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1. The nine articles of the new country and their main contents
On April 12, 2024, the State Council issued the Several Opinions on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market (hereinafter referred to as the "New Nine Articles"). The nine articles of the new country are very important as guiding and programmatic documents for the construction of the capital market. This is an institutional change, which will affect the behavior of listed companies, securities firms, securities fund companies and other institutions, and then affect the market and market style.
From the perspective of the market as a whole, the new nine articles respond to the reasonable concerns of the majority of investors and promote the resolution of the deep-seated contradictions accumulated in the capital market for a long time, including the overall quality of listed companies is not high, arbitrary reduction of holdings, it is difficult to delist, and low dividend repurchases. It is of great positive significance to improve investor confidence, enhance the quality of listed companies, and enhance investors' sense of gain and return. Therefore, for the market as a whole, we believe that the new national nine articles are a major positive.
Compared with the past two "National Nine Measures", this time the "New National Nine Measures" and the formed "1+N" policy system involve a wider scope and more chains, highlighting the improvement of the quality of listed companies, investor protection, and the high-quality development of industry institutions.
In terms of improving the quality of listed companies, we have comprehensively strengthened supervision around multiple links such as listing refinancing, dividends, shareholding reduction, restructuring and delisting. To further improve the listing standards and refinancing links, the company planning to be listed on the stock market should disclose the dividend policy, strictly control the review, and implement the responsibilities of intermediary gatekeepers.
The "New Nine Articles" attach great importance to the institutional arrangements for dividends of listed companies. In addition to disclosing the dividend policy in the process of planning to be listed, listed companies are encouraged to increase dividends, pay dividends multiple times, and link dividends to the shareholding reduction system and delisting system. Major shareholders are not allowed to reduce their holdings if they do not meet certain dividend conditions, and listed companies that do not pay dividends all year round and pay less dividends have the risk of being warned. The company is also encouraged to repurchase through institutional arrangements, and the amount of repurchase cancellation is included in the calculation of cash dividends.
The "New Nine Articles" further standardize the shareholding reduction system. In addition to meeting the conditions for dividends, it is also strictly prevented from using securities lending and refinancing to reduce holdings. Crack down on all kinds of illegal reductions. In the process of delisting, the "New Nine Articles" emphasize that all withdrawals should be made and cleared in a timely manner, expand the scope of application of mandatory delisting for major violations, reduce the years, amount and proportion of financial fraud delisting, increase the number of years of continuous fraud and delisting, and also add financial fraud ST situations, and further improve the transaction delisting thresholds such as capital occupation and market value standards.
Policies are also very critical to improving the integrity of the entire capital market and regulating the behavior of intermediaries and investment institutions, and also put forward higher requirements for intermediaries and investment institutions. The "New Nine Articles" establish new institutional norms in terms of transaction supervision, supervision of securities investment institutions, promotion of medium and long-term capital entry into the market, and comprehensive deepening of reform and opening up, etc., and more prominently focus on the guidance of the main business, taking responsibility, reducing rates, and focusing on investor returns.
Therefore, the behavior of listed companies, brokers, securities fund companies and other institutions may change, which often affects the market style.
According to the nine articles of the new country and the "1+N" policy system formed, more requirements are put forward for the delisting of listed companies, emphasizing that they should be withdrawn as much as possible and cleared in a timely manner. Specifically,
l Those whose dividends do not meet the standards and have not paid dividends for many years are at risk of delisting
l There is a risk of delisting in case of financial fraud
l Those with a market value of less than 500 million are at risk of delisting, compared with 300 million in the past
Under the new policy system, listed companies may increase dividend arrangements, and those listed companies that do not receive dividends and companies with financial fraud risks are at risk of delisting. Investment institutions may produce a kind of risk-averse behavior, focusing more on those companies that can pay dividends, and reducing the positions of thematic and thematic speculation stocks with very low market capitalization, difficult dividends, and unclear financial data, so as to avoid the risk of delisting.
