23 January 2019
Many small investors blame the persistent decline of small and mid-cap shares on CSRC chief Liu Shiyu’s reforms. Photo:
Many small investors blame the persistent decline of small and mid-cap shares on CSRC chief Liu Shiyu’s reforms. Photo:

How China’s securities watchdog performs a tight balancing act

China Securities Regulatory Commission (CSRC) Chairman Liu Shiyu recently invited retail investor representative (also an economist) Han Zhiguo to lunch in the CSRC canteen.

After the lunch, Han revealed in his Sina Weibo account that during the two-and-a half-hour lunch, they agreed on several measures to stem the slide of mainland equities, including the slowdown of IPO approvals and introduction of tighter rules regarding the disposal of non-tradable stocks.

Interestingly, the CSRC has not denied Han’s remarks. Coincidentally, the CSRC approved seven IPOs last Friday, compared with the typical 10 new IPOs each week.

Also, the regulator, published rules on Saturday aimed at preventing major shareholders of listed companies from reducing their holdings in an “intensive, massive and disorderly” manner that disturbs market order and dents investor confidence, according to a statement on its website.

Does that mean Liu is turning his back on the reform he has been pushing?

To answer this question, we need to firstly take a look at what actually led the slide in mainland stocks.

Whether mainland equities are tanking or strengthening in fact depends on how you look at it, because the market has become extremely bipolar.

While the Shanghai Composite Index, which covers more than 1,100 shares has been hovering around lows this year, the SSE 50, which covers only the top 50 stocks, has been going from strength to strength.

That means the performance of heavyweight stocks and small and mid-cap stocks has become increasingly divergent and most of the market weakness comes from mid to small caps, and this loss-leading segment is precisely where small investors are most heavily invested in.

Many small-cap investors have vented their anger at the series of reform measures taken by the CSRC since Liu took office early last year.

Liu previously accelerated approvals of IPO deals and relaxed restrictions for selling non-tradable stocks.

In theory, Liu has taken the right steps. Mainland individual investors tend to overly focus on small-cap stocks, while blue-chip stocks have been largely ignored. That has created a huge valuation gap, which led to a market meltdown two years ago.

The authorities are keen to squeeze bubble out of small-cap shares, as well as stabilize the overall market using blue-chip stocks.

The reform is supposed to lure more capital into large-cap stocks and make China’s capital market healthier.

However, most retail investors have been badly hurt by the recent underperformance of small-cap stocks. And some might be forced to close their positions as they’ve used high leverage.

Therefore, if prices of these small-cap stocks continue to tumble, it might create a domino effect. That would undermine the financial and political stability ahead of the 19th party congress.

As a result, the nation’s financial regulators have stopped the heavy-handed approach to reform to allow more breathing space to market participants.

For instance, the People’s Bank of China said on May 12 that it has to ensure stable liquidity while pushing for deleveraging.

While there is a need to adjust the reform pace, Liu has to balance the interests of different parties. Big shareholders, for example, have been pushing for easier rules on the sale of non-tradable stocks they hold.

The whole lunch could have been just a show to justify Liu’s policy fine-tuning rather than a sign that the securities watching has changed course completely.

This article appeared in the Hong Kong Economic Journal on May 29

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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