The problem with China’s financial regulator: Too much power and too little talent
China’s top leaders are seen in a rush to strengthen their grip over the financial regulators to avoid further missteps and restore investor confidence, but senior officials and analysts are warning the key problem with the country’s capital markets is not the lack of top-down guidance but the way it is dispensed.
The State Council, China’s cabinet and the official supervisor of the central bank and the watchdogs of banking, securities and insurance markets, has upgraded a financial affairs department to bureau level to improve coordination between the regulators, local media reported last week. Li Zhenjiang, former vice-president of Agricultural Bank of China, has been appointed deputy director responsible for its daily operations, sources said.
Meanwhile, Huang Qifan, the current Chongqing mayor known for his financial acumen, has been handpicked by President Xi Jinping to become the finance tsar, streamlining the chaotic and fragmented financial market regulation.
“Clearly the top decision-making body feels they are in urgent need to place financial experts at the top and ward off any financial crisis, a goal that has been stressed by President Xi himself,” said a Beijing-based think-tanker who did not want to be named.
In a speech at an annual work conference at the weekend, Xiao Gang, the beleaguered chairman of the China Securities Regulatory Commission (CSRC), said the recent “abnormal volatilities of the stock market shows the loopholes in CSRC supervision” and that the securities watchdog should “learn the lessons”. But he also noted that CSRC officials are under great pressure and many of them have resigned.
The CSRC had been criticised for introducing a poorly designed circuit breaker and then scrapping it four days later. The saga coincided with a plunge in Chinese stocks that is estimated to have wiped out all the gains made last year. The panic sell-off spilled over to global markets and dragged down Hong Kong’s benchmark Hang Seng Index to a three-year low as investors began to unload Chinese stocks in the city.
Analysts are blaming the central bank’s poor communication skills for misleading investors already confused over mixed policy signals. A sharp devaluation of the yuan since the beginning of the year, for example, appeared to have the tacit approval of the central bank until last week, when the People’s Bank of China abruptly intervened in the Hong Kong market aggressively buying up offshore yuan and pushing up the interbank lending rate.
What happened is “100 per cent not encouraging” for international investors in the near term, said Kay Van-Petersen, global macro strategist at Saxo Capital Markets. He also noted that China is a young market with young investors and young regulators, and it would take time to achieve maturity.
But there are already “too many chefs in the kitchen, half saying let’s not add anything, and the other half having a cupboard full of ingredients”, he added.
Li Jiange, a former senior regulator, said the CSRC “is having a crisis of talent” and if not sorted, it will lead to stock market crises over and over again.
Some of the top talent have left the CSRC for better paying jobs while some have fallen to the ongoing crackdown on corruption.
“I was the vice-chairman of the CSRC 15 years ago. Many people who have recently been brought under investigation used to work for me…They were not bad people at the time. On the contrary, they were very capable and very hard working,” he said at a speech in Beijing this month.
“Excessive power at the hands of regulatory supervisors is problematic, creating a fertile ground for corruption,” said Li, who was the CSRC vice-chairman between 1994 and 1998 and is known as an outspoken reformist. He is now the vice-chairman of Central Huijin Investment, a unit of China’s sovereign wealth fund.
Li also questioned the CSRC’s ability to make proper arrangements in advance, removing policy uncertainties.
A source close to the CSRC said the final arrangements of the circuit breaker were cleared by chairman Xiao Gang last year without a review by the State Council. The CSRC took just four months to design and introduce the mechanism after announcing the plan in early September to stabilise the markets in the wake of last summer’s meltdown.
Moreover, the regulator spent just three weeks collecting input for the draft regulation. In its feedback obtained by the South China Morning Post, the Shenzhen bourse suggested widening the gap between the two stages of the circuit breaker to avoid accelerating a market slump. The CSRC ignored the advice.
“The regulators should be humble and good learners. The most crucial thing is, we should adopt a good system, to attract and keep talent,” Li said.