FT Beyondbrics: China’s new securities regulator: more reformist than you think

FT BeyondBrics, March 21 2013

What should we make of the appointment of China’s new top securities regulator? The expectations are: stability, predictability, and no great drive for further market reform. But we might all be surprised.

Xiao Gang (pictured), until this week the chairman of the Bank of China, is being interpreted as a cautious new head of the China Securities Regulatory Commission.

The first question to ask about his appointment is: what was wrong with the old guy? Guo Shuqing lasted just 17 months in the CSRC job and now appears likely to be given a governorship of a major Chinese province, probably Shandong in the northeast: a big job, for sure, but not one with a real national imperative.

To see the article as it ran, click here: http://blogs.ft.com/beyond-brics/2013/03/21/chinas-new-securities-regulator-more-reformist-than-you-think/#axzz2fcki9Cnw

Guo was known as being reform-minded and outspoken. Many both in and outside China consider his most significant measures to have been positive: removing dud companies from China’s domestic stock markets, cutting trade fees, promoting transparency and making it easier for new listings, provided the new companies were good enough. It’s hard to see what, if anything, he has done wrong.

Instead, then, the question is: what has Xiao done right? Clearly, Bank of China has grown impressively during his 10-year tenure, which has included dual listings in Shanghai and Hong Kong and a raft of organisational restructuring. (That said, objectively one would probably argue that ICBC is the big four bank that boasts the greatest scale and momentum on the world stage). Known for prudence, Xiao had long been earmarked for other Chinese financial policy jobs. While he had been expected to become the next head of the People’s Bank of China, the central bank, a job that clearly does merit prudence at the top, the securities regulator job was unexpected.

The message seems to be that at a time when China is bedding in a new premier, it wants a safe pair of hands in charge of securities regulation: not stopping reform, necessarily, but certainly not doing anything unpredictable. As Finance Asia notes: “His only high-profile comment on China’s capital markets came in a carefully worded article on the country’s shadow banking system, which was published by China Daily last October.”

But is that the whole story? It’s always worth looking at local press for a counterpoint to international understanding of these movements. Caixin reported today that “Xiao Gang considers international standards important, sought to put more women in management positions and started learning English in his mid-40s.” This, in local terms, makes him something of a reformist, Caixin argues: quite different to the staid and conservative image foreigners tend to have of the man. Indeed, one regulatory change to be announced since his appointment – an expansion of the Renminbi Qualified Foreign Institutional Investor (QFII) scheme to international investors – looks thoroughly reform-minded, though one imagines its genesis predates him. And an article he wrote in China Daily in February has resurfaced, in which he wrote: “The financial industry should not be complacent. Instead, it must seize the opportunity to continue its reforms and restructuring.” Doesn’t sound too much like a conservative stick-in-the-mud.

Whatever he is like, he has a big job. China’s stock market may have become somewhat more transparent under Guo but it is still opaque and troubled by allegations of widespread insider trading. It remains volatile, too, which underlines the challenge: continuing reform without undermining market stability. Local press noted that the Shanghai Component Index lost 1.26 per cent on the first day of trading after his appointment was confirmed at the weekend, and linked it to him, citing investor concern that reform would slow under his leadership (this is a pretty tricky claim to stand up conclusively).

One thing he is expected to tackle is shadow banking: the growing proportion of credit in China that is believed to be supplied by non-banks, or by off balance sheet vehicles owned by the banks. In particular, he has complained about wealth management products that pool investor capital without transparency, and has even once referred to some of them as resembling ponzi schemes.

He also needs to make a call on when IPOs will restart in China. None have been approved since October; it is said that more than 800 firms, of variable quality, are in the queue to list in Shanghai and Shenzhen. They can’t wait forever.