Best intentions

China’s securities regulator is aiming to improve the quality of listed companies, but that is easier said than done.

The China Securities Regulatory Commission wants to raise standards by increasing penalties for listed companies that commit financial fraud, and trying to ensure that weak companies don’t make it to exchanges. It plans to inspect a third of listing candidates, up from around 5% now, and conduct more stringent reviews of unprofitable companies.

Those are admirable goals, but will take a lot of manpower and expertise. Will the regulator be able to spot red flags in reports that have already been signed off by auditors? The listing process in China has already slowed to a crawl and the new rules will cause it to drag on further.

The CSRC also wants to crack down on “pseudo-tech” companies – those that overstate their technological innovation. Even tech-focused investors have struggled to sift through the tech hyperbole, and the rally in artificial intelligence-related stocks in the US suggests that fund managers would rather follow the crowd than try to understand the claims behind the technology.

China understandably wants to restore confidence in its battered equity market, but investors’ concerns are mainly about the weak economic outlook and the unpredictable regulatory environment. Chinese stock exchanges don’t seem to have significantly more cases of fraud than the US equity market, for example, and the US Securities and Exchange Commission allowed the likes of Luckin Coffee to list.

The CSRC has good intentions, and it’s certainly sensible to try to raise standards for China’s stock markets. But Chinese stocks will continue to languish until there is a rebound in the economy or US-China relations improve. Those things are out of the regulator’s hands.