China stock market

Shanghai stocks swing as Xiao Gang takes over top CSRC job

Shares recover from early investor uneasiness over appointment of new top regulator on worries that it would lead to policy changes

PUBLISHED : Thursday, 21 March, 2013, 12:00am
UPDATED : Thursday, 21 March, 2013, 5:34am

Mainland equity investors initially appeared unimpressed with the appointment of Xiao Gang as the chairman of the China Securities Regulatory Commission.

When he took office on Monday, the Shanghai market fell 1.68 per cent. But the market rebounded 0.78 per cent and 2.66 per cent in the next two days.

Among the concerns of the investors was that personnel changes would result in an about-face in policymaking by the new securities regulator.

But Xiao, who resigned as chairman of Bank of China to take up his new role, has pledged to keep CSRC policies consistent, sending a clear message to investors that Beijing is adamant on deepening market-based reform as part of efforts to overhaul the financial sector.

When the country's 100 million stock investors bade farewell to Guo Shuqing, a reform-minded technocrat who led a series of policy changes during his 18-month tenure at the CSRC, they took it for granted that his expected appointment as Shandong governor was a "demotion" because he upset vested interest groups.

Guo was appointed the province's deputy party chief on Tuesday.

Guo gave priority to the interests of small investors after taking office in late 2011, called a timeout for high-priced initial public offerings, urged zero tolerance on insider trading, and directed a huge capital flow into A shares while tightening delisting rules.

Investors regarded him as a white knight for rescuing the beleaguered market and bailing them out of severe losses.

However, it was rumoured that Guo's efforts dealt a heavy blow to vested interest groups, including listing hopefuls, private equity and venture capital funds, and corrupt officials.

Guo also actively proposed creating a national-level integrated bond market with the two stock exchanges playing a dominant role rather than the interbank trading system under the watch of the central bank.

The reform measures pitted him against other ministry-level authorities and the vested interest groups, which investors believed resulted in his "demotion".

Sources with knowledge of the personnel arrangements disagreed, describing it as a tactic by the country's new leaders to groom Guo for a future political career.

It is just the beginning of another round of horse trading in the financial sector, but the personnel changes would have minimal impact on policy directions, according to the sources.

Party cadres who garner experience in regional areas usually gain a fast ticket to the top echelons of power.

Shandong, one of the biggest provinces that is of vital importance to the national economy because of its huge industrial and agricultural output, has generated three standing committee members for the Politburo in the past two decades.

The appointment as Shandong governor is by all means an endorsement of Guo's capability and integrity

"The appointment as Shandong governor is by all means an endorsement of Guo's capability and integrity," said a Beijing-based source close to the CSRC. "The leadership certainly wants to further implement the reforms in the capital market."

Premier Li Keqiang said at the weekend his cabinet was determined to defend the people against vested interests.

Guo was a top candidate to head the central bank, a more important role in the nation's financial system, but Beijing's last-minute decision to retain Zhou Xiaochuan as governor of the People's Bank of China led to the new arrangement for Guo, the sources said.

Liu Jipeng, an economist with the Capital University of Economics and Business, described Guo as a rising political star who would become a top financial policymaker in five years.

While he was at the CSRC, Guo successfully lobbied the central leadership and co-ordinated with the relevant authorities to introduce incentives to bolster investor confidence.

The recent hefty increase in the renminbi qualified foreign institutional investor quota to 270 billion yuan (HK$337 billion) from 70 billion yuan - a move to widen Hong Kong institutions' A-share purchases - provided a vivid snapshot of good teamwork between the CSRC and the foreign exchange regulators.

The market drop on Monday reflected investors' worries about policy changes that could hurt their interests.

"Investors were spooked by concerns on when the IPO market would reopen," said Shenyin Wanguo Securities analyst Qian Qimin. "Most of them were taking a wait-and-see attitude towards the personnel changes."

Guo told the media earlier that the temporary suspension of new listings in October last year was part of a policy aimed at protecting investors' interests.

Xiao, a former deputy central bank governor who was credited with leading Bank of China's expansion in the past 10 years, is also known as an enterprising technocrat with sound knowledge about the finance industry.

In October last year, he boldly questioned the wild growth of wealth management products, a rare self-criticism made by a top boss of a major state-owned bank.

Xiao earned respect from investors and bankers for his keen perception when the failure of a wealth management product offered by Huaxia Bank was exposed to the public in December.

It is widely believed that Xiao's remarks on sticking to CSRC's existing policies, or a legacy left by Guo, represents his resolve in further driving the market on par with international practices.

During his 10-year tenure at Bank of China, Xiao actively introduced Western management style into the country's largest foreign-exchange lender to control risks while pursuing stable growth.

He is also seen as a promising "young cadre" in the financial sector and is expected to assume a higher post in government hierarchy in future.