China's Top Regulator Woos Investors
Carrie Pan is about as intrepid as they come. Since she began investing in Chinese stocks six years ago, the 29-year-old Shanghai accountant has seen almost half the value of her portfolio evaporate, including a 40 percent loss last year alone. Undeterred, Pan recently bought 1,000 shares of Yang Quan Coal Industry Group. “I believe stocks will rise,” says Pan, watching her holdings on a computer screen in her two-bedroom apartment on a recent afternoon of maternity leave. “Guo has already done lots of things to support the stock market since he took office, and he is very keen on improving the market’s performance.”
That would be Guo Shuqing, who in October was appointed chairman of the China Securities Regulatory Commission, the equivalent of the U.S. Securities & Exchange Commission. A fluent English speaker, Guo is also a former vice governor of the central bank and most recently was chairman of China Construction Bank, the nation’s second-largest lender by market value. His challenge is modernizing China’s capital markets so that they can better support the country’s $6 trillion economy.
In the last few months he has set about instituting reforms to shore up investor confidence, wean businesses off state-backed financing, and lure more foreign money into China. “Our current stage of work is focused on improving the fair play of the market, protecting investors’ legal rights, and enhancing the ability of serving the real economy,” Guo, 56, said in a People’s Daily report posted on the CSRC website in March.
A key aim for Guo is restoring the trust of investors who’ve taken a beating in the stock market over the last few years. After peaking at 6,092 in 2007, the benchmark Shanghai Composite Index fell to just above 1,700 by the end of 2008. Four trillion yuan ($630 billion) of government stimulus provided a temporary lift in 2009, yet the market fell another 33 percent from 2010 through 2011. China’s 50 million individual investors lost an average of 40,000 yuan last year, according to a May 9 People’s Daily report. To entice them back into the market, Guo has urged listed companies to pay more cash dividends and persuaded the Shanghai and Shenzhen exchanges to cut stock-trading fees by 25 percent.
He also has taken aim at China’s initial public offerings. Over the last year individual investors were burned by a series of overpriced offerings that plunged after their debuts, including that of Sinovel Wind Group, China’s biggest maker of wind turbines. The stock is down about 60 percent since the company began trading in January 2011. The CSRC has taken steps to prevent overpricing of IPOs. If the price-to-earnings ratio of an IPO is expected to be 25 percent higher than that of publicly traded companies in the same industry, the company will need to disclose the factors that went into the pricing decision, the CSRC said in an April 28 statement. The CSRC will now invite as many as 10 individual investors to advise on IPO pricing, a role previously restricted to institutional investors. Guo is dealing with “all the historical hangover,” says Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting. “That’s definitely very helpful for the healthy, long-term development of China’s capital market.”
Guo also has moved to attract more cash from outside the country. Only approved foreign institutional investors can buy or sell yuan-denominated securities. In April the CSRC announced that it would nearly triple the amount that approved investors can invest in Chinese securities, to $80 billion.
Next on the agenda: the bond market. For years China’s bond market has amounted to little more than money shuffling between state entities, with state-owned companies selling their debt to state-owned banks at controlled interest rates, and banks holding the bonds on their books. In this cozy system, corporations aren’t allowed to default. Borrowers that come close are bailed out by local governments and banks. As a result, China’s bond market is tiny. At $661 billion, it’s just 9 percent of China’s gross domestic product. In the U.S., the $7.9 trillion in fixed-income securities equals more than half the country’s total economic output. A more active bond market would provide funding for small businesses and divert risk away from banks, which provide 75 percent of the nation’s credit via loans.
In early June Guo launched a plan to let small and medium-sized companies sell debt comparable to speculative-grade bonds. Translation: Get ready for Chinese junk bonds. The first went on sale as a private placement on June 8, with a 50 million yuan offering by Suzhou Huadong Coating Glass. Speculative-grade offerings could lead to China’s first corporate default—which could be a good thing because it would help bond investors price risk, says John Sun, managing director at Citic Securities International in Hong Kong. “The high-yield issuers will be small companies, so the impact on the whole market will be small,” he says. Psychologically, though, it will be important because it will show investors that the market is operating freely. “For a mature bond market, we should allow some firms to go bust,” says Sun.
Pushing through these reforms has required Guo to consolidate his power over other regulatory agencies, moves that could create enemies who might stymie his efforts. “What he needs to do is pick fights he can win,” says Fraser Howie, a Singapore-based managing director of CLSA Asia-Pacific Markets.
Guo has already shown his bureaucratic dexterity. From 2001 through 2005 he was head of the State Administration of Foreign Exchange, which manages China’s foreign exchange reserves. In that role Guo pushed through reforms by forging relationships between departments and building support for his positions, according to Hong Weizhi, a former SAFE spokesman. In the end, it’s all about inspiring confidence, something Guo seems to be good at. Says Hao Hong, chief China strategist at Bocom International Holdings in Hong Kong, “Guo is the man.”