Xiao Quits Bank of China to Take Helm at Securities Watchdog

Xiao Gang, who stepped down yesterday as chairman of Bank of China Ltd., will take on the challenge of restoring confidence in Asia’s third-largest stock market as head of the nation’s securities regulator.

His appointment was announced to China Securities Regulatory Commission staff at a meeting yesterday, according to a person with direct knowledge of the matter who asked not to be identified because he isn’t authorized to speak to the media. The 54-year-old, who resigned from Beijing-based Bank of China because of “the needs of national financial work,” will succeed Guo Shuqing at the watchdog.

Xiao is tasked with overseeing stocks in Asia’s worst-performing major market of the last three years, as well as deepening a bond market supervised by multiple regulators. His appointment comes as China transitions to a new government under Premier Li Keqiang, who pledged over the weekend to open the world’s second-biggest economy to more market forces even when it feels “like cutting one’s wrist.”

“Xiao is likely to extend Guo’s policies, but there will definitely be some changes,” Wang Aochao, Shanghai-based head of research at UOB Kay Hian Ltd., said today. “Handling resistance to reforms will be Xiao’s biggest challenge.”

China’s equities benchmark index, which had plunged to near a four-year low in December even as Guo, 56, withheld approval for more than 800 initial public offerings, rallied to end January in a bull market before paring back gains.

Government Reshuffle

Guo’s future role wasn’t disclosed at the CSRC meeting, the person said. He may be appointed governor of Shandong province in eastern China, the South China Morning Post reported on March 13. The regulator’s Beijing-based press office declined to comment on Xiao’s appointment today.

Shares of Bank of China fell as much as 3.4 percent in Hong Kong trading today, closing at HK$3.49, a loss of 1.7 percent. The Hang Seng Index dropped 2 percent.

Li, 57, vowed to target 7.5 percent annual economic growth through 2020 after being named premier on March 15. His economic team retained People’s Bank of China Governor Zhou Xiaochuan and added sovereign wealth fund chief Lou Jiwei as finance minister after a once-in-a-decade leadership transition. Zhou, 65, had previously served as chairman of the securities watchdog between 2000 and 2002.

Xiao may be a “transitional figure” at the securities regulator as the government prepares him for a more senior role, such as succeeding Zhou, said UOB’s Wang.

Reforms Slowdown

“If that’s the case, the pace of new measures being pushed out may slow,” said Wang. “His focus may be on making sure there’s no major problem within the securities system.”

Xiao’s success in steering the nation’s largest foreign-exchange lender through the global economic crisis and to mounting record profits, as well as his calls for a crackdown on shadow banking, may give him credibility with global and domestic investors.

Xiao was named head of Bank of China in March 2003. Under his stewardship, the Beijing-based lender’s net income probably grew for a seventh straight year to a record 132.5 billion yuan ($21.3 billion) in 2012, according to a Bloomberg survey of 34 analysts. That would match earnings at JPMorgan Chase & Co., the most profitable U.S. bank. Bank of China will report 2012 results by the end of the month.

Still, Xiao’s strategy at Bank of China has been “rather conservative” compared to its local rivals, said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp.

‘Law Abiding’

“Xiao leaves no room for criticism,” said Yuan. “Other banks have come out with all sorts of ways to circumvent new regulations and restrictions, but Bank of China has been conservative and law abiding.”

Xiao had previously held various posts at the People’s Bank of China for more than 20 years, and rose to become deputy governor of the central bank before joining Bank of China, according to the lender’s annual report. He had graduated from the Hunan Institute of Finance and Economics in 1981, and obtained a master’s degree in international economic law at Renmin University of China in 1996.

He became a full member of the Communist Party’s 205-member Central Committee in November.

Bank of China’s profit has grown by an average 31 percent a year since 2006, when its shares started trading. That compares with an average 19 percent increase at HSBC Holdings Plc, Europe’s largest bank by market value, and 20 percent at New York-based JPMorgan. The lender is China’s fourth-largest by assets, and ranks No. 14 globally.

