While the latest National People’s Congress (NPC) yielded some positive signs for China’s stock market reforms, the future pace of change was called into question as a regulatory reshuffle highlighted the fragile side of the reformist agenda and the challenges it still faces.
News that the proactive Guo Shuqing has been reassigned to another post after just 18 months on the job were difficult to swallow for investors who have come to rely on the CSRC chairman as a key proponent of change. CSRC’s website showed Xiao Gang, the former chairman at Bank of China, has replaced Guo as chairman. Lou Jiwei, the reformist chief of China Investment Corp., the nation’s sovereign wealth fund, was appointed finance minister. Guo has been appointed deputy Communist Party secretary for Shandong province, according to the provincial government’s website.
Under Guo’s leadership, the CSRC has introduced a steady stream of reforms, reportedly releasing at least one new policy every week. His successor would need to work hard to fill his shoes. “Guo has put in place quite a number of new policies and reforms since coming on board which have been embraced by Chinese investors,” says Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai who advises global hedge funds, sovereign funds, pension funds, endowments, family offices and institutional investors. “Investors are expecting more favourable and innovative measures to come from the chairman in 2013 as they are starting to have more faith and confident expectations of what he’s going to bring.”
Guo may simply have stepped on too many toes in his efforts to clean up the stock markets. Government sources were quoted saying the chief regulator’s gusto has upset some interest groups, in particular those that have profited from manipulating weak rules governing the IPO process. Still, with Guo gone, the CSRC’s enthusiasm for reforms is likely to remain strong anyway.
“I don’t think it will impact negatively on the momentum of reforms. He’s not the only person in the CSRC advocating regulatory change, and the momentum is coming from a group of officials not just one person,” Winnie Deng, senior analyst at Z-Ben Advisors, tells IPA. “Judging from the known personnel changes set to happen at the meeting, the new administration will probably welcome reformists to run the game as long as they oversee and insure the stability of the banking system.”
The various policies initiated in 2012 are ongoing and are likely to continue rolling out at a similar pace under the new leadership, if not faster, according to the analyst.
Stock market reforms look set to keep coming thick and fast after the new premier Li Keqiang vowed to continue market oriented reforms and improve access to equity and bond markets at his first press conference following the NPC. At the meeting, Guo had pledged to continue accelerating the pace of change with further expansion of investment channels and more improvements to the IPO process to make it more market orientated and reduce speculation on new issuances. The comments were mainly focused on domestic issues and stressed the importance of better information transparency.
The markets will be watching closely for clearer indicators of policy direction and the release of more concrete measures after the “Two Meetings”, especially with China’s moratorium on IPOs expected to be lifted at the end of March.
Deng says the CSRC is likely to focus on the three main areas: encouraging cross-border flows, managing platform liberalisation and market reform, including improving transparency and protecting investor interests. “If they want to boost the market, investor confidence needs to be improved across the board, both retail, HNWI and institutional.”
Chinese stocks started 2013 on a positive note but euphoria has evaporated since the Chinese New Year holidays as weaker economic data cast doubts on the recovery of the world’s second largest economy and investors held back waiting for the dust to settle from the leadership changeover.
Elsewhere, financial regulators may turn their attention to cleaning up the mutual fund and private equity spaces. While the former is already fairly transparent, the latter could prove more difficult as it is currently a fragmented and lightly regulated industry. Ensuring investors are aware of the risks of wealth management products offered by banks is another priority. “One of the main agendas on their mind is all of these wealth management products, nobody knows how they’re run or how returns are generated, but there’s immense investor demand for these short-term products,” says Deng.
On the international front, China’s cross-border investment programs look set to continue expanding at a rapid clip, especially the popular RQFII scheme, which has developed much faster than its sister QFII programme did and is likely to see the arrival of a third batch of actively managed products after allocation rules were recently relaxed. “The various announcements of pilot schemes are likely to continue. A number are already under discussion such as QDII2 and Taiwan RQFII. We expect 2013 to be a very busy year,” Deng says.
In other concrete development to emerge during the meetings, China opened up its stock markets to mainland-based residents of Hong Kong, Macau and Taiwan. Tse says: “I think this is a very encouraging step in that the CSRC is permitting non-PRC retail investors to participate in the A share market for the very first time. This is a sign of the beginning of further reforms to come.”
The CRSC has implemented new regulations allowing brokerages to issue a range of asset-backed securities, as well as issuing draft regulations giving stock ownership rights to brokerage employees. The regulator also released proposals to expand the QDII programme that lower eligibility requirements and allow participants to invest in CSRC-approved derivatives listed on foreign exchanges.