China mar­ket chaos blamed on ex­o­dus of reg­u­la­tory


At the height of the 2008 fi­nan­cial cri­sis, as Wall Street slashed jobs, Bei­jing took ad­van­tage of the dis­ar­ray to poach top Chi­nese fi­nan­cial tal­ent from over­seas to help re­form its stock mar­kets.

By sum­mer 2015, China's Se­cu­ri­ties Reg­u­la­tory Com­mis­sion (CSRC) needed them more than ever; a year-long mar­ket boom had im­ploded in a few weeks, and the gov­ern­ment was des­per­ate to keep the cri­sis from widen­ing. But the best and bright­est re­turnees, known in China as "sea tur­tles", had al­ready left for the pri­vate sec­tor, dis­il­lu­sioned and dis­ap­pointed.

A for­mer of­fi­cial at the CSRC, one of a group of 20 high-pro­file re­turnees, re­called the CSRC's ap­peal to make "sac­ri­fices for the mother­land". "We moved our fam­i­lies back to China and gave up high-pay­ing jobs, be­cause we wanted to con­trib­ute," he said. He said the group was sent for spe­cial train­ing at Jing­gang­shan, a for­mer rev­o­lu­tion­ary base used by Mao Ze­dong dur­ing the Chi­nese civil war. Their ide­al­ism soon turned to cyn­i­cism. Their pay was a frac­tion of what they could earn in the pri­vate sec­tor, and the CSRC didn't seem to value them.

"Sev­eral years passed, and none of us got pro­moted," said the of­fi­cial. "Some of us didn't even ob­tain a con­crete po­si­tion." "Just at the time they needed peo­ple with both do­mes­tic and in­ter­na­tional ex­pe­ri­ence, those most in­ter­na­tion­ally ex­pe­ri­enced peo­ple were forced out," said Liu Li-Gang, China economist at ANZ. The CSRC did not re­ply to re­quests for com­ment.

Those who left in­clude Tang Xiaodong, for­mer head of ABN AMRO's ex­otic credit de­riv­a­tives, who served var­i­ous roles at CSRC in­clud­ing driv­ing re­forms to for­eign in­vestor ac­cess pro­grams; Li Bing­tao from J.P. Mor­gan Chase's global trea­sury depart­ment, who joined the CSRC plan­ning com­mit­tee; and Luo Deng­pan, for­mer stu­dent of No­bel Prize-win­ning economist Robert Shiller, who took charge of CSRC's in­sti­tu­tional in­no­va­tion depart­ment. None of them replied to re­quests for com­ment.

In­sid­ers who spoke to Reuters point to a ris­ing wave of res­ig­na­tions within the reg­u­la­tory ap­pa­ra­tus over the last 12 months, just when sound ad­vice was most needed. "Nearly ev­ery week, there are peo­ple sub­mit­ting res­ig­na­tion letters," said an of­fi­cial at the Shang­hai Stock Ex­change. "And the pace of peo­ple leav­ing ap­pears to be ac­cel­er­at­ing."

Chi­nese fund man­agers say the exo- dus left Chi­nese mar­kets in the hands of peo­ple who don't un­der­stand mar­kets. "They don't have the same level of ex­per­tise as they did in re­cent years," said a se­nior Chi­nese de­riv­a­tives trader at a for­eign bank in Hong Kong. That led, he said, to mis­guided, counter-pro­duc­tive poli­cies like the crack­down on de­riv­a­tives and "ma­li­cious" short-selling that some say only ac­cel­er­ated the sell­off. "It's not that they aren't smart," said an ex­ec­u­tive at a ma­jor fund who com­mu­ni­cates regularly with the CSRC. "The dif­fer­ence is they don't have fi­nan­cial ex­per­tise."

An of­fi­cial still at the CSRC said reg­u­la­tors failed to grasp the sig­nif­i­cance of the surge in mar­gin fi­nance used for stock spec­u­la­tion that many warned was desta­bi­liz­ing the mar­kets. It's also crit­i­cized for botch­ing re­form of the IPO mar­ket. It re­opened the mar­ket in early 2014 af­ter a year's sus­pen­sion, but un­der new pric­ing guide­lines that in­ad­ver­tently made IPOs a one-way bet that sucked funds from the wider mar­ket. Af­ter a surge in sum­mer IPOs was partly blamed for set­ting off the crash, the CSRC sus­pended them again, in­def­i­nitely.

Such fail­ures have ham­mered gov­ern­ment's cred­i­bil­ity, not least with in­vestors who trusted Bei­jing to res­cue the mar­ket in July and bought back in. Gov­ern­ment di­rected 900 bil­lion yuan ($140 bil­lion) into stocks, but in­dexes con­tin­ued to fall af­ter a brief hia­tus, wip­ing out all the year's gains, and more than $4.5 tril­lion in mar­ket value - more than Ger­many's gross do­mes­tic prod­uct. The heavy-handed in­ter­ven­tion also dam­aged the cred­i­bil­ity of China's public com­mit­ment to fi­nan­cial re­form. An­a­lysts were not sur­prised when global stock in­dex com­piler MSCI

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