Listed companies form the backbone of China’s economy. Improving the quality of listed companies is the primary goal of their supervision. With the steady growth of listed companies, the frontline regulators of SZSE face challenges in balancing the efficiency and quality of supervision, improving allocation of regulatory resources, and promoting the well-regulated operation of listed companies. Given that the situation varies in the multi-tiered market, SZSE focuses on improving the quality of listed companies, thoroughly explores and promotes classified supervision by “grasping two ends and promoting the middle”, and continues to increase the efficacy of supervision by making more specific, targeted and concise efforts.
Carrying through the idea of classified supervision
SZSE has begun to evaluate the information disclosed by listed companies since 2001, marking its very first step toward classified supervision. In 2003, SZSE formulated and implemented risk classification standards for listed companies, and assessed their risk level in a dynamic manner based on regular report review, and carried out targeted supervision. In practice, SZSE takes into account market trends, new problems identified in supervision, and characteristics of each board to improve the evaluation system of classified supervision.
At present, SZSE owns an evaluation system for classified supervision covering more than 40 financial and non-financial risk indicators, taking into consideration information disclosure, corporate governance, standardized operation, operation capability, profitability and solvency, and comparing with peers and history data to accurately identify risks. Listed companies are classified into four categories, namely pass, special mention, sub-standard, and doubtful based on regular supervision practice. Besides annual evaluation, listed companies are also subject to monthly assessment and classification adjustment so as to early identify, track, handle and mitigate risks.
At the same time, SZSE firmly grasps the opportunities brought by information technology innovation, upholds IT-based technology to solve problems and mitigate risks, and integrates scientific and technologic advances with classified supervision. First, focusing on risk monitoring and early warning, SZSE has developed a risk monitoring system covering market operation risk monitoring system and three major businesses, namely stock pledge, securities margin trading and fixed income, so as to monitor market leverage in real-time and perform stress tests to enhance its ability to pre-research and judge risks. Second, focusing on identifying clues of violations against laws and regulations, SZSE has launched IT-based supervision projects, such as the self-developed program "corporate portrait", which can display and inquire the shareholding of and employment relationship between all enterprises registered in China’s industrial and commercial bureaus, explore and identify hidden related party transactions, and assist regulators in finding clues of unrelated related party transactions and fictitious transactions. Third, centering on identifying regulatory problems and employing new technologies such as machine learning and text mining, as well as annual report post-review assistance system and the "corporate portrait" system, SZSE has analyzed and summarized more than 20,000 issues found in thousands of annual reports and restructuring inquiry letters issued by itself in recent years. SZSE has primarily realized automatic review of annual reports and restructuring plans combining enterprise business, finance, equity, shareholders, information disclosure, regulatory evaluation and other information. According to statistics, the "corporate portrait" system has revealed more than 10,000 abnormal concerns in the 2018 annual report review for companies listed on SZSE.
Enhancing the quality and efficiency of supervision by promoting classified supervision
Upholding the principle of “grasping two ends and promoting the middle”, SZSE focuses on classified supervision and continues to make supervision more professional, targeted and effective.
On the one hand, for companies operating in compliance with regulations, SZSE supports them in becoming better and stronger. SZSE steps up efforts to provide support for listed companies conducting high quality information disclosure and operating in pursuant to regulations with continuous effots, so as to boost their inner motivation. First, SZSE improves the differentiated review model by appropriately exempting quality companies from regular supervision, such as periodic report review; second, SZSE further promotes the application of evaluation and assessment results of classified supervision and information disclosure, and actively supports listed companies to achieve direct financing and leap-forward development in the capital market in terms of differentiated review procedures for mergers and acquisitions and feedback of continuous supervision over re-financing; third, SZSE continues to deepen industry-based supervision, explores to create “circles of friends” for listed companies operating in different industries, summarizes and shares the inherent laws and key factors of outstanding companies in pursuing excellence, builds a benign mechanism whereby listed companies interact with each other, gives full play to the role of industrial leaders in uniting, setting good example for, and motivating industry participants, and jointly cultivates a good ecosystem for the capital market.
