Xiao Gang just can’t win. Just days into the new year, Xiao, chair of the China Securities Regulatory Commission, had to explain to senior leaders in Beijing why the CSRC’s so-called circuit breaker mechanism had worsened the sell-off of Chinese stocks that began last summer.
“Mr. Xiao has an unenviable job — when people make money, they would not thank him, but when they lose money, he becomes a scapegoat,” says Hong Hao, managing director of research at Hong Kong–based brokerage BOCOM International Securities. “If someone else were in his position, could he or she do a better job?”
The CSRC adopted the circuit breaker in a bid to steady the market, but on January 4 — the first trading session of 2016 and the first day the mechanism came into effect — the benchmark Shanghai Stock Exchange Composite Index fell by 7 percent, the maximum allowed, and trading was halted early. After a brief respite, selling pressure triggered the circuit breaker again three days later, forcing the market to shut after just 29 minutes of trading. That evening CSRC officials pulled the plug on the mechanism.
“The design of the circuit breaker generated the magnet effect that made prices gravitate toward breakers and accelerated the sell-offs,” says BOCOM’s Hao. “But they corrected the mistake by suspending it quickly. It is a good outcome of a bad situation.”
The market continued to drift lower, though. As of January 22, the Shanghai Composite had fallen 17.6 percent year-to-date and sat 43 percent below its 2015 peak last June.
Rumors persist that Xiao, 58, has turned in his letter of resignation to the top brass several times, only to be rebuffed. On January 8 the website of respected financial magazine Caijing reported that his resignation would be approved “over the weekend,” but more than two weeks later he’s still on the job.
Xiao, who took charge of the CSRC in 2013 after spending much of his career as a bureaucrat with China’s central bank, has taken steps to deepen the country’s capital markets, including allowing short-selling and margin trading. These measures, all adapted from the West, have had mixed results.
The world should cut China some slack, argues Kenneth Courtis, former vice chair of Goldman Sachs Asia. “China has come a very long way in a very short time, probably faster than for what the regulators are prepared,” says Courtis, who now serves as chair of Starfort Investment Holdings, a Cayman Islands–registered firm with offices in London, New York and Tokyo. “What that really means is that China has not yet developed the sometimes more sophisticated means of intervention that we see employed on occasion in more mature markets.”
Li Jiange, a former secretary to ex-premier Zhu Rongji, who oversaw the launch of the nation’s stock markets in the early 1990s, is less charitable. “China’s entire financial system lacks people who have adequate experience, especially experience in crisis management,” Li, now a professor at the Graduate School of the Chinese Academy of Social Sciences and Renmin University of China, griped in a recent speech.
Xiao spent more than 20 years rising through the ranks at the People’s Bank of China, becoming a deputy governor, before being named chair of Bank of China in 2003. He was appointed to head up the CSRC in 2013, but reports say his real ambition was to become governor of the central bank.
The official has said he only studied economics, at the Hunan College of Finance and Economics, because he didn’t have the grades to get into a Chinese literature program at a prestigious university. “I didn’t study economics voluntarily,” Xiao told Hong Kong’s Phoenix Satellite Television Holdings. “I didn’t even know what finance was.”
Some would ask whether he does today. Xiao, or whoever succeeds him, will have to be a quick study. Investors are counting on it.
Follow Allen Cheng on Twitter at @acheng87.
