CSRC chairman Liu Shiyu pivots to stability over reform ahead of autumn political meetings
China Securities Regulatory Commission (CSRC) Chairman Liu Shiyu made an oblique reference to his planned reform path last weekend which could offer clues on what to expect from China stocks this year.
The mainland’s top securities regulator told members of the Shenzhen Stock Exchange that market stability would remain the CSRC’s policy priority this year, ahead of the 19th Communist Party Congress expected to be held in the autumn.
“The finance sector can’t survive without stressing politics,” he said. “Politics always pays close attention to finance.”
If his remarks were anything to go by, Liu is likely to refrain from pushing forward with major reforms this year, aggravating investors who had been optimistic on the prospects for change.
Liu was perceived as a trouble-shooter when he became CSRC chairman in February 2016, a period when the stock market was mired in crisis.
An influx of speculative capital, estimated to be worth 4 trillion yuan (US$581.4 billion), helped to lift the stock market 120 per cent between October 2014 and mid-June 2015. But millions of retail investors were affected when a market rout unfolded in mid-2015, wiping out US$5 trillion in market capitalisation in less than three months. The damage was compounded when an unsuccessful circuit-breaker mechanism caused the key stock benchmark to slide an additional 10 per cent in the first week of 2016.
In the midst of the crisis, Liu was tasked with putting a floor under plummeting share prices as well as taking other steps to help shore up investor confidence.
He scrapped a raft of reform plans, including the implementation of a new initial public offering (IPO) mechanism designed to facilitate fundraising for companies.
The measures were seen as rectifying missteps by the former CSRC chairman Xiao Gang, who actively encouraged margin financing to help inflate share prices as a way of supporting state-owned enterprises (SOE) reform.
The thinking at the time was that elevated prices of listed SOEs made it easier for the government-controlled shareholders to sell down their stakes.
Meanwhile, Liu won kudos for his success in stabilising the market 2016 when the Communist Party mouthpiece People’s Daily published an upbeat commentary late year that praised the regulatory boss.
As calm settled over the market there was heightened speculation that the CSRC would revisit the previous agenda of reforms designed to bring China’s capital markets into closer alignment with international counterparts.
However, Liu’s recent references of the need for stability may connote a cautious approach toward reforms and signal a back down on announced liberalisations.
Another worry is that the CSRC could even roll out administrative measures at the expense of shareholders’ interest.
Importantly, Liu’s statement suggests that policymaking will be driven by political considerations.
“For investors, it is also important to understand politics,” said Wang Feng, chairman of Shanghai-based financial service firm Ye Lang Capital. “They will otherwise lose money.”
Many investors were initially sceptical that Liu, a former deputy central bank governor and chairman of the Agricultural Bank of China, had the right experience to deal with the equity markets.
But since taking the helm of the CSRC, the benchmark Shanghai Composite Index has advanced about 11 per cent. Since the start of the year the blue chip index is up 2.2 per cent.
Liu’s star garnered additional praise after he fired a salvo at the mainland’s insurance sector in December, likening some insurers to “barbarians” or corporate raiders that sought to strike it rich through buying and selling shares of companies listed in Shanghai and Shenzhen.
Earlier this month, Xiang Junbo, chairman of the China Insurance Regulatory Commission, was placed under investigation by authorities for violating Party discipline.
Meanwhile, as much as Liu deserves credit for helping to bring about market stability, there are risks. As CSRC chairman he remains ultimately responsible for what may turn out to be a volatile situation as market interventions and the rolling back of market reforms have helped to push stock prices out of sync with economic fundamentals.
Pressure for the stock market to remain stable will increase as the Party Congress nears, an event that marks the transfer of power at the highest level in China.
China’s senior leadership are aware that stability in the stock market, with its more than 100 million retail investors, is key to maintaining social harmony.