The day China lost its nerve to push for bold financial reform
Scrapping of a stock trading circuit-breaker mechanism a year ago marked the start of a much more cautious and risk-averse attitude to regulating the markets, according to analysts
The announcement on the night of January 7, 2016 that the mainland would “suspend” its unpopular circuit-breaker mechanism was a defining moment in the history of its financial markets.
Just four days after introducing the price-monitoring threshold, which was designed to stabilise the market but in effect amplified panicked selling, the China Securities Regulatory Commission (CSRC) admitted the initiative had failed. Xiao Gang, the commission chairman, stepped down the next month.
While that suspension a year ago on Sunday night calmed the market and pleased the country’s 100 million retail investors, its implications were felt across the financial sector over the next 12 months, as Beijing turned risk-averse and paranoid about stability in the financial industry.
“Regulation” and “risk management” became the keywords under the new CSRC chairman, Liu Shiyu, replacing the bolder “reform” and “innovation”.
Beijing also became wary of freewheeling financial activities and more active in state-led efforts. The mainland slowed or back-pedalled capital account opening, the central bank intervened heavily to defend the yuan and, when there were signs of property bubbles, Beijing dished out orders “disqualifying” some homebuyers and depriving others from access to bank credit.
“You have to despair of meaningful financial reform” over the last year, said Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.
The pursuit of stability persists. A top communist leadership meeting last month concluded that the key economic priority for this year was to maintain stability and manage risks so the ruling party could achieve its once-a-decade power reshuffle smoothly.
Circuit breakers in a stock market temporarily halt trading on securities when prices hit predefined levels, and are intended to curb panic selling, but the arrangement, borrowed from the United States, Singapore and Hong Kong, proved unfit for the mainland stock market.
A break was triggered on the first trading day of last year, and it took only one hour to end full-day trading the following day.
“The daily trading limit of 10 per cent in the A-share market is already a kind of curb,” said Zhu Qibing, chief macro analyst at BOC International. “The trading halt points of 5 per cent and 7 per cent are too close and too easy to reach. It amplifies, rather than restricts, market volatility.”
While the short-lived introduction of the circuit breaker was not the cause of the country’s financial problems, the consequences of the failed initiative provide a vivid reminder to officials not to take excessive risks.
“The mishandling of the circuit-breaker mechanism is reflective of poor management of financial sector reform in China amid reform zeal and best intentions,” said Henry Chan Hing Lee, an adjunct research fellow at the National University of Singapore.
Xiao’s fate was sealed after the fiasco, although the official announcement of his removal only came six weeks later. He has disappeared from public sight since, marking a rare case where a senior official was sacked for lack of capability, not political reasons.
His successor Liu, former chairman of the Agricultural Bank of China, heeded the clear lesson. He again tightened control over the initial public offering process and halted some short-selling activities to prevent big swings in the market.
“Nothing was expected of him except calm, and he delivered,” Howie said.