some industries, from the perspective of investment efficiency and quality, the capital market should not only avoid ineffective financing but also take the initiative to reduce capital expenditures, strengthen delisting efforts, and increase dividend repurchase efforts to optimize capital returns. The goal of the new "Nine National Articles" is to promote the high-quality development of the capital market, emphasizing from the investment perspective to more effectively protect the legitimate rights and interests of investors, especially small and medium investors, and to better serve the high-quality development of the economy and society with the high-quality development of the capital market itself, fully reflecting the goal orientation and problem orientation. A series of reform measures will fully enhance market liquidity expectations, strengthen transaction supervision, enhance the inherent stability of the capital market, and further enhance market risk appetite.

In the process of continuous change and improvement of the capital market, intermediary institutions need to take the initiative to cooperate with the work of regulatory agencies and exchanges, leverage their own advantages to serve enterprises, help enterprises with listing and information disclosure, and help enterprises continuously move towards high-quality development.