Abacus | Why China’s mixing of regulation and politics is a recipe for financial disaster

What makes a successful company? If you are a customer, a successful business is one that sells you goods or services that you want at a price you can afford. If you are an employee, a good company offers a stimulating workplace that pays you well. If you are a shareholder, it delivers you handsome returns through capital gains or solid dividends. And if you are an economist, a successful company is one with a return on capital that comfortably exceeds its capital cost.

To all these definitions, add another. If you are a mainland Chinese regulator, a successful company is one that focuses first and foremost on “party building”.

That might sound like fun. But the regulator in question wasn’t talking about businesses that put time and effort into perfecting the annual employees’ dinner and dance. Instead, Liu Shiyu, the newly appointed head of the China Securities Regulatory Commission (CSRC) – charged with supervising the mainland’s stock markets and the corporations listed on them – was talking about businesses that put the interests of the Communist Party and its in-company members and committees above mere commercial interests.

Companies that prioritise party building do not just perform well, Liu told a press conference last week, they are “unbeatable”. In contrast, companies that perform badly are those that fail to pay due attention to the party’s policy directives and to the leading role played in business development by party members.

Most observers are inclined to disregard Liu’s comments as the kind of guff that senior officials are obliged to spout in order to demonstrate their loyalty to the party, and more importantly, to their seniors in the party hierarchy. Few credit such statements with much significance as far as the day-to-day business of stock market regulation is concerned.

In this case, however, such a dismissive attitude could be a mistake. Liu’s appointment to the CSRC comes at a time when the authorities are once again attempting to get a grip on the mainland’s financial system, and in particular to rein in the runaway credit creation engine of China’s shadow financial markets.