In recent months, the mood surrounding China's capital markets has shifted remarkably, a change prompted by a series of favorable policy measures and positive market newsAfter a prolonged period of sluggishness, the markets are beginning to show signs of rejuvenationProminent among these developments has been the government’s coordinated efforts to bolster investor confidence, including calls to enhance the intrinsic stability of the capital markets as outlined in the recent Two Sessions reportsVarious local governments are actively promoting the development of new productive forces, contributing to an upswing in investor sentiment and a potential sustained recovery in the capital markets.

The basic tenet of any capital market is to oscillate between highs and lows; however, certain abnormal phenomena can distort its functionality, undermining its capacity to serve as a financial conduit for economic growth

Fundamentally, the stock market serves as a platform for both financing and investment, designed to balance the circulation between the virtual and real economiesWhen functioning optimally, this 'reservoir' facilitates the expansion of tangible industries; yet it simultaneously introduces the leverage effects characteristic of various financial derivatives, which can exacerbate price deviations and create an environment where prices drift significantly away from their true valuesThis distortion can undermine the market's fundamental role as a support mechanism bridging the virtual and real economiesIt’s essential, therefore, to enhance the stability of the capital market continuously, safeguarding investor interests to prevent the erosion of this crucial economic framework.

To further bolster the internal stability of its capital markets, China is advised to implement a set of highly structured policies—essentially a policy “combination punch.”

First and foremost is the need to tightly control the pace of new stock issuances

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Observations from recent months indicate that a mere two new stocks were launched in February, which was received positively by the investor community, reflecting the management’s protective stance towards the capital marketWhile the issuance of new stocks is a natural phenomenon aimed at market expansion, it must occur within a controlled rhythmPreviously, surges in new stock issuances, coupled with excessive fundraising and inflated offering prices alongside significant sell-offs by major shareholders, have placed undue stress on market liquidity and eroded investor confidenceHigh levels of new stock issuance can provoke existing shareholders to liquidate, causing volatility in the prices of existing sharesFurthermore, speculative trading of new stocks draws substantial capital, further straining overall market liquidityHistorically, patterns of excessive speculation and rampant issuance have precipitated financial catastrophes, such as the 1929 stock market crash that heralded the Great Depression in the United States

From a spatial economic theory perspective, the forces of capital aggregation and dispersion must achieve an equilibrium; breaching this balance can invite dramatic market fluctuations that jeopardize sizable investmentsThus, avoiding an overly rapid expansion of the stock market is critical to maintaining investment and financing harmony.

Secondly, the strict enforcement of regulations prohibiting the provision of margin trading for intraday reversal transactions—essentially a form of disguised T+0 trading—must be reinforcedThis practice allows certain short-selling forces to unlock profits within a single trading day, an act that significantly contributes to high volatility in stock pricesWhen a large volume of stocks is sold in rapid succession as part of a strategy to short-sell, it could push the prices to new lows, subsequently leading to substantial "bloodletting" in the capital market, as seen in previous downturns where indices dipped dramatically.

The third strategy includes raising the margin ratio for short-selling index futures

In measures introduced in October 2023, the China Securities Regulatory Commission (CSRC) announced an elevation of the ordinary margin ratio for short-selling from 50% to 80%, and raised private fund margin requirements from 50% to 100%. This policy considerably limits the scale of short-selling and contributes positively to market stability by implementing counter-cyclical regulation.

Moreover, it is imperative to reinforce penalties against large shareholders involved in fraud and insider trading, diligently punishing all parties associated with such misconduct in compliance with existing lawsShould corporations engage in deceitful listing practices or manipulate financial disclosures, investor trust could erode leading to turbulent market conditionsRecently, the CSRC has intensified its crackdown on fraudulent activities, significantly securing the interests of retail investors and stabilizing the capital market overall.

Furthermore, the market must adopt a more rigorous delisting policy to ensure timely removal of underperforming companies

The issue of "difficult delisting" has long haunted the A-share market, wherein companies, due to local economic concerns, opt to remain listed despite poor performanceWith the full implementation of the registration system, there has been a concerted drive to expedite the delisting process, promoting a healthier market cycle.

Additionally, entities are encouraged to augment their dividend payouts to exceed traditional bank saving rates, fostering an influx of medium to long-term capital into the marketThe cyclical nature of market mechanics suggests that companies ought to reward their investors just like they raise capitalCash dividends are crucial not just as a return but also serve as indicators of company health, enhancing the quality of investment decisions.

Ultimately, fostering the internal stability of the capital market requires a multifaceted approach