China’s ‘most hated’ ex-regulator warns that government intervention creates stock boom-to-bust cycles

South China Morning Post 發布於 2019年09月20日00:09 • Karen Yeung karen.yeung@scmp.com
  • Xiao Gang, who oversaw China’s stock markets during the 2015 crash, stresses need to rectify authorities’ ‘fatherly love’ type of supervision
  • He says previous loosening measures to boost growth have resulted in market bubbles, amid Beijing’s increasingly pro-growth policy to arrest a slowing economy
A brokerage is seen in Shanghai in the summer of 2015. More than US$3 trillion in value were wiped off the Chinese markets in the stock crash. Photo: Reuters

The former government official behind the nation's stock market crisis in 2015, one of China's most hated men, has offered a harsh lesson on the dangers of government intervention that have created many of the country's boom-to-bust equity cycles.

Xiao Gang, a member of the National Committee of the Chinese People's Political Consultative Conference " China's top political advisory body " and former chairman of the China Securities Regulatory Commission (CSRC), oversaw the mainland's trillion-dollar stock market between March 2013 and February 2016.

During his three years as the top regulator, the mainland stock market underwent a roller-coaster ride that eventually went into a free fall in the summer of 2015, wiping more than US$3 trillion off value of shares, sending unprecedented shock waves through global financial markets, and making him an easy target for blame.

On Wednesday, Xiao told a financial forum in Beijing that rectifying the market regulator's excessive "fatherly love" type of supervision was a very important lesson learned from the 2015 stock market rout.

Proper management is needed by the government, where the "tangible hand" and the supervisory authorities know what they have to do, Xiao said.

Xiao Gang oversaw China's trillion-dollar stock market for three years until early 2016. Photo: Xinhua

Despite advocating for a bull market, he warned not only against an abnormal "bull market complex" that would create a short market upswing along with a long market decline, but also against the ways regulators thought and behaved.

The regulator's top priority was to be clear about the path of the stock market's long-term development, which should not be measured by the performance of equities, Xiao said.

"This means the metrics used during that time (in 2015) was definitely wrong," he said.

Past experience of the (domestic) A-share market shows that excessively loose monetary policy and ample liquidity can easily influence the price of the asset market, leading to a bubbleXiao Gang

In 2015, the Chinese authorities took drastic action to halt a stock market routthat would have threatened the entire financial system. A "national team" of state-controlled financial companies was formed to bail out the market with a reported 1.5 trillion yuan (US$212 billion) worth of stock purchases.

The rescue was led by China Securities Finance Corporation, which injected funds into brokerages, while sovereign wealth fund subsidiary Central Huijin Investment bought shares of blue chips and smaller companies.

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The CSRC also banned major shareholders from selling their shares. Short-sellers and journalists were detained and questioned as part of an official inquiry into market volatility.

The doubling of the Shanghai Composite Index in the year to June 2015 was followed by a loss of half of the market's value over the next seven months. Hong Kong's benchmark Hang Seng Index suffered one of its biggest point drops on record, erasing all its gains over the previous 12 months.

The entrance of the CSRC headquarters. The regulator banned major shareholders of listed companies from dumping their shares during the 2015 stock crash to help arrest plunging markets. Photo: Reuters

The benchmark Shanghai Composite Index has surged 20 per cent so far this year to the current level of around 3,000, reversing last year's 25 per cent slump. The CSI 300 " which tracks the large companies listed in Shanghai and Shenzhen " is up 30 per cent, the world's best performing stock market.

Xiao also warned that China's current policy, which leans towards economic stimulus rather than measures to control risk, is making the stock market particularly dependent on government policy.

"Past experience of the (domestic) A-share market shows that excessively loose monetary policy and ample liquidity can easily influence the price of the asset market, leading to a bubble."

Xiao warned against a regulatory bias towards buying shares while adopting strict policies again short-selling " betting that stock prices will fall " could ultimately lead to a bursting of a bubble.

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Historically, China's seven equity bubbles occurred when money was relatively loose, Xiao said. Of those, three occurred when the economy was growing, and the remaining four during an economic transition.

When the outlook for new growth drivers was grim, and investment returns relatively low during an economic transition, investment tended to be speculative and fuelled market bubbles, he said.

China's stock market is dominated by state-owned companies with valuations often heavily influenced by government policies and liquidity conditions, but not corporate financial performance.

Xiao said new signs showing increase debt risks in the current stock market should not be underestimated. The recent stock market performance suggested investors were borrowing funds to speculate, compounded by the emerging risk of investors pledging shares as collateral to obtain new loans to buy more shares.

At the centre of the 2015 crisis was an explosion of unregulated off-balance sheet lending " shadow banking " and margin financing as the ruling Communist Party tried to use the equity market to bolster the finances of state-owned companies.

Margin financing, in which brokerages lend money to clients to invest in stocks or other securities, came with high risks to the financial system and was eventually curtailed by tighter rules.

Xiao said it was necessary to establish a financial committee to assume more responsibility to improve the emergency response mechanism for handling and preventing risks to the country's financial system.

Such systemic risks would have the greatest impact on those commercial banks, securities, firms and asset managers that have relatively less money to fight off a downturn in the market.

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