The market maker

In August 1988 two young men from China made a pact outside New York’s stock exchange. The Wall Street rookies were plotting to bring something completely forbidden back to their home country: a stock market.

Knowing how difficult the task might be, the two vowed to quit high finance and switch to selling steam buns in China if, within five years, their ambition remained unrealised. However, the men would achieve their dream, becoming two of the most influential “sea turtles” (or haigui: overseas-educated Chinese who return home) in financial history.

One of them was Wang Boming, the founder of China’s first automated stock trading system, as well as an influential business magazine called Caijing. The other was Gao Xiqing, who retired last month as the president of CIC, China’s sovereign wealth fund (which now oversees $570 billion of assets).

Born in 1953, Gao’s early life did not suggest he’d be a pioneer. Like many of his generation, his education was interrupted by the Cultural Revolution. So instead of going to university, he spent three years building a provincial railroad, before getting transferred to an ammunition factory. There, Gao wangled a way to attend English classes that were reserved for trusted technicians. Now a Party member, his obvious sense of ambition impressed his patrons and in 1974 he was admitted to the University of International Business and Economics in Beijing. Next Gao went to law school, after coming first in admission examinations. “English tutors who came to help us from the Communist Party of Britain were amazed that I knew more English vocabulary than them,” he later recalled.

In 1982 UIBE set up an exchange programme with a US law firm and Gao was picked to take part.

By then Sino-US relations had been re-established, following Richard Nixon’s historic trip to Beijing a decade before. In fact, the former US president would cast a shadow over much of Gao’s career. In 1983 he won full funding as a Nixon scholar to study at Duke University’s law school (Nixon was an alumnus) and after obtaining a doctorate Gao became the first mainland Chinese to pass the New York Bar exams, taking a position at Nixon’s former employer Mudge Rose Guthrie Alexander & Ferdon.

While many of the junior lawyers on Wall Street turned stony-faced at the intense workload, Gao was said to be conspicuous for wearing a smile. Asked why he stayed so cheerful, his response was tongue-in-cheek. “Lenin told me to,” he would reply, “for I am digging a grave for capitalism.”

A struggle then began over Gao’s future. The US government needed Chinese nationals like him to help bridge the different worlds of Beijing and Washington. But so too did China and Gao was instructed by Party officials to return in 1987. However, Nixon entered his life again: the former president wrote personally to the leadership in Beijing asking that Gao be allowed to stay at Mudge Rose another year.

It was around this time that China began privatising many of its malfunctioning state-owned enterprises (SOEs) and the need for a stock market was urgent. In 1988 Gao and Wang authored white papers on how to create one. Their advice was well received by reformists and six months later the pair finally made their way back as sea turtles.

For Gao it was a bold decision. It meant giving up a lucrative Wall Street career and possibly a US green card too – all for an unknown future that would pit him against determined political opponents.

First he returned to UIBE as a law professor. Then in March 1989 he became a core member of the newly founded Stock Exchange Executive Council (SEEC), a body created to prepare for the establishment of a stock market in Beijing.

Drafting the new rules was a challenge, Gao reminisced to Duke Law magazine. Often the Chinese language didn’t even have terms to describe the changes that they were proposing. “Today many people say things like ‘market makers’ with ease, but in those days, people laughed because it sounded so strange – in Chinese, ‘market maker’ sounded very much like ‘love maker,” he remembers. “Now we have the words we need, and nobody thinks about where they came from.”

Plans for a stock market were put on hold during 1989’s political tensions. Nevertheless, work on the proposals spearheaded by the SEEC continued, and stock exchanges were set up in Shanghai and Shenzhen a year later.

Selling ownership stakes in state firms via the stock market was a step too far for many of the Party’s hardliners. To sidestep some of the opposition, Gao pushed for SOE listings in Hong Kong, creating the first of the so-called H-shares. Tsingtao Brewery was the first SOE to go public in Hong Kong in 1993. (And a year later, in Shanghai too.)

But Gao argued his case strongly back in China. “Even Marx praised stock exchanges and banking systems. He regarded them as tools, rather than goals, and tools can be used by anyone – they can be used to serve the purposes of the poor people and the working class,” he would later tell Duke Law.

“So in my mind, in order for China to change for the better and compete, we needed a better financing system. Stock exchanges were an inevitable part of that.”

When the China Securities Regulatory Commission (CSRC) was created in 1992, Gao was asked to serve as lead counsel, as well as its director for new issuance, a hugely sensitive position. Rivalry and corruption made him a hate figure in some political circles. Despite overseeing some important reforms he resigned in 1995. “I was actually kicked out of the CSRC,” he later admitted. “Apparently my work there incensed six different groups of people.”

After a stint as president of Bank of China’s investment banking unit, Gao would rejoin the CSRC as vice chairman in 1999. A year later Zhou Xiaochuan, currently head of the central bank and another notable sea turtle, was appointed as chairman. In fact, by 2001, a fifth of the CSRC’s roster came from officials returning from abroad, most in key positions.

Yet Gao and his fellow reformers continued to run into stiff resistance and they failed to press ahead with one of the most high profile reforms: turning illiquid state-owned shares into tradable stock. (The non-tradable stock existed to ensure absolute state control of SOEs). So Gao departed the CSRC a second time. Many of the other sea turtles followed him out of the door, to be replaced by homegrown officials.

“There were more than 6,000 proposals on the reform [of illiquid shares in state firms] which could be classified into 19 categories,” Gao recalls. “Looking back, no matter how clever we were and how hard we tried, it was simply impossible to reach a consensus in the face of conflicting interests.”

But Gao was hardly cast out into the political wilderness. In 2003 he was appointed as vice chairman of the National Social Security Fund (it invests in SOEs to generate a strategic reserve to cover the retirement costs of China’s ageing population). Then, when China set up its first outbound sovereign wealth fund in 2007, Gao was thrust back into the limelight, becoming president of China Investment Corporation, the country’s new wealth manager. Soon there was more controversy after CIC ran up huge paper losses on stakes purchased in Blackstone and Morgan Stanley – both made before the worst of the global credit crunch.

Today CIC is making money on its investments, even if its strategy is an ongoing subject of debate – especially in respect to its portfolio of US government debt. “People criticising our Treasuries exposure are those who don’t understand finance,” Gao told a Davos summit last month. More than two thirds of CIC’s portfolio is invested in stocks, Gao pointed out, with US government debt a “small portion” of its fixed income holdings.

Gao tells critics that CIC deserves more time to prove itself. “The State Council evaluates our performance every 10 years,” he says. “CIC is only six years old. There are three more years to go. I hope there will be a satisfying answer by then.”

Gao leaves the scene after reaching the mandatory retirement age of 60.

He says he will spend some of his time teaching at Tsinghua University and also at Duke. But he continues to push for change. “There are plenty of intelligent and hard working people in China. It is the system that is lacking,” he told reporters in Davos.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.