Along this line of thinking, those large-cap stocks and dividend stocks may be subject to increased capital holdings, and small-cap stocks, especially those with poor operating fundamentals, are likely to be reduced.
2. Impact on CSI 300, CSI 500 and CSI 1000 Indexes
In fact, according to the market capitalization of listed companies, A-shares as a whole can be simply divided into 4 main indexes:
• The CSI 300 is a representative of large-cap stocks.
• CSI 500 is a representative of mid-cap stocks.
• CSI 1000, which is a representative of small-cap stocks.
• CSI 2000 is a representative of micro-cap stocks.
These four indices basically include the top 3,800 stocks in the A-share market by total market capitalization.
The total number of listed companies in Shanghai and Shenzhen is about 4,500, which means that the CSI 2000 is close to the bottom half of the listed companies. The risk is generally the largest among these indices. In addition, micro-cap stocks are extremely risky. This may be detrimental to quantitative strategies that are not adjusted to the model, i.e., are not rebalanced to constituents but are still holding micro-caps.
However, the impact on CSI 1000 and CSI 500 is small. Let's illustrate this in three dimensions.
1. From the perspective of market capitalization of constituent stocks
Table 1 Comparison of relevant indicators of major indices Statistics as of April 15, 2024, the data are from Wind.
From the perspective of delisting risk, the risk of a company with a larger market capitalization is relatively low. At present, although the CSI 1000 is a constituent stock with a relatively small market capitalization, it is still in the range of the top 1,800 listed companies in the whole market, which is still large compared to the total number of more than 4,500 listed companies. The overall risk of delisting is low.
2. From the perspective of valuation and dividend payout ratio
Combined with the dividend payout ratio data, the dividend payout ratio of the CSI 1000 constituent stocks is also 38%, exceeding the CSI 300, indicating that there are still listed companies in the constituent stocks with better operating ability and higher operating quality.
3. From the perspective of the distribution of index industries
Table 2 Market capitalization distribution of major index industries (%) Statistics as of April 15, 2024, data from Wind.
Figure 1 Market capitalization distribution of major index industries (%) Statistics as of April 15, 2024, data from Wind
In addition, the CSI 1000 is relatively more biased towards information technology in terms of industry distribution, so it is also closer to artificial intelligence in terms of industry distribution attributes.
Figure 2 Correlation between major indices and AI indices Statistics as of April 15, 2024, data from Wind.
3. Summary
The new Article 9 has an impact on the market by influencing the behavior of listed companies and investment institutions. Overall, it will boost investor confidence and support the market. In terms of structure, institutional investors may be encouraged to focus more on listed companies with dividend potential or already have the ability to pay dividends in order to reduce the risk of delisting, while the shell value, financial soundness and dividend ability of small and micro cap stocks make the market more worried. In terms of style, it may be biased towards the large-cap style in stages.
However, the impact on the CSI 1000 is also relatively controllable.
1. From the perspective of market capitalization: From the perspective of all the more than 4,500 listed companies, the CSI 1000 constituent stocks are still relatively high in market capitalization, and the risk of delisting due to market value is low.
2. From the perspective of valuation and dividend payout ratio:
At present, the valuation and point of the CSI 1000 are low, the dividend payout ratio is also high, and a considerable proportion of the constituent stocks have paid stable dividends for a long time.
3. From the perspective of industry distribution:
The CSI 1000 also has a high correlation with the artificial intelligence sector, and under the expectation that the growth of the artificial intelligence-related sector is more optimistic, the related cost stocks may also have the potential to rise, thus forming a certain support for the index.
To sum up, based on the promulgation of the new National Nine Articles, investors can appropriately adjust the account allocation, make the style allocation more balanced, and appropriately improve the allocation of the market style. At the same time, don't panic too much about the CSI 500 and CSI 1000, from the perspective of valuation, dividend yield, and potential growth, the risk of further significant downside of the CSI 1000 in the current position is still limited.
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