After the fall: CSRC chief Liu Shiyu faces uphill battle to reform China’s stock markets

Liu takes on the prestigious but unenviable job of curbing share market chaos and lifting investor confidence

PUBLISHED : Sunday, 21 February, 2016, 11:50pm
UPDATED : Monday, 29 February, 2016, 12:18pm

If there is a senior Chinese cabinet job that seems to denote power and prestige but is the daily target of public anger and ridicule, the chairmanship of the China Securities Regulatory Commission, the mainland’s top securities watchdog, would have to lead the list.

Just as mainlanders prepared for the final binge of feasting for the Lantern Festival on Monday to mark the end of the Lunar New Year celebrations, the mainland authorities announced the removal of Xiao Gang as the chairman of the CSRC on Saturday. Photos online showed a small group of senior commission officials lined up to say farewell to Xiao, whose job security had been the target of intense speculation over the past six months since mainland stock markets fell more than 60 per cent from their record highs.

His fate seems to have been sealed early last month after the ill-considered introduction and hasty rescinding four days later of the circuit-breaker mechanism, an about-turn that spooked markets at home and beyond, and wiped out several trillion yuan in market capitalisation on the mainland alone.

READ MORE: Meet the veteran banker tasked with bringing order to mainland stock markets as new securities regulator chief

The timing of the announcement about Xiao suggests some attempt not to spoil his mood during the country’s most important festival but it also sends a message about marking a new phase with the Year of Monkey, which started this month.

The mainland’s stock markets are poised to open higher on Monday, with investors likely to cheer Xiao’s removal and feel some optimism that his successor could do a better job.

But their optimism is not going to last long. Xiao’s successor, Liu Shiyu, formerly chairman of Agricultural Bank of China, has become the eighth CSRC chief in 26 years to oversee the country’s roller-coaster, casino-style share markets.

Like Xiao, Liu also rose through the ranks of the mainland’s state banking system, mostly at the country’s central bank. Interestingly, Xiao’s predecessor, Xiao himself, and now Liu, have all been central bank deputy governors at various times, indicating that the mainland leadership still has a preference for a central banker to head the securities regulator.

Indeed, none of China’s eight securities regulators over the past two-and-a-half decades has had a strong background in the industry.

Since its inception at the beginning of the 1990s, the mainland stock market has been nothing but a roller coaster fuelled by intense speculation and insider trading with little regard for corporate bottom lines or fundamentals.

READ MORE: CSRC chief Xiao Gang: the accidental banker and the Chinese stock market circuit breaker

From the very start, the CSRC’s heavy-handed regulation and intervention gave rise to the moral hazard of encouraging many mainland investors to take unusual risks with the unrealistic expectations that the CSRC on behalf of the government would help them out. It goes without saying that when the markets nosedive, there is huge pressure for the head of the CSRC to roll.

The so-called reforms of the past 26 years have been largely incremental. In fact, during Xiao’s reign of nearly three years, he was more reform-minded than most of those who came before him. He pushed for a more effective crackdown on rampant insider trading and a plan to scrap the CSRC’s power to approve initial public offerings and instead allow market forces to play a bigger role.

Even Xiao’s decision to introduce the ill-fated circuit-breaker mechanism also reflected his intention to bring mainland stock markets in line with international standards.

Now Liu has the hot potato in his hands. The media has already started to comb through Liu’s past for clues to his family background and his record. They have discovered that he came from a farming family and was known for a low profile and pragmatism as well as high intelligence in balancing the interests of various parties.

But Liu needs more than intelligence to navigate the minefields of reforming the chaotic securities industry and restoring investor confidence.