Those looking forward to a new broom sweeping clean will have to wait, as the priority for China’s new chief securities regulator will be stability rather than reform, industry insiders say.

Schemes in the reform pipeline, including reform of the initial public offering process and plans for a Shenzhen–Hong Kong stock connect scheme, to complement the existing Shanghai–Hong Kong stock connect that would enable global investors to trade more mainland shares, were likely to be shelved in the next few months, they said.

The mainland’s benchmark Shanghai Composite Index plunged 6.41 per cent on Thursday to close at 2,741.25, it’s lowest level since February 3, just days after the appointment of Liu Shiyu as the new chairman of the China Securities Regulatory Commission.

The big drop would have reminded him just how volatile markets dominated by retail investors can be, and how hard it could be to stabilise casino-style markets crammed with speculators and vested interests.

“It is always challenging to find out the best supervisory path in China, as the market is torn by the struggle between small retail investors and big ones,” a CSRC official told the South China Morning Post. “We can never copy what is done in the US because our market participants are of different nature.”

The pressure will be bigger for Liu if he wants to push forward with more reform
Judy Chang, China International Fund Management Asset Management

The official said Liu was “doing research”.

A senior analyst with a state-owned brokerage said a new CSRC chairman usually took a few months to do research and talk to market participants before delivering a formal speech highlighting his vision and ideas on governance.

In his first speech to senior CSRC officials on Tuesday, Liu urged them to fight back against market manipulation and actively guide funds into the stock market.

Liu’s predecessor, Xiao Gang, was replaced after coming in for heavy criticism from retail investors, many of whom lost heavily when the mainland China markets plunged last summer. The Shanghai Composite Index spiked in just a few months to a seven-year high to 5,178.19 by mid June, but dropped by almost half by late August to 2,850.71. Since then it has struggled to gain substantial upward momentum.

Xinhua said 22 trillion yuan (HK$26.1 trillion) had been erased from the A-share markets’ capitalisation, with the average retail investor losing 43,700 yuan.

Under great pressure to bolster the benchmark after the “national team” spent trillions of yuan of capital in a bid prop up the market, Xiao led the short-lived decision to impose a “circuit breaker” mechanism in January. It lasted on four days before being scrapped after fuelling panicked sell-offs when markets fell, and Xiao was widely criticised for the scheme’s flawed design.

“I do not think Xiao is as poor in management capability as some people complained,” said Judy Chang, chief investment officer of China International Fund Management Asset Management. “He just did not have good timing. Moreover, he was more active in reform, for instance, pushing forward an easier and more transparent system for initial public offerings. But with regards to what has happened, the pressure will be bigger for Liu if he wants to push forward with more reform.”

In December, Beijing gave the green light to the push for registration-based IPO reform, and pledged to finish the transition in two years.

The reform, actively pushed by Xiao and drawing Western listing systems including those in the United States, is meant to simplify the listing process and reduce the possibility of abuse of power by CSRC officials.

However, investors are worried that making it easier to list on the Shanghai and Shenzhen bourses will flood the market with new shares, dealing a blow to current A-share valuations. Thursday’s plunge was largely the result of rumours that the regulators were going to make listing reviews for the Nasdaq-style ChiNext board in Shenzhen easier from March 1.

Chen Shuang, the chief executive of state-owned financial conglomerate China Everbright, said he was not expecting the Shenzhen–Hong Kong stock connect to be launched in the near term.

“Sentiment has not fully recovered on the mainland market, also the mainland authorities appear to have prioritised the task of curbing capital outflows and have strengthened controls on cross-border capital flows,” he said.

The Shanghai–Hong Kong stock connect was launched in November 2014 on Xiao’s watch. The scheme allows international investors to trade up to 13 billion yuan of Shanghai-listed A shares a day via Hong Kong brokers, while mainlanders can trade up to 10.5 billion yuan of Hong Kong stocks via mainland brokers a day.

Roughly 40 per cent of the 300 billion yuan aggregate quota to buy Shanghai-listed shares had been used up by Thursday, compared with 50 per cent of the 250 billon yuan aggregate quota to buy Hong Kong-listed shares.

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