Chinese Character

Taking stock

How will Xiao Gang tackle the reform of China’s securities market?

Will he lift the IPO freeze? New CSRC boss Xiao Gang

When Xiao Gang was named head of Bank of China back in 2003, it took the low-profile official 10 months to make his first public speech. But Xiao was quicker onto the podium on assuming his most recent role as chairman of China’s securities regulator (the CSRC).

In fact, Xiao gave his maiden speech just a couple of months into the job, electing to make his address on May 4, the date marking the anniversary of the May Fourth Movement (a 1919 student protest that said China must modernise if it was to grow strong again).

So little wonder that the theme of Xiao’s own speech was President Xi Jinping’s widely discussed phrase the “Chinese Dream” (see page 7). Much like the May Fourthers, Xi’s slogan is being associated with a sense of national renewal.

Of course, one thing about “the Chinese Dream” is that it’s open to any number of intepretations. And in Xiao’s case he chose to connect it with China’s capital markets.

In remarks that were widely picked up in China’s press, he told a crowd of students: “Every capital market regulator should become a practitioner of the Chinese Dream. Following the rapid growth of the past 20 years, the capital market is becoming an important ‘carrying medium’ of the Chinese Dream. Our capital market is buzzing with youthful energy, young people should become the reinvigorating force of the market, and a force to make the Chinese Dream come true…”

What, if anything, to make of this lofty rhetoric, especially the claim to put China’s bond and stock markets at the heart of Xi’s call for national rejuvenation? After all, associating money so closely with a ‘dream’ recalls an earlier pro-reform slogan (“to get rich is glorious” is the phrase famously associated with Deng Xiaoping).

Does it suggest that Xiao is identifying himself as a market reformer too? Certainly, the recent speech is a significant break with his earlier, more subdued way of going about his business (a friend told Southern Weekend back in March: “He is quite prudent and will not easily declare where he stands.”) By Xiao’s standards, asking young people to become the “reinvigorating force of the market” is bolder stuff.

But it would be better, perhaps, to assess Xiao more by what he does than by what he says. A lifelong banker, albeit with most of his career on the regulatory side, he went straight from university to a job at the central bank, where he worked for 22 years (reporting at one stage to Zhu Rongji, who would go on to become premier).

Climbing the ranks required “politically savvy”, says the Wall Street Journal, further evidence of which can be seen in Xiao’s promotion last year to the Central Committee – a privilege that saw him outrank the heads of China’s three other major banks.

Xiao’s big break came a decade ago when he was selected to run Bank of China. It was a key appointment and Xiao was tasked with cleaning up the bank ahead of its listing in 2006. The IPO proved a major success, raising $9.7 billion.

The Securities Daily says that foreign investors were impressed in their meetings with Xiao (helped by the fact that he speaks good English, although learnt in China, not abroad). And during his time at the helm, the bank’s profits grew from Rmb57 billion in 2003 to Rmb145.5 billion ($23.7 billion) last year.

Like his peers at the other state-owned banks, Xiao paid close attention to the prevailing political wind. For example, when he was called upon to open the lending taps in the wake of Lehman’s collapse, he duly obliged. Much of this stimulus lending went into infrastructure. The largesse of similar lending between 2008 and 2011 was a major reason why state-owned firms saw such strong growth in the period – boosting the impression at home and overseas that China was championing a new economic model based on state-led capitalism.

Xiao may have been one of the first to open the spigots, but he later spoke out about the risk of lending spiralling out of control. In an editorial piece for the China Daily last year he also highlighted the risk of wealth management products, likening this rapidly growing sector of the shadow banking industry to “a Ponzi scheme” (see WiC172). The warning resembled Warren Buffett’s famed comparison of derivatives to “weapons of mass destruction”.

He also penned articles advocating interest rate liberalisation – a move that suggests he is not allied to the Party’s more conservative faction.

So where does Xiao fit on the chessboard of Chinese politics? His role matters as reformers see the capital market as a vital counterweight to the banking system and the more overbearing of the giant SOEs. A vibrant bond and stock market should allocate capital more efficiently, reformers believe, especially to China’s entrepreneurs and private businesses, rebalancing the economy away from its reliance on infrastructure-led investment and cheap loans to state-owned companies.

Activity is afoot. In WiC190 we reported on a wave of arrests involving senior bond market participants – which local media thought was part of the anti-corruption tsar Wang Qishan’s new push to clean up malpractice. “The entire grey chain of vested interests in the bond market will be sucked into the regulatory storm,” the China Securities Journal predicted.

Attempts to reform the moribund stock market have been underway for longer, with Xiao’s predecessor Guo Shuqing pursuing a somewhat contradictory path.

His remit was to push through a series of measures designed to revive investor confidence and during his brief 18-month tenure, he cut trading fees, pushed for higher dividend payouts and increased foreign investor access to Chinese stocks. But perhaps the most significant step was a CSRC’s decision to halt new IPOs, in a move said to be motivated by a desire to weed out the weakest candidates.

The result was IPO lockdown: at the end of last year 809 companies were in the CRSC’s listing queue.

With Guo now installed as governor of Shandong province, attention has shifted to when Changsha-born Xiao might lift the IPO freeze. The CSRC reported on April 12 that 167 companies have already withdrawn their IPO applications due to the more stringent auditing process and there is speculation that a small group of the best performing firms may soon be given the freedom to float.

According to Southern Weekend the new mantra being employed is Zhu Rongji’s phrase “never cook the books” and 30 designated companies have been undergoing exhaustive due diligence reviews at the headquarters of the Shanghai National Accounting Institute in Qingpu.

The CSRC, the country’s stock exchanges and its leading accounting firms are also working on the exercise, which Southern Weekend calls the “largest and most stringent financial review in the history of enterprise application since IPOs began”.

The inspection process is expected to last a couple of months. But apparently, the hope is that after these firms start listing – perhaps as early as next month – investors will have more confidence in their credentials.

Higher quality IPOs – as vetted by Xiao’s taskforce – could then lift market sentiment, fuelling a wider recovery in Chinese stocks.

All eyes will be on which of the 30 companies make the cut. Indeed, in what could amount to a fresh start for the IPO market, Xiao will send a positive ‘reform’ signal if the selected group contains well-run blue chips. On the contrary, if the group is crammed with shoddy but well-connected firms, it will be viewed as a lost opportunity.


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