After encouraging liberalization to fuel a slowing economy, Beijing is becoming increasingly anxious about financial shock
April 20, 2017 4:53 a.m. ET
SHANGHAI—The Chinese government is trying to ensure financial-system stability in a pivotal political year by focusing on the officials who do the regulating.
China has removed three of its four top financial-industry regulators over the past year or so as it also tightens the reins on banks, brokerages and insurers. The latest to fall was liberalizing insurance regulator Xiang Junbo, who jazzed up a stodgy business but caused ripples beyond his agency’s purview.
After encouraging liberalization for banks, brokers and insurers in hopes of fueling a slowing economy, Beijing is becoming increasingly anxious about possible financial shock.
The new message for its regulators: back to basics.
Until recently, China’s leadership promoted broadening the financial sphere, from wider equity ownership and peer-to-peer lending to online insurance sales. The idea was to spur new consumption and business activity, open access to investments and loans and, in the case of insurance, energize a moribund industry.
But then came the $5 trillion stock meltdown of 2015. The government responded to the debacle by pumping in hundreds of billions of dollars in emergency support, restricting speculative instruments and firing the top market regulator. Since then, authorities have toppled the country’s leading hedge-fund manager, the head of the largest brokerage and the chairman of one of China’s Big Four banks on allegations of corruption. A billionaire with holdings across the financial sector, Xiao Jianhua, is presumed to be in custody.
New regulators are emphasizing tougher fundamental risk control by trying to clearly delineate responsibilities.
As they let financial firms experiment, China’s various regulatory agencies failed to coordinate. The International Monetary Fund highlighted gray areas in regulation as a medium-term economic risk in a mid-2016 report that described “the increasingly large, opaque and interconnected financial sector.”
The back-to-basics push is meant to neutralize chances a financial flare-up could detract from the Communist Party’s once-in-five-years leadership conclave expected late this year, when President Xi Jinping needs support to increase his power.
“This is completely defensive,” says Anthony Neoh, a longtime adviser to Chinese financial policy makers and a board member of giant Industrial and Commercial Bank of China Ltd. “Markets have a way of running away from governments all the time.”
The agencies didn’t respond to questions.
In a January address to the World Economic Forum where he lauded globalization, Mr. Xi displayed his distrust of financial markets and their monitors. He blamed the 2008 global economic crisis on “excessive” pursuit of profit and the “grave failure of financial regulation.”
By then a shake-up of Chinese financial regulation was well under way. One agency after another has issued rules meant to rein in use of financial instruments for speculative purposes, admonishing firms that innovative activity must benefit the real economy, not merely spin new fortunes.
Insurance is one industry widely viewed as running amok, as companies—often newly formed insurance arms of property businesses—raised cash fast by peddling policies that doubled as short-term high-yield deposits. Anbang Insurance Group Co. had defined the trends, bulking up and making bold plays like the purchase of New York’s Waldorf Astoria hotel.
Wielding increasing financial clout that made waves for banks and stock markets, the insurers drew attention—and name-calling, including by regulators of other segments of the financial sector.
In December, the new stock regulator, Liu Shiyu, criticized insurers’ stock-buying. “Using improperly sourced money for leveraged buyouts, turning from strangers into barbarians, and finally robbing the industry is not OK,” he said.
Under fire itself, the Insurance Regulatory Commission quickly dialed back support for the deposit-like insurance products and banned a developer-turned-insurer from the sector for a decade. The agency’s No. 2 official, Chen Wenhui, seemed to give Anbang’s high-profile chairman, Wu Xiaohui, the cold shoulder at a Beijing conference, nearly sprinting down a hallway as he waved off Mr. Wu, who was trotting behind asking to chat.
Anbang and the insurance regulator declined to comment.
On April 9, the Communist Party’s anticorruption watchdog announced an investigation into Mr. Xiang, the top insurance regulator and industry champion. Details of the probe aren’t known and he isn’t available for comment.
Mr. Xiang had made no secret of his inclination to reduce scrutiny of insurers, saying in a 2013 interview published in The Wall Street Journal that the industry had been ”regulated to death.”
To give insurers room to grow, he said, “We have relaxed regulations in almost every area possible.”
Mr. Xiang’s downfall was reported in Chinese state media together with warnings from Premier Li Keqiang that “the financial sector is vulnerable to risks such as bad assets, shadow banking and illegal internet financing.” According to the chief executive of one insurer that benefited from Mr. Xiang’s regulatory loosening, whoever succeeds him is likely to “put on hold anything that jumps out of line.”
The lone Chinese financial-regulatory chief who so far has retained his title is central-bank Gov. Zhou Xiaochuan, who at 69 is already four years overdue for retirement. But the People’s Bank of China has joined the shift toward stability, and efforts to internationalize the yuan have turned into a quest to keep the currency from weakening too fast.
The focus on stability was also a factor in the November ouster of Finance Minister Lou Jiwei, whose focus on economic overhauls threatened China’s short-term growth.
Politics appear to be weighing on stock regulator Mr. Liu, a banker installed at the helm of the China Securities Regulatory Commission just over a year ago following the firing of his predecessor, who had led the agency during the 2015 stock crash.
In a speech last weekend, Mr. Liu said the need to crack down on financiers who disturb market order and maintain stable capital markets is currently “particularly weighty,” describing the coming party conclave as “the top priority of the party and political life of the nation.”
—Chao Deng and Yang Jie in Beijing and Xie Yifan in Shanghai contributed to this article.
Write to James T. Areddy at email@example.com
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