FX Monopoly

Founded in 1912 by Sun Yat-sen, known as the father of modern China, Bank of China held a monopoly on the nation’s foreign-exchange dealings and overseas banking from 1949 to 1994. The lender today has the biggest overseas operations of any Chinese bank, accounting for about 24 percent of its assets at the end of June, data compiled by Bloomberg show.

Xiao took the reins at Bank of China at a time when the lender was struggling to overcome a legacy of fraud and mismanagement. A vice president was given a suspended death sentence in 2005 for embezzling funds and in 2003, a former president was sentenced to 12 years in prison for taking millions of yuan in bribes and gifts.

As chairman, Xiao set up a risk-management system that forces loan approvals to be reviewed by a central oversight commission, according to the bank. Previously, individual branches approved loans without supervision from headquarters.

Overseas Success

On Xiao’s watch, Bank of China also expanded its global reach to more than 11,000 outlets in over 35 countries, according to its interim report. It was the only Chinese bank included on the Financial Stability Board’s provisional list of 28 systemically important financial institutions in 2011.

Its Hong Kong unit was appointed by China’s central bank as the clearing bank for yuan business in Hong Kong in 2003, the first outside the mainland. This year, BOC was selected for the same role in Taipei, while larger rival Industrial & Commercial Bank of China Ltd. won the right to clear yuan transactions in Singapore.

“Xiao has done pretty well in running the overseas business of BOC,” said May Yan, a Hong Kong-based analyst at Barclays Plc who recommends that clients buy the stock. “When the global economy rebounds, BOC’s performance will improve.”

At home, Bank of China and its three largest rivals, which include ICBC, China Construction Bank Corp. and Agricultural Bank of China Ltd., account for about half the outstanding loans in the country.

Biggest Risk

As Chinese banks increasingly came to rely in recent years on higher-yielding off-balance-sheet financing, and especially wealth-management products, to fund their businesses, Xiao repeatedly warned against such operations, calling shadow banking “the biggest risk to China’s banking system.”

“Xiao is very prudent,” said UOB’s Wang. “In the past ten years, he’d rarely made any blunt comments until very recently, when he became outspoken about shadow banking.”

The outstanding balance of banks’ wealth management products may have reached 13 trillion yuan at the end of last year, compared with 8.5 trillion yuan the previous year, according to Fitch Ratings.

“China’s shadow banking sector has become a potential source of systemic financial risk over the next few years,” Xiao wrote in a China Daily commentary in October. “Particularly worrisome is the quality and transparency of wealth management products.”

Xiao’s relative youth and his background working in China’s financial system will make him valuable to the new government, said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group. His “relatively low-key” style may also set him apart from Guo, Chen said.

Bull Market

Since Guo became chairman of the securities watchdog in 2011, the CSRC has expanded foreign investor quotas to buy stocks, cut trading fees and pushed companies to increase dividends. The Shanghai Composite Index entered a bull market on Jan. 29 after rallying 20 percent from Dec. 3. The gauge has dropped 8 percent since its Feb. 6 high.

Guo has also overseen a surge in corporate bond sales as part of China’s effort to wean companies of a dependence on bank lending to finance their operations. Sales of corporate bonds more than doubled last year to 1.41 trillion yuan as share sales declined 12 percent to 286 billion yuan, according to data compiled by Bloomberg.

Xiao’s new role will also give him oversight of China’s securities industry, whose 114 brokerages posted a combined profit of $5.29 billion for 2012, according to the Securities Association of China. That’s 41 percent less than Goldman Sachs Group Inc.’s $7.48 billion.

Xiao will probably continue with reforms, said Chen of Phillip Securities.

“He is a young and pragmatic person,” the analyst said. “By reading his resume, you can tell that the party has been grooming him to take up important roles.”