Stock market under Guo shows how politics clashes with reform
Hopes were high when Guo Shuqing was appointed to head the China Securities Regulatory Commission, but politics soon got in the way …
Hopes are riding high that China's new leaders will live up to their promises and press ahead with much-needed economic reforms.
But a look at the mainland's stock market and how it is regulated provides an object lesson in just how difficult implementing real reform can be.
In October 2011, when the former China Construction Bank chairman Guo Shuqing was appointed to head the China Securities Regulatory Commission, hopes soared that a brave new era was dawning for equity markets.
With his experience in the commercial sector, Guo was widely perceived as someone who understood the way markets should work. He was seen as just the chap to shake up the stock supervisor and place market regulation on a new footing for the future.
A shake-up was badly needed. Unlike regulators in other countries, the CSRC was not concerned either with ensuring a level playing field for market participants or with protecting investors' interests.
Instead the regulator's job was to ensure that state-owned enterprises were able to raise equity capital at cheap rates.
As a result, unlike regulators elsewhere, the CSRC did not stick to satisfying itself that listing applicants met threshold standards of governance, transparency and profitability, then let the market get on with deciding whether or not to buy their shares.
Instead, it drip-fed the market with initial public offerings, selected from a queue of applicants on a case-by-case basis according to their political influence. And in order to make sure the shares were sold at attractive prices for the issuers, the regulator only allowed new offerings when it judged valuations were suitably high.
If valuations were not high enough, the CSRC did not shy away from twisting a few arms in the brokerage and fund management community in an attempt to make sure there were sufficient buyers to get them up.
Under Guo, all that was supposed to change. As he explained, he wanted to transform the regulator, shifting it away from controlling access to the market and steering prices, and moving it to a more conventional supervisory role.
It was a worthy aim. Unfortunately, there was a problem. When he took over the CSRC in October 2011, mainland-listed A shares were sliding into an increasingly vicious bear market, having dropped almost 20 per cent over the preceding 12 months.
The fall continued, and over the course of last year Guo abandoned all pretence of being a dispassionate, even-handed regulator, as his attempts to talk up the market became increasingly desperate.
He advised everyone to buy as shares were "rare investment value". He allowed investors to leverage up. And he pushed companies to launch share buy-backs and to increase their dividend payments.
Nothing worked. So finally, under political pressure to engineer a market recovery to coincide with the leadership transition, in the last quarter of last year Guo halted new share issues lest they dilute demand.
Share prices have climbed since, thanks largely to a surge in liquidity, but Guo is still trying to massage the market higher.
Speaking in Hong Kong this month, he protested that mainland stocks were still undervalued. "The high quality of the companies is not reflected in their price to earnings ratios," he complained.
He also admitted that the number of companies queuing for regulatory approval to issue shares had grown to 900, up from about 750 in October, making a nonsense of his aims to move the regulator away from controlling access to the market.
In many ways, Guo's tenure at the CSRC illustrates the difficulty of pushing through reform in China.
Everyone knows what needs to be done. But, time and again, political imperatives get in the way and forbid actual implementation.