article

The "Nine National Principles": The Secret Key to a Bull Market?

What are the "Nine National Principles"? They refer to a set of "several opinions" consisting of nine specific suggestions, just as was the case in the previous two instances.

Why must it be exactly "nine" principles?

Much of the content could actually be consolidated into similar categories, or further expanded to form 10 or 8 principles, which would also be feasible.

However, the number nine is essential. In China, nine is a nominal number representing abundance, such as in the context of "Nine Chapters" or "Nine Songs." From the perspective of the yin-yang concept in the stock market, the number nine is also indispensable.

In the stock market, a rising line corresponds to an increase, and the number nine represents the extreme of yang. This implication carries a more profound meaning than other auspicious numbers like eight or six.

We did a bit of research and found that the so-called coming bull market is both a psychological expectation and a retrospective statistical game. The first "Nine National Principles" were published on January 31, 2004. After their announcement, the stock market continued to decline for about two and a half years before entering a bull market. If one insists on finding a temporal correlation, it is merely an attempt to强行 find a connection where there is none, and the significance is minimal.The second "Nine Measures for the Nation," which was introduced on May 9, 2014, seems to have been well-timed. Almost in sync with its launch, the stock market bottomed out and began to climb, eventually breaking through the 5,000-point mark.

Advertisement

In the past, it was realized once after two years and another time quite quickly. With too few samples, there's not much statistical significance.

However, when we extend the time frame, an interesting phenomenon emerges.

Before the introduction of the first "Nine Measures for the Nation" in 2004, the A-share market peaked in June 2001. After the measures were implemented, the market bottomed out around November 2005, with the time span from peak to trough being about five years (actually four and a half years).

Coincidentally, before the second "Nine Measures for the Nation" in 2014, the peak was in July 2009 (the high point of the rebound in the 2007 bull market), and the trough was in June 2014, which adds up to exactly five years.

From this perspective, the "Nine Measures for the Nation" in conjunction with a time frame of about five years seems to hold more significance.

Before the introduction of this "Nine Measures for the Nation," if we count from the high point in January 2018 (the rebound high of the 2015 bull market), it has been over five years now, which seems to be about right in terms of timing.

What will the actual outcome be? It's like the Duke of Zhou's dream of butterflies.

Some securities firms have statistics showing that in the short term, up to a span of one year, the stock market's performance is quite direct. It might have a bit of a stimulating effect in the short term. With a one-year limit, the outcomes of the previous two "Nine Measures for the Nation" were mixed, with gains and losses interwoven.

Back to the present.According to the CSRC's public WeChat account, the "Nine National Measures" were released at 3:43 PM on April 12th, after the A-share market had closed. Given the nature of the A-share market, such significant news should have had an impact during trading hours.

Was there a reaction during trading hours?

It can be said that there was, and it can also be said that there wasn't.

Recently, global stock markets have been performing poorly due to geopolitical factors and changes in expectations for interest rate cuts by the Federal Reserve. Since April 1st, the Dow Jones Industrial Average has been adjusting for two weeks.

With the global market sentiment being negative, the stable sentiment of the A-share market is highlighted. The A-share market is accustomed to significant fluctuations, and the Shanghai Composite Index still appears relatively strong.

On April 12th, around 1 PM, there was a peculiar surge in the A-share market, and it is possible that some funds had prior knowledge of the news. However, under the combined effects of macroeconomic data and geopolitical factors, the surge was quickly extinguished.

What about the FTSE A50?

Logically, it should have immediately reacted to the significant positive news for China's capital market.

The actual situation is that after the release of the new "Nine National Measures," the FTSE A50 showed almost no reaction. Perhaps everyone was too preoccupied with the turmoil caused by Iran, Israel, and the Federal Reserve to pay attention to what was happening in China.

What exactly did the "Nine National Measures" say?Regardless of how the market performs in the future, the significance of the "Nine National Policies" is self-evident.

What exactly did this "Nine National Policies" say?

From April 12th to the time of our article submission, after reading numerous articles, the general sentiment is one of confusion, with the feeling being, "Wow, this is a great boon, bullish." However, the specifics of the benefits are unclear.

Let's meticulously and succinctly organize this information for everyone.

First, let's look at the names of the three instances of the "Nine National Policies."

The first was to promote the reform, opening-up, and stable development of the capital market, the second was to further promote the healthy development of the capital market, and the third was to strengthen risk prevention and promote high-quality development of the capital market.

