Policing the regulators

Another week, another high profile official gets swept up in Chinese leader Xi Jinping’s anti-corruption net. Last week’s scalp was Liu Shiyu, who until four months ago was still heading the China Securities Regulatory Commission (CSRC), the securities watchdog.

According to a short statement published by the Central Commission for Discipline Inspection (CCDI) last month, Liu has been placed under investigation on suspicion of “violations of laws and discipline”. The 57 year-old is now cooperating with the CCDI’s probe after turning himself in, the anti-graft watchdog said, without elaborating.

He is the second high-profile regulatory figure to fall from grace, following China Insurance Regulatory Commission head, Xiang Junbo, who was arrested, fired and then found guilty of bribery charges only months after Liu took office in 2016.

The latest news has also sent shockwaves through political circles given that Liu is one of the 204 members of the Party’s Central Committee (which advises the 25-member Politburo), implying that he is the CCDI’s biggest catch since the ruling Party’s 19th National Congress in 2017.

Liu had stepped down from the CSRC after three years at the helm in January this year for the far less glamorous job as deputy president of the All-China Federation of Supply and Marketing Cooperatives. As we wrote in WiC439, there was plenty of speculation about what lay behind his abrupt departure.

At the time, market watchers came to what now looks like an erroneous conclusion. They decided that the government had appointed Yi Huiman as his replacement because they wanted someone new to focus on institutional and technological reforms at the bourse following Liu’s three-year stint cleaning up the mess caused by China’s 2015 stock market crash.

Liu had even gave that impression himself after stating that “a stock market spring isn’t far away”.

Yet serving as the CSRC chairman is like “sitting by a volcano crater” (the famous phrase came from the CSRC’s first boss back in 1992, see WiC223). And Chinese equity markets performed poorly last year: the key CSI 300 Index lost a quarter of its value.

Many market observers wondered if Liu was being held responsible for the dismal performance, until this month’s CCDI probe announcement suggested otherwise.

Some newspapers, particularly Western ones, have commented that Liu’s subsequent fall from grace proves just how much of a poisoned chalice regulatory work in China can be. The Financial Times, for example, reported that other officials are “puzzled and alarmed” by what has happened, given what an “effective and staunch advocate of financial reform” Liu had been.

The most comprehensive report on Liu’s downfall has come from Caijing magazine.

It alleges that certain parties were allowed to buy bonds issued by Bank of Nanjing at sub-market rates. Nanjing is the capital of Jiangsu province, where Liu is from.

Other domestic news outlets alleged these parties are Liu family members, although, so far, no one has been named.

And then there is the issue of which initial public offerings got approved during Liu’s tenure. They included seven banks from Jiangsu.

As Shaun Rein, managing director of Shanghai-based China Market Research Group, told the South China Morning Post: “Corruption accusations can be hard to avoid in an approval-based regulatory system where the authority decides whether and when a company can go public.”

Caijing argues that Liu’s case is interesting: not because he may be found guilty of corruption, but because it highlights a new direction for Xi Jinping’s anti-corruption campaign.

For Liu was not in fact arrested. The mainland media have been at great pains to point out that he “voluntarily handed himself in” in late April.

Since then he has conducted public duties including attending the centenary of a youth movement in early May and meeting officials from Vietnam this month too.

In the official announcement, Liu is addressed as tongzhi, or ‘comrade’ and it emphasises that he is cooperating with the investigation.

Caijing also explains how Article 67 of China’s criminal code allows for lower penalties if there are mitigating circumstances including age, mental health and pro-actively admitting to a crime.

It cites the recent case of Ai Wenli, the former vice-chairman of the Hebei Provincial Committee, who also turned himself in. In mid-April, he was fined Rmb3 million ($430,000) and sent to jail for eight years for accepting bribes.

Caijing says this is the first time that “mitigating circumstances” have been taken into consideration during a bribery case.

Chinese citizens currently feel very confused about Liu’s case. Caijing’s article has incited plenty of comments: the most that WiC has seen in a mainstream newspaper article in recent years.

None are sympathetic. Many are wondering why Liu’s achievements are being highlighted at the same time he is being investigated for potential corruption. The most liked comment asserted that stock market investors are the victims, not Liu.

A number highlight how Liu dished out a record number of fines to companies, damaging their share prices and investor returns. In 2018, for instance, Liu issued 310 administrative punishments and fines totalling Rmb10.6 billion.

“He was a wolf in sheep’s clothing,” says one. “He should be shot,” says a second.

“Blood debts should be paid in blood,” argued a third commentator from Shanghai.

One netizen from Changsha in Hunan province also argues that, “the Chinese stock market was dominated by Liu Shiyu-style people. When he was in office, he said that he was the leader and never changed tack. Is it any wonder that the stock market has experienced such difficulties for so many years?”

Indeed, one of the ironies of Liu’s case is just how famous he was for his colourful descriptions of the market’s various miscreants.

In early 2017, he lambasted the ‘financial crocodiles’ that disregarded the law and said that he intended to arrest ‘the rats’ and fight ‘the wolves’ because he was not afraid to unleash his sword. The People’s Daily even described him that same year as “the hunter” who would go after“demons” and “big crocodiles” and advised the public to wait patiently for the results.

During the research for its article, Caijing tracked Liu down in late April and says his tone was calm throughout the interview. It leaves readers with the distinct impression that he is fairly unruffled by the ongoing investigation and its likely findings.

The Global Times has also written a number of articles along similar lines. It reports that, “voluntary confessions from officials suspected of violations prove the deterrent strength of China’s anti-corruption system”.

In a nod to Sino-US trade war volatility, Li Daxiao, chief economist at Shenzhen-based Yingda Securities, took a different line, telling investors to remember that, “China will continue on its own path regardless of domestic and foreign pressure. So in that sense, this is a boost to market confidence.”

And the investigations continue apace. Just a few days before Liu turned himself in, Qin Guangrong, former Party chief of Yunnan province, did the same after “committing serious violations of party discipline and laws”. One day after Liu’s detention, it was reported that Tang Qilin, former deputy Party secretary of Changning in Hunan, had also begun cooperating with the CCDI.

According to a CCDI report published this February, a total of 27,000 Party members have confessed to violating Party discipline since President Xi began his second term in 2017. A further 5,000 members have voluntarily submitted their cases to the police.

And then there is the private sector. This week also saw the arrest of Nie Yong, former chairman of Kweichow Moutai’s e-commerce division. His arrest follows that of former chairman Yuan Renguo who “severely violated political discipline” and took large bribes at the liquor company.

Yuan was previously credited with building Moutai into the biggest spirits company in the world by market value but he is alleged to have personally profited from kickbacks from the murky, third-party liquor distribution network he cultivated.

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