Chinese Securities Regulator Is Out, but Little May Change

HONG KONG As Chinas economic woes intensified, the nations top securities regulator appeared to have the support of the Communist Party leadership, even when his efforts to stabilize the stock markets faltered and in some cases made matters worse. Just weeks ago, he issued a lengthy defense of his record and the securities agency aggressively denied reports he had offered to resign.

But on Saturday, Beijing abruptly fired the securities chief, bowing to criticism of the countrys bungled attempts to stem a market rout that started last summer. The dismissal of Xiao Gang, coming in the form of a terse statement from state-run news media, represents a rare public reversal for the Communist Party and a gamble by its leader, Xi Jinping, whose management of the economy has come under growing scrutiny.

Underperforming officials in China often get shuffled to less-influential jobs or are allowed to resign quietly. Most officials who have been fired of late have been ensnared by the broad crackdown on corruption by Mr. Xi.

Mr. Xi appears to be betting now that in heeding public opinion and replacing Mr. Xiao in such a high-profile fashion he can buy time to limit damage to the partys reputation from the stock market mess and the broader economic slowdown. But if the problems continue, he risks further undermining faith in his leadership and his governments ability to navigate a difficult economic transition.

For decades, the party oversaw spectacular growth, buttressing its authoritarian rule and cementing Chinas role in the global economic hierarchy. Now growth has fallen to its slowest pace in a quarter-century and the partys failed attempts to control the markets and the currency are unnerving investors around the world. Mr. Xiaos dismissal came days before global finance ministers are to meet in Shanghai, expecting answers from Chinas leaders on how they will restore confidence in their ability to competently manage the economy.

Replacing Mr. Xiao is only a first step to cleaning up the mess in the markets. His successor will need to follow up with swift action, to improve the functioning of Chinas equity markets and wean them off state intervention, without doing further damage to the economy

This will be a positive for the stock market, but the key will be the economic policies issued by the government in the next few months, said Chen Bo, an Beijing-based investor and independent political scholar. Without them, he said, the short-term gains in the stock market in the next couple of months could be followed by another serious slump.

But Mr. Xiaos replacement, Liu Shiyu, may not necessarily offer the bold change the markets need. Mr. Liu, chairman of the Agriculture Bank of China, has little experience in equity markets.

The shake-up also does little to solve the underlying problem: a government increasingly under the control of one man, President Xi, who is trying to subdue economic turbulence. It is this penchant for control, investors and analysts say, that is driving talent away from the technocratic bureaucracy and rewarding officials who fall in line.

Thats the problem of a very top-down policy style thats emerging in China now, said Victor Shih, a professor at the University of California, San Diego, who studies the confluence of finance and politics in China. No one dares to challenge whatever preconceived notion the top leadership has.

China has a wealth of talented financial professionals, many educated at top universities in the United States, who are now entering the prime of their careers. But unlike in the United States, where talented people rotate in and out of government, few of them may be willing to take jobs in the China Securities Regulatory Commission, Chinas equivalent of the Securities and Exchange Commission.

The pay is too low and the risks are too high. Mr. Xis anticorruption drive in recent months has focused on the financial sector and the securities regulator itself, making it a difficult environment even for officials free of graft, said Mr. Chen, the investor.

The professional makeup of the C.S.R.C. is really not even up close to that of the big brokerages, Mr. Chen said. This problem isnt found only in the equities sector. Its much more widespread than that.

Mr. Liu is typical for a top financial official. He spent his career working in government committees and at the central bank.

Fred Hu, the chairman of Primavera Capital Group and the former chairman of Goldman Sachs for China, called Mr. Liu a highly experienced and results-oriented financial official, but said he would find himself in a challenging position, like his predecessor.

Over and time again the regulators have struggled to meet some of the difficult tasks modernizing securities markets, engineering rising equity prices, while protecting investors and ensuring market stability, Mr. Hu said in an email.

While Mr. Liu has little experience with markets, he does have connections. In the mid-1990s, he worked the state-owned China Construction Bank. The bank, at the time, was headed by Wang Qishan, who is now overseeing the anticorruption campaign as one of seven members of the Communist Partys ruling Politburo Standing Committee.

Hes definitely not a bold reformer, Mr. Shih said of Mr. Liu.

The new securities chief may be in an impossible position, expected to control inherently uncontrollable markets and take the blame if the efforts fail. The push by Mr. Xis to assert state control over the markets and the economy go against the philosophy of Chinas early reformers under Deng Xiaoping, the paramount leader who sought to give more space to the market.

The approach that they took toward the stock market is telling me that they are not willing to let go control, Yasheng Huang, a professor of political economy and international Management at M.I.T., said of Chinas current leaders in a December interview.

One former Chinese financial official, who requested anonymity so he could freely discuss personnel issues, said Mr. Xiao, the former securities chief, might be heading to a new post to help oversee economic policy under Chinas cabinet. The influential magazine Caijing also reported that Mr. Xiao may be moving to a new government position.

The shake-up at the securities regulator is also likely to result in renewed questions about the eventual retirement of Zhou Xiaochuan, the head of Chinas central bank since 2002.

When Prime Minister Li Keqiang criticized the governments handling of financial markets at a meeting last Monday of the State Council, Chinas cabinet, he cited management of the currency. The currency falls under the direct purview of the Peoples Bank of China.

Mr. Zhou, 68, was widely revered as the man who spearheaded considerable financial deregulation. He also led the countrys currency, the renminbi, to recognition by the International Monetary Fund last November as one of the worlds main reserve currencies.

But Mr. Zhous stature suffered after an abrupt 4 percent currency devaluation last August. The currency situation greatly alarmed financial markets. Economists and monetary specialists around the world, including Christine Lagarde, managing director of the International Monetary Fund, called for the Chinese central bank to communicate better with financial markets.

Three years ago, said Minxin Pei, a specialist in Chinese politics at Claremont McKenna College, it would have been unthinkable for anyone to suggest that Mr. Zhou retire.

He would be a good scapegoat now, he said.