Will Xiao Gang’s Resignation Save China’s Stock Market?
Xiao Gang, Chairman of the China Securities Regulatory Commission (CSRC), stepped down on February 20 in the wake of a series of stock market crashes and failed regulatory policies. The Communist Party of China appointed Liu Shiyu, President of the Agricultural Bank of China, as the country’s new chief stock regulator.
China’s A-share, shares of the Renminbi currency that are purchased and traded on the Shanghai and Shenzhen stock exchanges, experienced one of the most volatile periods in history during the second half of Xiao’s term. Starting in September 2014, the Shanghai Stock Exchange Composite Index, the SSE Composite Index, rose from around 2,000 to 5,164 within 10 months. Three crashes followed in June 2015, August 2015, and January 2016, each time causing roughly a 30 percent loss in the Composite Index. As for individual stocks, in the period between June and September 2015, more than 1,000 stocks hit limit down every four days.
To combat the volatilities, the CSRC introduced the circuit breaker system to the stock market in the beginning of 2016. During the four days that the system was in place -- the CSRC quickly suspended the system after its disastrous performance -- SSE plunged 11 percent.
Investors all over China blamed the crises on Xiao’s incompetency. Many demanded his resignation. Disappointment and antipathy towards Xiao strengthened in January, when the circuit breaker system failed completely. However, the stock market showed signs of improvement immediately following Xiao’s resignation; the Shanghai Composite Index increased by 2.35 percent the next trading day.
However, Xiao represents not the only reason for China’s stock market mess. On the surface, margin trading, or borrowing money from a broker to purchase stock, and its regulation led to high degrees of volatility. Indeed, many critics note that the CSRC did not limit margin trading as much as it should have in the beginning, and it later cracked down on it excessively. But had the government not continuously injected confidence into the market, there would not have been so much margin trading in the first place.
Trying to reverse the economy’s deceleration in 2014, the government began to experiment with the idea of stimulating the real economy through the stock market. In theory, a booming stock market will provide both state-owned enterprises and private firms with sufficient funds for production and investment. As a result, the government strongly encouraged ordinary people to invest in the stock market. In April 2015, two months before the first market collapse, an article on People’s Daily still claimed that 4,000 was the beginning of the bull market. As a stock regulator, Xiao simply could not control the policy directions of the central government. Other factors, including the lack of talents in the CSRC and the slow process of institutionalization, were also out of Xiao’s control.
Three days after Xiao left the position, SSE Composite Index again plummeted by more than 6.41%, reminiscent of the market crashes during Xiao’s term.
Indeed, Xiao Gang might not be competent enough. But ultimately, he is just another tragic scapegoat that both officials and ordinary investors can spit upon.