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Meet China's stock rescue chief: he never saw the crisis coming

Monday, August 3, 2015 - 07:24
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Investors react in front of screens showing stock market movements at a brokerage house in Shanghai on July 29, 2015.

[SHANGHAI] After China's stocks crashed in June, the government put more than US$400 billion at the disposal of a little-known state agency, the China Securities Finance Corp, headed by an academic and bureaucrat named Nie Qingping. It was told to save the market.

The agency's unique mandate is to intervene in the market to buy stocks, with money borrowed from the central bank and other sources, in order to help prop up share prices. With the recent volatility evidenced by another crash on July 27, its success so far isn't readily apparent.

Mr Nie, the 53-year-old chairman, hasn't given interviews on his emergency role, and the government hasn't spelled out exactly what discretion Mr Nie and his agency have when executing orders from above. Four weeks into the new role, the picture emerging from Mr Nie's published books and commentaries, as well as interviews with fellow academics, is of a professor with 25 years of experience watching stock manias - who still got blindsided by China's latest crisis.

"The latest rally has the characteristics of a structural bull market," Nie wrote in an article in March, joining a chorus of officials and state-media commentators talking up the market's prospects. As one of the architects of China's move to allow margin financing, in which people borrow money to buy stocks, Mr Nie played down concerns that debt-funded stock purchases were rising too quickly.

Now, Mr Nie faces a "Herculean task" as head of an agency that never expected to be handed the role of market savior, according to Liu Yuhui, a Beijing economist and a researcher at the Chinese Academy of Social Sciences.

TRICKLING FOUNTAIN

China Securities Finance was set up in 2011 to provide liquidity for brokerages offering margin financing. Housed on the 15th floor of a building in Beijing's financial district, in an office where water trickles over traditional Chinese rock sculptures, Mr Nie and his 70-odd staff got access to between 2.5 trillion yuan and 3 trillion yuan (S$89 billion to S$107 billion) for the rescue, according to people familiar with the matter.

"The role of stock bailout most certainly wasn't their mandate when they started China Securities Finance," said Fraser Howie, a co-author of Red Capitalism, a book on China's financial system.

"It was set up to do one job, and clearly has been co-opted or coerced - you can choose your verb - to go and do another job."

VOLATILITY SURGE

The money on tap is in the form of credit from commercial lenders and from the People's Bank of China, which has its headquarters about a mile away, as well as from the proceeds of bond sales. It's designated for buying shares and mutual funds, as well as the agency's usual role of liquidity for margin finance.

Since China Securities Finance started buying on July 6, a measure of volatility in stocks has surged to nearly a 20-year high.

On July 27, the Shanghai Composite Index plunged 8.5 per cent, the most since February 2007, as investors feared that the government was pulling back from its rescue efforts.

Details of how China Securities Finance now operates, how much liquidity remains at its disposal, and how it chooses which stocks and mutual funds to buy haven't been released officially. Neither Mr Nie nor the agency responded to requests for comment.

The agency first bought blue-chip companies before also targeting mid- and smaller-sized companies on July 8, according to statements by the China Securities Regulatory Commission, which oversees the agency.

STOCK MANIA

"Its opacity has already led to extreme volatility and confusion in the stock market," said CASS's Liu, who also works for brokerage GF Securities Co. "Investors deserve to know more about it."

As a junior official, Mr Nie received training at the London Stock Exchange before he was dispatched by the People's Bank of China to help investigate a bout of stock "mania" in Shenzhen in 1990, which ultimately led to the creation of a formal stock market.

People had stopped working to speculate on shares, according to his book The Long On China, a history of the stock market. Investigators determined the causes were high dividend payouts, a lack of limits on daily share-price moves, and a limited supply of stocks, he wrote.

Mr Nie headed China's task force that designed the rules for short-selling and margin financing, which China began allowing in 2010.

BULL RUN

In an article published by Caijing magazine on March 20, Mr Nie played down concerns about margin financing's role in the latest stock rally. He wrote that calling the run-up in stock valuations a "leveraged bull run" was inappropriate, since investors saw value in stocks and were borrowing to invest in blue-chip companies.

The article came after margin financing had more than doubled in the previous six months, with the Shanghai stock index leaping 58 per cent.

Besides lecturing at universities - Nie is accredited as a professor at at least two - his resume also includes a three- year stint at China Everbright Holdings Co.

His latest book, Theory And Practice Of Securities Lending, published in March, does warn of hidden risks in over-the-counter margin finance, calling it a "black box" in which brokerages sometimes offer funding to customers who aren't qualified for it. The book also warned that some stocks had gained too much and that some investors could face margin calls because their portfolios were overly concentrated.

Still, the book gave a bullish view on how securities finance would develop, saying that in five years' time, margin finance and short-selling would account for close to 20 per cent of the value of A-share turnover, up from 10 per cent.

An academic who has known Mr Nie since 1998 when Mr Nie was at Everbright and worked with him at the China Securities Regulatory Commission, He Jia, called him nice, smart and "maybe more of an academic than a government official," because of the volume of his academic writing.

While Mr Nie's in the spotlight, that doesn't mean he's in control, said Mr He, who's a finance professor at the Chinese University of Hong Kong.

"Things in China are never dependent on one person," he said. "It's always a plan designed by the very top."

BLOOMBERG