These three names represent the high-level's expectations for the "Nine National Policies," or rather, their substantive objectives.

The first two can be simply understood as promoting the capital market for the purpose of financing, with smooth financing as the main goal.

This time, looking at the name, there are two objectives: one is to prevent risks, and the other is high-quality development. The biggest difference from before is that financing is not the main purpose, but rather other objectives.

What objectives? Before the new village head took office, on January 25, 2024, the vice chairman of the China Securities Regulatory Commission (CSRC) stated that the future construction of the capital market should be investor-oriented, which moved many people at the time.Later, the new village head also expressed a similar attitude. In the first general requirement of the new "Nine National Articles," it is explicitly stated, "Adhere to the people-oriented nature of the capital market work," "It is necessary to always practice the concept of finance for the people, highlight the people-centered value orientation, and more effectively protect the legitimate rights and interests of investors, especially small and medium investors."

That's the idea, everyone can ponder it for themselves.

On the official website of the China Securities Regulatory Commission (CSRC), there is the full text of the new village head's response to reporters' questions, where the response regarding "people-oriented nature" is: to create more opportunities to increase residents' property income.

This expression is what the village head said in response to the reporter's question, and it is not written in the new "Nine National Articles."

In the era of the registration system, thousands of new stocks have been issued in a few years, and hundreds of billions of funds have been raised, making it a financing market. The new "Nine National Articles" focus on the people-oriented nature, hoping to improve residents' property income, which can be regarded as a repositioning of China's capital market.

What about financing? On this point, the qualitative expression in the new "Nine National Articles" is: the investment and financing structure tends to be reasonable.

That is, investment will become a condition that restricts financing, and they will coexist harmoniously, and the situation of having a big head and a small body, which is a nutritional imbalance, is expected to be rewritten.

As for how to do it, the details are in the accompanying N documents.

For example, significantly increasing the cost of illegal and non-compliant activities, strengthening the supervision of high-frequency quantitative trading, enhancing the supervision of cash dividends of listed companies, restricting shareholder reductions, improving the regulatory system for key businesses such as derivatives and margin trading, deepening the reform of the delisting system, accelerating the formation of a system where all should be delisted, and raising the listing standards of the main board and the GEM, etc.

This essentially echoes the content of the new village head's initial meetings with people from all walks of life and the topics that investors care about at the public opinion level.The devil is in the details, and the delisting list has been released.

If the "Nine National Articles" are a guide to the future direction of the capital market, then the simultaneous release of supporting documents by the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) is the concrete details of the implementation.

On April 12th, the new "Nine National Articles" were announced, almost at the same time, the SSE and SZSE published a series of documents on their official websites, involving details of listing, delisting, and strengthening trading supervision.

The latest IPO standards for the main board, STAR Market (Science and Technology Innovation Board), and Growth Enterprise Market (GEM) were provided. The overall tone is to raise the entry threshold, with higher hard indicators and also higher soft definitions.

There are three sets of listing standards for the main board market, and meeting one of them is sufficient. Under the new rules, both exchanges have raised the three sets of listing standards together:

The first set of listing standards:

The net profit indicator has been increased from a cumulative 150 million yuan in the last three years to 200 million yuan, and the net profit indicator for the most recent year has been increased from 60 million yuan to 100 million yuan;

The net cash flow indicator has been increased from a cumulative 100 million yuan in cash flow from operating activities in the last 3 years to 200 million yuan;

The operating income indicator has been increased from a cumulative 1 billion yuan in the last 3 years to 1.5 billion yuan.

The second set of listing standards:The net cash flow from operating activities generated in the last three years has increased from 150 million yuan to 250 million yuan.

The third set of listing standards:

Market value indicator, increased from 8 billion yuan to 10 billion yuan;

Operating income indicator, increased from 800 million yuan to 1 billion yuan.

Regarding the IPO on the ChiNext board, the Shenzhen Stock Exchange has raised the following indicators:

The first set of listing conditions:

Net profit indicator, increased from a net profit of 50 million yuan in the last two years to 100 million yuan, and added a requirement that the net profit for the most recent year should not be less than 60 million yuan;

The second set of listing conditions:

The expected market value has been raised from 1 billion yuan to 1.5 billion yuan, and the operating income for the most recent year has been increased from 100 million yuan to 400 million yuan.

