Risk Switch Just Flipped to `On' in China Stocks
(Bloomberg Opinion) -- China is changing its head securities regulator for another veteran banker. A shift was inevitable, with the stock market still flagging after sinking into a bear market last year. After three years of cautious regulation, prepare for a return to risk.
Yi Huiman, chairman of Industrial and Commercial Bank of China Ltd., will succeed Liu Shiyu as chairman of the China Securities Regulatory Commission, the state-run Xinhua News Agency announced Saturday, confirming an earlier report by Bloomberg News. Yi takes over the Herculean task of attracting hot technology listings and foreign investors to a market that was among the world’s worst in 2018.
No CSRC chairman has lasted more than three years. They tend to be yanked from their jobs either when the market gets stuck in a prolonged slump or when lax controls lead to an unsustainable boom and bust. Liu was parachuted in from Agricultural Bank of China Ltd. in February 2016 after a crash and abortive government-engineered bailout.
Under his tutelage, China’s stock market became a lot less risky: Companies were barred from using ad hoc trading halts when their stock slumped, and there was a scaling down of the margin loans that fueled the 2015 rally. The CSRC also stepped up enforcement actions against market manipulation and other abuses. The swing to prudence may have gone too far, though.
Strict profitability requirements meant China lost out on prized technology IPOs such as Xiaomi Corp., which chose to list in Hong Kong last year after the city relaxed its rules. A plan to allow depositary receipts, so firms such as Alibaba Group Holding Ltd. could make their stock available to domestic investors, also failed to get off the ground. Finally, a spate of state takeovers of cash-strapped companies that had pledged shares sapped what vitality was left in the market.
With the end of Liu’s reign, expect an end to this emphasis on caution. Yi will be tasked with launching the technology innovation board announced by President Xi Jinping in November, China’s latest answer to Nasdaq. The new market will be registration-based, meaning that companies won’t need to queue up for approval from the CSRC. They may not be subject to a profitability requirement, either. That would potentially give China’s domestic investors the chance to buy into the next crop of technology stars – perhaps Ant Financial, the Alibaba payments affiliate, and Bytedance Ltd., the world’s most valuable startup.
History stands in the way. China’s previous attempts to replicate the Nasdaq have been disappointments. Shenzhen’s ChiNext board for small and medium-size companies, introduced during the 2015 rally, has underperformed the city’s main benchmark index. Beijing’s over-the-counter New Third Board has few takers, meanwhile.
Increasing foreign participation won’t be easy, either. China’s stock market remains predominantly locally driven even after trading links with Hong Kong opened more channels for overseas money. Investors don’t have high hopes for a planned trading pipe between Shanghai and London. While more Chinese stocks will join the MSCI Emerging Markets Index in February, the trade war with the U.S. and a slowing economy remain as overhangs.
Easing regulations will help. There are signs already of this happening, with CSRC Vice Chairman Fang Xinghai recommending this month removing the 44 percent cap on how much a stock can gain on its trading debut. That could bring a bonanza for investors in new listings. Beijing’s plan to ease credit for squeezed private companies should also be a fillip.
Volatility is the only constant in China’s on-again-off-again pattern of stock market regulation. Risk is back – at least until the next crash.
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Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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