On the other hand, for high-risk companies, SZSE “suits the remedy to the case”. Adhering to the principle of concise management, SZSE focuses on special-mention companies with high risk identified in classified supervision. For capital occupation and guarantee violations, SZSE pays close attention to companies with high balances of deposits and loans, high prepayments, overdue debts, large provisions for asset impairment, and high proportion of pledges by shareholders. SZSE specifies risks as indicators and includes them in the classified supervision evaluation system to effectively identify potential risks. Moreover, SZSE, based on its supervision practice and experience, reconstructs the specific financial indicators from the typical characteristics of financial frauds of listed companies, forming a label system for analyzing enterprise risks.
Relying on information disclosure, SZSE cracks down on violations of laws and regulations and increases accountability. First, SZSE pushes for whole-process supervision by putting in place dual review on periodic reports, regulatory inquiry in special cases and on-site inspection. In the first half of 2019, more than 2090 letters of concern, letters of inquiry for periodic reports and other letters were issued. SZSE went deep into and continuously tracked audit and evaluation institutions suspected of being unqualified in annual report review, and reported 60 clues to CSRC in a timely manner. SZSE also joined hands with securities regulatory offices in establishing an efficient and sound cooperative supervision mechanism. Second, SZSE accurately cracks down on irregularities and promptly takes disciplinary actions. In the first half of 2019, SZSE initiated disciplinary actions 61 times, including 14 cases of public denouncement, mainly due to violations of “hollowing out” the companies by major shareholders, false performance, and dishonesty; 15 cases being investigated and strictly punished, mainly because listed companies were hollowed out by major shareholders, and the rights and interests of small and medium-sized shareholders were seriously damaged. 29 people from six companies including *ST Shengda Forestry, *ST Oriental Ocean, and *ST ZNHI were publicly condemned. Additionally, over 10 cases of disciplinary punishment are underway. Third, SZSE creates a powerful synergy for conducting oversight and explores to mitigate and dispose risk. Uniting local governments and local securities regulation offices, SZSE urges major shareholders and related parties to come up with feasible measures to safeguard the legitimate rights and interests of small and medium-sized investors. In the first half of 2019, nearly CNY9.8 billion of illegally occupied funds were recovered, and CNY1.7 billion or so illegal guarantee lifted.
Upholding long term classified supervision
Emerging technologies such as big data, cloud computing and artificial intelligence are going strong, which create a solid foundation for responding to new issues and challenges arising from oversight over listed companies, and strengthening classified supervision. In this context, SZSE strictly acts on CSRC’s requirements of holding the market, the law, the risk and professionalism in awe, and creating a strong synergy of the whole society. Centering on the goal of improving the quality of listed companies, it further promotes classified supervision, focuses on oversight with greater efficacy, urges listed companies and major shareholders to not cross the line (i.e., do not disclose false information, engage in insider trading, manipulate stock prices, or harm the interests of listed companies), and takes direct and first responsibility to regulate and improve itself, with a view to achieving high-quality development of listed companies.
First, continuing to upgrade the evaluation system of classified supervision, and improving the ability to better identify risks. On the one hand, SZSE upgrades the evaluation indicators and calculation methods for higher efficiency, for example by putting in place unified evaluation indicators for supervising different Boards, and improving and adjusting indicators on the basis of supervision practice. On the other hand, SZSE channels in data from more sources, puts semi-structured and unstructured data from corporate announcements, news release, investor complaints and research reports issued by securities brokers into better use, further improves data requirements in the banking industry and steps up classified supervision in a bid to make more comprehensive judgment.
Second, effectively using the idea and evaluation results of classified supervision, so as to make supervision more targeted. SZSE tightens supervision over companies with frequent irregularities and high risk on an on-going basis, and places greater efforts on increasing the cost for violating laws and regulations. Meanwhile, it explores to provide more support for quality listed companies seeking development in the capital market.
Third, pushing ahead with IT-based supervision, and building a mechanism for tracing the application of emerging technologies such as big data and artificial intelligence. SZSE continues to explore how emerging technologies can be applied in supervision, increases its ability to be better positioned to identify and handle problems, promotes further integration of smart technology with supervision practice, and fosters a new supervision model underpinned by both human intelligence and technology.