The departure this week of China's top securities regulator, Xiao Gang, leaves his successor, Liu Shiyu, with the difficult task of restoring investor confidence in mainland markets. The 2015 government intervention in the stock market makes this hard, but Liu is even less likely to improve the communication and transparency in decision-making that investors want to see. His boss, after all, is Communist Party Secretary Xi Jinping.
Rumours of Xiao’s demise sprouted in the wake of the failed attempt to prop up A-share valuations, and now he is the government’s fall guy. Xiao did push through improvements during his tenure at the China Securities Regulatory Commission. For example, it has become more consultative in advance of important decisions, and does a better job explaining its actions to industry leaders, according to one mutual fund executive in Shanghai.
Nor was the CSRC without accountability under Xiao. In January, he and vice chairman Fang Xinghai acknowledged mistakes such as the abortive introduction of a circuit-breaker based on the CSI300 index. It is unusual for a Chinese regulator to admit mistakes – although their climbdown was already public and obvious, given that the circuit-breaker lasted a mere four days at the start of the year.
More important to investors is what lay behind this mea culpa. Fang had told the World Economic Forum in Davos that the CSRC intended to accept more market volatility and reduce its intervention. This has led investors to hope the government would really allow market forces to play the “decisive” role promised by Xi shortly after he assumed the presidency in 2012.
But perhaps not. Li Yuanchao, China’s vice president, said at the same venue that Beijing stood ready to intervene again in order to “look after” the interests of retail investors, a remark taken by Davos-goers to mean the government would continue to intervene to maintain market stability.
This discrepancy reveals the limits that the CSRC’s incoming chairman will face. Liu is an experienced technocrat, having served as deputy governor of the People’s Bank of China (PBoC) as well as chairman of state-owned Agricultural Bank of China. But even if he and the CSRC bureaucracy are financial professionals keen on reform, they must operate within the constraints of politicians such as Li, who wield more power.
The most controversial policy decisions in last year’s bailout were not those of the CSRC, which lacks such powers. The same is true of the biggest market liberalisations.
The CSRC is a public agency under the supervision of the State Council, China’s highest administrative body, which is led by Prime Minister Li Keqiang. It is the State Council that would have approved policy changes such as the index circuit-breaker, and whose blessing will be required to enact expected projects such as the Shenzhen-Hong Kong StockConnect, or proposed amendments to the Securities Law. In such matters, the CSRC’s job is to implement and to supervise, not to decide.
Enter Liu into this supervisory role, at a time when China’s leadership acknowledges the need to further open securities markets to foreign investors to improve the quality of those markets, but which also fears the impact this could have on market levels and retail confidence.
Liu will not have the power, by himself, to change the way CSRC manages these things.
“A change of top regulator does not mean a change of the system,” said Hung Hao, chief strategist at BoCom International in Hong Kong. “Every time they appoint someone from a commercial bank [as chairman], there’s not much difference.”
Nor is Liu the only such mandarin operating within opaque political constraints. The PBoC has also been criticised for its poor communication skills during its delicate moves to put the renminbi on a more market-based footing. PBoC governor Zhou Xiaochuan’s long silences may not be his choice; no one knows.
Defenders of the Chinese style of economic management – which many in the West praised for many decades – say it is unfair to compare a securities regulator with only 23 years of history to the longstanding traditions in Western countries. In other words, don’t expect Fed chair Janet Yellen-style openness any time soon.
But China’s policymakers may not have the luxury of taking a long time to catch up, not if they wish to transform its economy into one based on services, innovation and market-based decisions. In the short term, that means giving people such as Liu Shiyu more of a say in how securities markets are run.