Gang had been tasked with liberalising Chinese equity markets so as to integrate the nation's financial systems with that of global standards in an effort to attract foreign investment to its shores. However the former deputy Governor of the PBOC played his hands to fast and loosened the grip on leverage allowance effectively spurring on valuations to treble over a period of less than a year. The sped up process led to concerns from asset managers that mass distortions were beginning to present themselves and government needed to intervene to prevent any further damage that could descend down on financial markets.
These warnings were merely brushed aside with the regulator going as far as to arrest any individual caught sowing seeds of doubts amongst the droves of newly inducted investors riding high from the risky speculative game playing itself out.
True to their word chaos covered the market quickly with frantic daily moves that would make any trader sick. The CSRC responded by trying to coax the market out of believing there was any concerns contributing to the often fluctuating and dangerous nature the stock market had turned into saying that it was a momentary pause in trend after an impressive rally that would continue driving higher once uncertainty had blown over. It didn't...
As volatility gathered momentum the contagion spread to the entire global financial system which at one point got so bad a team assembled by the regulatory authorities were assigned the task of artificially pump the market by buying up large tranches of stock towards the end of the day with market participants picking up on this trend very quickly. Initially exacerbating the problem the market eventually settled down but fear remained.
The icing on the cake must've been the implementation of circuit breakers intended to halt trading when volatility got out of hand. The date set down for the start of their functions was the New Year but it wasn't four days in that the system was already creating haywire with markets entering back into the chaotic scene it found itself four months prior. A decision was made to scrap the system before it caused anymore harm which marked a big dent of confidence in the regulators ability to maintain instability.
Replacing Gang as the chairman is Liu Shiyu who joins the organisation after having served previous stints in the same role at the Agricultural Bank of China but most notably his work in developing the bond market in China has been recognized by market participants as an added boost to his employment as the head of the CSRC.New boss at China's CSRC has 99 million local investors to win over (plus some global ones) https://t.co/QbgZUij3Ef pic.twitter.com/YZHK9frihK— Sarah McDonald (@mcdonaldsarahj) February 22, 2016
Shiyu takes over the role at a pressing time for Chinese equity markets which will be testing to the new regulator head with the height of global volatility being seen to have generated from the rudimentary attempt to align equities in China with the rest of the world that has subsequently caused ructions throughout financial markets.
Judging the last eight months of price action in Chinese securities would task Shiyu with a tough job of trying to restore confidence in a system that has failed to live up to its expectations policymakers had paraded about by cutting deep into the pockets of unbeknown investors of which the majority is made up of middle class Chinese citizens.
Market stability forms an important foundation in drawing confidence to a system that requires copious amounts of trust in terms of transparency, marketability and functionality. The balance that needs to be struck is to allow the forces of market buyers and sellers to find a state of equilibrium and at the same time reassure the rest of the world that current valuations are correct, a hard proposition to sell.
Towards the start of 2015 Chinese equities were valued at around $10 trillion but today find themselves hovering just above $5 trillion representing roughly half of what it stood at a year ago with some analysts going as far as to say that equities remain overvalued and could still come in for a hard blow in months to come.
Whether this comes to fruition is the least of Shiyu worries as he needs to adequately cement down rules that set down a long term basis from which to work from that not only promotes confidence but also doesn't hinder the function of the market. Participants lack of certainty around the CSRC seems more likely to cause problems than actual market themes so the need to get it right is placed on the highest priority.
But more importantly, the way Chinese equities are viewed from a global perspective will probably be the toughest task that needs to be accomplished. The sheer population of China catapults their economy to amongst the top ranking in the world if managed properly however the completion to a fully fledged economic powerhouse requires that financial systems are properly set up to benefit from the large flows in and out of that nation due to the size of the economy. China is yet to convince its developed counterparts of such transition with the latest blunders confirming this.
It'll be interesting to see how markets respond over time to the measures Shiyu puts in place but it is certain that he will be watched carefully to any missteps he makes. Let's hope that maybe this time we have the right man for the job.
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