China removes top securities watchdog amid turmoil

Beijing / Bloomberg

The head of China’s securities regulator has been removed from his post after last year’s $5 trillion stock-market bust, an unprecedented government rescue and a renewed crisis as plunging Chinese equities last month reverberated around the world.
Xiao Gang, 57, a former head of Bank of China Ltd., had been chairman of the China Securities Regulatory Commission since March 2013. His exit was announced on Saturday by state-owned Xinhua News Agency, which cited a State Council statement. Xiao’s replacement is Liu Shiyu, who previously served as chairman of Agricultural Bank of China.
It was on Xiao’s watch that unchecked leverage drove a jump in equities from late 2014 before a collapse in June last year that triggered government stock purchases, restrictions on stake sales and a temporary ban on initial public offerings. In an about-face, the CSRC in January scrapped circuit breakers within four days of their introduction as they deepened turmoil rather than stabilized the market.
“Somebody needed to bear responsibility after the suspension of the circuit-breaker system,” Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp., said before the announcement. Xiao’s exit is to show investors that the government is concerned about their losses, Zheng said.
Systemic Risks
China’s Premier Li Keqiang earlier this week became the the most senior official to fault regulators’ reaction to the market turmoil, saying at a State Council meeting that they didn’t
respond actively to declines. Li didn’t specify which regulators, and defended the decision to intervene in markets as necessary to head off systemic risks, according to a Beijing News report carried on the government’s website.
“The worst thing the CSRC has done is to rescue the market at all costs without thinking about the consequences,” said Liu Shengjun, deputy director of the CEIBS Lujiazui Institute of International Finance in Shanghai. “The market rescue is the biggest setback for China’s stock market in its 25 years of history. The market system is moving backward.”
During Xiao’s stint at the helm, another senior CSRC official was one of those caught up in probes across the finance industry by the Communist Party’s anti-graft investigators. Yao Gang, a vice chairman at the regulator, was targeted in November for “alleged serious disciplinary violations,” language often used for corruption probes. No comment has been available from Yao.
Xiao’s predecessors include Zhou Xiaochuan, the central bank governor, Guo Shuqing, the governor of Shandong province, and Shang Fulin, chairman of China Banking Regulatory Commission.

Market Bubbles
As a former state bank chairman, Xiao saw first-hand the roll-out of record amounts of credit, the government’s response to the global financial crisis. Margin lending for stock purchases soared in the lead-up to the market’s collapse in June last year.
As a regulator, Xiao was criticized for helping to talk up the market as a bubble developed, saying in March last year that China’s reform plans were driving the rally. As early as December 2014, analysts at Capital Economics Ltd. had seen signs of a stocks “mania” developing.
His departure comes as China plans a shift in its IPO structure to a registration-based system, loosening the grip of the CSRC, which has controlled the timing and pricing of listings. His move also comes amid discussion of the potential for China to reorganize its financial regulators. In November, Wu Xiaoling, a former deputy governor of the central bank, pushed the case for the People’s Bank of China to be dominant and urged officials across agencies to ditch their territorial approaches.

‘Gambling Mindset’
New securities regulator head Liu joined Agricultural Bank, the nation’s third-largest lender, in 2014. He had previously been a deputy governor at the People’s Bank of China. Before the PBOC, Liu worked at China Construction Bank Corp. and the nation’s economic reform commission. He holds a master’s degree from the economic management school of Tsinghua University in Beijing.
While at the central bank, Liu spoke in 2014 of risks to the financial system from shadow banking, saying that a “gambling mindset” was pushing up costs for the real economy as people channeled money into short-term investments such as wealth-management products.