Whether it fits the positioning of the ChiNext board is actually flexible and has become a way to regulate the entry and exit of listings.Compared to hard conditions, the binding force of soft-defined constraints may be even greater.

The STAR Market now concentrates on semiconductors, innovative drugs, and other companies that are currently most lacking in innovation in China. The remaining ones are also innovative, but the sense of urgency is not high, such as the integration of new and old industries, where enterprises belong to the situation of deep integration of traditional industries with new technologies, new industries, new business forms, and new models, all can be listed on the ChiNext board.

What about the conditions of the STAR Market?

According to the revised "Guidelines for the Evaluation of Scientific and Technological Attributes (Trial)", there are mainly three changes in hard conditions:

The "amount of R&D investment in the last three years" has been adjusted from "a total of more than 60 million yuan" to "a total of more than 80 million yuan";

The number of "invention patents applied to the company's main business" has been adjusted from "more than 5" to "more than 7", and the "compound annual growth rate of operating income in the last three years" has been adjusted from "reaching 20%" to "reaching 25%".

It highlights the "hard technology" characteristics of the STAR Market, mainly serving enterprises that are in line with national strategies and possess key core technologies.

What is hard technology? What kind of technology is in line with the national strategy? There is a lot of room for interpretation here, and the special mention implies that the hard technology of the past may not be in the future, and what was in line with the strategy in the past may not be in the future.

For example, after 2018, semiconductors have been a popular field for listing on the STAR Market, with a large number of design, equipment, and material companies going public.

In fact, in terms of results, design companies are the main ones, and homogenization is very serious. Apart from price wars, there are not many breakthroughs in technology.In the future, companies similar to semiconductor design firms may find it very difficult to go public on the STAR Market.

The secondary market is not performing well, and fundraising in the primary market is challenging, which may lead to a significant collapse in the relevant fields.

Aside from changes in both soft and hard conditions, there is one thing that has always been distasteful to investors: the practice of dividend payouts just before an IPO.

Why go public if you have money? The motives are not pure.

The Shenzhen Stock Exchange specifically addressed this issue in response to a reporter's question.

If the cumulative dividend amount over three years of the reporting period exceeds 80% of the net profit during the same period; or if the cumulative dividend amount over three years of the reporting period exceeds 50% of the net profit and the total dividend amount exceeds 300 million yuan, while the combined proportion of replenishing working capital and repaying loans in the raised funds exceeds 20%, they will not be allowed to go public.

The regulations for going public have become stricter, and so have the rules for shareholding reduction.

In the A-share market, the actual controllers or directors and supervisors of listed companies often become the counterparties to ordinary investors, with endless selling pressure and cunning ways to reduce holdings. The Shanghai Stock Exchange and Shenzhen Stock Exchange have provided specific opinions on this issue.

Shareholding reduction is not allowed for companies that have broken issue, broken net value, or failed to meet dividend targets; strict prevention and defense are required against tactics such as fake divorces, dissolving joint action relationships, and implementing gifts.

Sophisticated methods such as securities lending through the securities lending market, short selling, and subscribing to ETFs are not permitted.Essentially, all the tactics that people can currently think of have been blocked.

To make the reduction in holdings more transparent, the time frame for the reduction plan has been adjusted from a maximum of 6 months to a maximum of 3 months, in order to minimize the impact period of the reduction. Those who go through the bulk trading must disclose it 15 trading days in advance.

Regarding the identification of ST (Special Treatment) stocks, it is a significant highlight in the "Nine National Guidelines" and its supporting documents. It is said that many listed companies are in a panic.

What circumstances will lead to an ST designation in the future?

In the mainboard market, companies that do not meet the dividend standards will face strong binding measures.

The so-called non-compliance means that there are conditions for dividends, but the company is stingy, with the specific indicator being;

Companies that have a total cash dividend amount in the last three fiscal years that is less than 30% of the average annual net profit, and the cumulative dividend amount is less than 50 million yuan, will be subject to ST.

Many companies on the STAR Market do not have profits and cannot uniformly apply the dividend clause.

For this point, the new regulation is that companies on the STAR Market with a cumulative R&D investment in the last three fiscal years that accounts for more than 15% of the cumulative operating income, or with a cumulative R&D investment amount of more than 300 million yuan in the last three fiscal years, can be exempted from the ST implementation.

If there are conditions for dividends, the absolute amount of dividends is a cumulative 30 million yuan over three years.The ChiNext Board, also applicable to a cumulative total of 30 million over three years, also has exemptions.

