New securities chief takes over after US$5t rout

Hong Kong

THE new head of China's securities regulator has been tasked with restoring confidence after policy missteps by his predecessor rattled investors and helped deepen a US$5 trillion rout.

Liu Shiyu is assuming oversight of the world's second-largest stock market in the wake of last summer's slump that saw Xiao Gang criticised for mismanagement. As well as needing to rebuild morale among the nation's 99 million investors, Mr Liu will preside over an overhaul of initial public offerings, the planned expansion of a trading link with Hong Kong and a campaign to get the nation's shares included in MSCI Inc's global indexes.

"China faces a confidence crisis after the recent stock market turmoil, stoked to a large extent by policy flip flops," said Vasu Menon, Singapore-based vice-president for wealth management research at Oversea-Chinese Banking Corp. "International investors will wait to see if he can deliver fresh policies to stabilise the stock market with a steady hand without backtracking on market liberalisation."

Mr Liu takes over as chairman of the China Securities Regulatory Commission from Mr Xiao, who was removed from his post on Saturday after less than three years. Under Mr Xiao, looser controls over leverage helped triple the value of Chinese equities to US$10 trillion before share prices collapsed last summer. The plunge reverberated across global financial markets and triggered unprecedented state intervention as the government sought to prevent the turmoil from spreading to an economy already growing at its slowest pace in 25 years.

Mr Liu was previously chairman of Agricultural Bank of China, the nation's third-largest lender, and was a deputy governor at the People's Bank of China before that. Prior to joining the PBOC, he worked at China Construction Bank Corp and the nation's economic reform commission. He holds a master's degree from the economic management school of Tsinghua University in Beijing.

Mr Liu has played a significant role in developing China's bond market, and should be a better steward of the securities industry than Mr Xiao, according to Xia Chun, a senior finance lecturer at the university of Hong Kong. Both are seen as quite conservative towards new developments in financial markets, he said.

For Bocom International Holdings Co and Partners Capital International, Mr Liu's appointment may buoy the market in the short term as investors anticipate supportive policies.

The Shanghai Composite Index rose 0.8 per cent at 10.21 am, after its best stretch in 2016 last week, when it rallied 3.5 per cent. Even so, the benchmark gauge is down 19 per cent this year, with losses surpassed only by Italy and Greece. The Shanghai measure trades at 15.1 times earnings, compared with 11.3 times on an index of global emerging equities.

"The situation is not very stable," said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities. "The CSRC must regulate without overly protecting the market." One of Mr Liu's most important tasks will be to oversee the introduction of a more market-based registration system for initial public offerings, expected to be unveiled later this year. The new regime would leave the questions of IPO supply and timing to companies and the market, rather than the CSRC, and give firms more power to determine pricing.

Investors are still awaiting an exchange link between Hong Kong and Shenzhen, modelled on the Shanghai one that began in November 2014. MSCI has said that giving foreigners more access to China's second-largest equity market, home to many of its small technology companies, is key to getting the nation's stocks included in global gauges. The index compiler refrained from taking that step in June, saying China still needed to make shares easier for foreign investors to access. The decision came before the summer rout spurred state intervention that was criticised by global asset managers.

Mr Xiao last month acknowledged mistakes after a review of the turmoil. An immature bourse and participants, incomplete trading rules, an inadequate market system and an inappropriate regulatory system were to blame and regulators will learn from the experience, he said.

In one of the most high-profile missteps, the CSRC scrapped circuit breakers in the same week it introduced them. The implementation of the system in January, which was meant to reduce volatility, had the opposite effect as investors panicked at the prospect of not being able to sell their shares.

"The circuit breaker system was the last straw," said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. "Mr Xiao does not have a very thorough understanding of the stock market."

Hao Hong, Hong Kong-based equity strategist at Bocom International said Mr Liu's "challenge is to roll out the registration-based IPO system to let the stock market become an even more efficient financing instrument". BLOOMBERG