Princelings and patronage pose barriers to cleaner IPOs
A graft probe into the mainland’s top securities regulator would be welcomed, but it is unlikely because of the many vested interests at stake
It's not everyday that mainland investors have a reason to cheer, functioning as they do in one of the world's worst-performing markets. This Tuesday, they did.
No, it wasn't a rally in the A-share index. It was a short, 38-word Weibo post saying the Central Commission for Discipline Inspection had sent an investigation team to look into the affairs of the China Securities Regulatory Commission, the mainland's top securities regulator.
Thousands of jubilant investors expressed their approval on online trading forums. "At last!" said one. "They [CRSC officials] have the final say in every juicy listing, yet no corruption case has ever been detected. It's ridiculous!" said another. "I finally see hope in our market. Teach the bloodsuckers a lesson," read yet another upbeat post.
Under the new leadership's take-no-prisoners crackdown on corruption, heads have rolled in the armed forces, state-owned enterprises and provincial leadership in rapid succession.
In a country where there are few investment opportunities, making any public offering almost as good as a blank cheque, one would think the CSRC would be an obvious hive of vice, and hence an obvious target for any graft-buster. There would naturally be no reason to question the validity of the news.
But investors' hopes were dashed within 12 hours when Reuters quoted a CSRC-related source denying the report.
The next day, an online article by Caijing magazine carried an unusually detailed report confirming a CSRC visit by discipline officials but called it a "routine check".
The report said the visit was part of the State Council's check on how well the CSRC had been implementing its policy to cut bureaucracy and simplify approval procedures.
"The disciplinary inspection team was there to facilitate the work of the State Council's supervision team," said the report. "It was not a 'specific investigation', as has been rumoured."
To some market watchers, the whole episode was a case of wishful thinking. "The CSRC involves the interests of too many princelings," said the retired boss of a mainland brokerage house.
Translation: if arresting the chairman of a state enterprise is moving the cheese of one powerful family, cleaning up the commission would be messing with many such families.
The cheese here is the "relationship fee", which ranges from a few millions to tens of millions of yuan, depending on the difficulty or urgency of the public offering.
To begin with, one has to hire the right "public relations firm". The services offered by this firm would include meetings or dinners with the right official; moving the application to the top of the pile; a short and sweet list of queries instead of the detailed, rigorous one reserved for the less resourceful applicants; and a referral to the least critical listing panel for vetting. But there is still no guarantee of success.
Bureaucrats get a slice of the fees the "PR firm" gets, but most of it goes to the families who have secured them the jobs.
These are, however, only small change compared with the other cheese, which is packaged under the innocuous banner of "private equity".
Sons and daughters of top families have set up various private equity funds over the years. These funds buy stakes in firms with listing potential at dirt-cheap prices, while their men in the commission secure them the listing approval. Once the listing happens, these princelings reap billions of yuan in profit.
This web of patronage is too tightly woven for anyone to touch. The only exception was the former CSRC chairman, Guo Shuqing.
In April 2012, he moved 41 officials from departments with approval power to back offices and brought the same number of back-office officials to these key departments. They included the Listing Department, which is the juiciest. Many of those affected had been in their jobs for almost a decade.
In less than a year, Guo was transferred to Shandong. Having held the job for just 18 months, Guo's bold reforms earned him a legion of fans in the market.
Those who were moved to the backwaters have since quietly found their way back. A former listing official is now with the hot Private Equity Department after a brief stint at the Audit Department. Such is the power of guanxi.