The exemption situations are:

ChiNext companies that have a cumulative R&D investment of more than 15% of the cumulative business income in the last three years, or a cumulative R&D investment amount of more than 300 million yuan in the last three years, can be exempted from implementing the ST (Special Treatment) designation.

The aforementioned regulations will be implemented starting in 2025, which means that if companies do not wish to be designated as ST, they have 8 months left in 2024 to focus on dividends or R&D.

We have a list of companies that may currently be at risk of being designated as ST, and upon review, a total of 238 listed companies are facing the fate of being designated as ST.

The next step after being designated as ST is delisting. Delisting should be carried out as necessary, without an annual delisting quota. Companies that meet the delisting requirements must delist.

The determination of delisting is also a major highlight of the new "Nine National Rules."

Increased delisting thresholds:

For those involved in financial fraud, if the fraud amount reaches 200 million yuan or more in one year, and the proportion of fraud is more than 30%, delisting is required; if the fraud continues for two consecutive years, with a combined fraud amount reaching 300 million yuan or more, and the proportion of fraud is more than 20%, delisting is required; if the fraudulent behavior lasts for three years or more, once identified, delisting is required.

In addition to fraud, companies with internal control issues must also delist:For instance, when internal controls are out of order, and controlling shareholders illegally occupy funds (like Evergrande), if the scale reaches 30% of the net asset value or exceeds 200 million yuan, and if it is identified and not promptly rectified, delisting will occur.

Accounting firms that issue a negative opinion or are unable to express an opinion on a listed company for two consecutive years will be put on a blacklist. If they still issue a negative opinion or are unable to express an opinion in the third year, delisting will follow.

Many stocks in the U.S. market with little trading activity or long-term stock prices below $1 are subject to delisting, and the A-share market is also moving in this direction.

The new delisting rules have raised revenue or market value indicators. For the main board market, companies with a market value consistently below 500 million and revenue below 300 million will face delisting.

The STAR Market is temporarily not involved in the aforementioned adjustments.

If the business is not performing well and one wants to survive in the stock market, shell preservation is a way to escape like a cicada shedding its skin.

In the future, preserving a shell will be more difficult. This is because the new "Nine National Guidelines" propose that mergers and acquisitions should strengthen the relevance to the main business. For those who want to cross-industry to preserve a shell, I'm afraid it's not going to happen.

Regarding the quant trading that everyone is concerned about, the new "Nine National Guidelines" have clear regulatory guidelines.

In addition to improving monitoring standards and making quant trading reports more transparent to the market, regulatory authorities have also used differentiated pricing and other measures to increase the cost of quant trading.

It should be noted that, according to research by Zhongtai Securities, the annual turnover rate of private equity quant trading is around 400 times.According to a report by Caixin on April 12, currently, the market value of stocks held by algorithmic trading investors accounts for about 5% of the total circulating market value of A-shares, and the trading volume accounts for approximately 29%.

CITIC Securities statistics show that, as of the end of the third quarter of 2023, the management scale of public and private quantitative funds has reached as high as 2 trillion, with a year-on-year increase of nearly 50%. Among them, the scale of private quantitative funds has reached 1.58 trillion.

The ultra-high turnover rate combined with the ultra-high trading volume means that any changes in transaction costs will have a huge impact on quantitative trading.

Caixin disclosed that, as of the end of 2023, there were 119,000 quantitative accounts under surveillance.

In terms of the frequency of high-frequency trading, the China Securities Regulatory Commission (CSRC) currently only regulates those with a maximum reporting rate of more than 300 times per second or a maximum of 20,000 reports per day. This part of the quantitative trading accounts for 60% of the total transaction amount.

It is very likely that the scope of surveillance for quantitative accounts will be expanded in the future, and the surveillance threshold will be lowered. The days of unrestricted quantitative trading are gone.

This means increasing the cost of surveillance. It is obviously unrealistic to chase a Ferrari with a Wuling, but it is reasonable to buy a Lamborghini to keep up.

These investments are believed to be worthwhile, after all, the new "Nine National Articles" focus on "people-oriented" principles, giving small and medium investors a sense of gain, which is much more valuable than letting the quantitative giants suffer.

After reading the new "Nine National Articles" and the supporting documents, it is clear that the new village head came prepared, acting quickly, accurately, and decisively, which makes some people feel apprehensive.

Will a bull market come as a result?