Date
20 October 2017
Liu Shiyu's remarks on insurers using improper funds for aggressive buyout activities had an impact on share prices of some Chinese firms on Monday. Photo: China dwnews
Liu Shiyu's remarks on insurers using improper funds for aggressive buyout activities had an impact on share prices of some Chinese firms on Monday. Photo: China dwnews

Why China needs a financial super-regulator

Public opinion is divided over the harsh comments made late last week by China’s top securities regulator on professionals involved in the asset management industry.

During a speech at a meeting of the Asset Management Association of China on Saturday, Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), lashed out at asset managers who engage in leveraged buyouts through the use of “public funds” or “improper money”.

Describing such asset managers as “barbarians”, “evil monsters” and “poisonous pests”, the regulator said unhealthy practices are corroding the business environment in China.

Following the strong rebuke, some observers said Liu was too emotional and dramatic, but there were others who agreed that the tough criticism was entirely justified.

While the issue can be debated, the remarks have however brought to the fore a key underlying problem: the fragmented regulatory framework of financial institutions in China.

Three top regulators – China Banking Regulatory Commission, China Insurance Regulatory Commission, and the CSRC — hardly work together, leaving loopholes and gray areas that can be easily exploited.

A case in point is the insurance industry, where we have seen firms engaging in aggressive buyout activities using policy holders’ money.

Active bidding by the firms have led to share prices of the target companies, as well as those considered as potential targets, spiking substantially, creating a bubbly market.

The problem is that there are no clear rules with respect to regulating insurers’ activities in the securities markets, such as what sort of funds can be used and the maximum limit of each type of fund.

Since Liu is in charge of the securities markets, it may have been inappropriate for him to talk about how insurers should be regulated.

That said, he could have been trying to sound an alarm due to the fear that heated buyout activities could ultimately lead to an ugly fallout in the market.

Liu is warning of the dangers ahead and also sending a signal to the insurance regulator that the ball is now in its court.

On Monday, several firms — such as Gree Electric Appliances Inc of Zhuhai (000651.CN) and Guizhou Wire Rope Co. (600992.HK) — that had been targeted earlier by Chinese insurance groups for stake bidding saw their share prices plunge the daily limit.

This indicates that the stock market is taking Liu’s words seriously.

Meanwhile, there are reports that the State Council has dispatched teams of officials to the US and UK to study the systems in those countries and help China create a super financial regulatory body.

This article appeared in the Hong Kong Economic Journal on Dec. 6

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Hong Kong Economic Journal columnist

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