In the Proposal Formulating the 13th Five-Year Plan (2016-20) on National Economic and Social Development, the Central Committee of the Communist Party of China vowed to accelerate the financial system's reforms. The financial sector needs to accomplish the following goals: First, they need to raise their efficiency in serving the real economy. Next, they should establish a more transparent and healthier capital market. Third, a much needed overhaul of the issuance and trading mechanism of stocks and bonds. Finally, they need to encourage direct financing and lower leverage ratios.

That means the major task for China's financial reform is to ensure the sound development of the capital market, which can provide more financing channels for the real economy, reduce corporate financing costs and diversify resident investments. If the financing functions of the stock market cannot be fully utilized, the above goals will not be met, making it imperative to resume IPOs.

The regulator must also take into consideration the real-time conditions of the stock market when resuming IPOs. If the stock market is not well restored, an IPO relaunch will bring adverse impacts to the market. To avoid this, the CSRC had also issued some new policies for the IPO mechanisms.

According to Deng, removing the requirement for full payment of shares in advance will prevent the IPOs from locking up too much capital. For instance, the 25 companies launching IPOs in early June this year locked up 5.7 trillion yuan ($896.23 billion) of subscription capital. Clearly, the new measures should greatly alleviate pressures on the market brought by IPOs, which used to drain a lot of liquidity from the stock market.

More importantly, the restoration of IPO highlights that a self-correction of the stock market is entering a new stage: The investment function of the stock market is resuming, and investors' confidence is recovering. After the financing functions are fully restored, the stock market will see a new situation of supply and demand, which should invigorate the market.

After the financing functions of the stock market recover, improving the market order and readjusting the ideas of supervision will both be crucial steps in ensuring a new round of bull markets.

The CSRC must draw lessons from the abrupt burst of the previous bubbles. In order to make the A-share market a financing market which serves the real economy and a safe market for people to make investments, the watchdog must establish surveillance of the stock market, improve the market order and define a strong regulatory position.

This is an edited excerpt of an article written by economist Yi Xianrong and published in National Business Daily