China's new securities regulator must continue on path of market reform
Hu Shuli says Guo Shuqing's leaving must not mean a U-turn on efforts to build a healthier regulatory system, and the early signs are reassuring
With his departure as chairman of the China Securities Regulatory Commission, Guo Shuqing became the agency's most short-lived chief. We don't know how he felt, but the stock market swing on March 18, the day Xiao Gang took office, suggested that investors were not yet sure what to expect of Guo's successor.
Guo's departure after 17 months in office is not good news for a securities market in need of overhaul. The various schemes he launched were aimed at long-term market reform, and their effects can only be felt after a few years of implementation. To be sure, the deregulation of the stock market and funds must continue, to prevent a return of the old ills; efforts to securitise bonds and assets will come to a dead end if they are put on hold now; and the "zero tolerance" audit policy, especially, must be fully backed, for there can be no U-turn.
Continuity in the regulatory framework is a priority. That does not mean Xiao must only follow in Guo's footsteps, but the new chief has the responsibility to deepen market reforms.
So what kind of securities regulator does China really need?
Of the reforms introduced over the past year, the most challenging is to revamp the framework that regulates the issuance and delisting of stocks. During his tenure, Guo did not fully resolve the problems with the application and vetting of a listing, but the direction of change is clear. The commission has set out to make delisting simpler and quicker, raise the standards for the reorganisation of corporate assets, enhance the transparency of the vetting process and crack down on financial fraud.
We also recall Guo's words when he first took office, "Could we stop vetting IPO applications?" The question reflected the open mind of a progressive regulator.
At their heart, Guo's reforms are guided by a belief that the market should be left to allocate resources, while the government should retreat to its proper role as service provider and regulator. China needs a securities regulator that works towards this vision.
At a time of leadership transition, any perceived hesitation about reform could undermine market confidence. So it's essential that there is policy continuity.
Being the securities regulator is a tough job. The biggest challenge is to stick to the job amid the market's rise and fall. When the stock index falls, interest groups will invariably lean on the regulator with the cry of safeguarding investor interests. But boosting the stock index is not the job of the regulator.
By the same token, the tendency to judge the performance of the regulator by the performance of the market is misplaced. It creates the wrong impression that the regulator has a political task to push up the index. If that were the case, the Chinese stock market would rise on the back of favourable government policies, and individual investors would be the ones who suffer when the market falls. In the long run, the stock market will remain sluggish if its market fundamentals, structure and regulatory system are not improved.
When Zhou Xiaochuan took the chair in 2000, he pointedly stressed that the commission's job was not to manage the stock indices but to monitor them. As its chief, he introduced reform measures that sought to cut the powers of the regulator. Sadly, Zhou left the post after serving only 34 months, and the commission's focus soon shifted thereafter.
Guo, too, did not pursue policies that set out to boost the stock index, and was careful to say little beyond expressing his confidence in the A shares and blue-chip stocks. Faced with a sluggish market, his response was not to demand central government help to lift it, but to focus on strengthening the market framework to try to raise confidence.
It would seem that regulators could only win support if they made it their job to boost the market, and all that was expected of them was an artificially propped-up market.
But Guo set out to change the script. His hard work earned him popularity and respect, and people in the industry were largely sorry to see him go. This was not only because the blue-chip stocks he backed are now doing well, but also because of worries that the reforms he advocated for a stronger, healthier capital market might come to an end.
The new chairman of the commission should take heart: the rise and fall of the stock market should reflect economic fundamentals, and any effort to "stabilise" it would be misguided.
The stock market attracts all sorts of investors seeking profit. As its regulator, the chairman of the commission need only adopt an open, fair and streamlined system to regulate market transactions. This is his proper role. Such an approach is good for the market, and consistent with the policy direction of the new government.
The new chair of the commission is a low-key person who has spent most of his career in banking, including at the central bank. We don't yet know his thinking on the stock market. But Xiao has proved himself capable of plans that respect the market and are mindful of risks. He is also known to have an international outlook. If he brings these qualities to the commission, the reform effort will not fail.
A day before he took over, Xiao pledged policy continuity at the handover meeting at the commission. This is a good start.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com