Earlier this month, China tried to implement a circuit breaker designed to guard against the turmoil that’s been reverberating through the country’s equity markets since an unwind in a half dozen backdoor margin lending channels triggered an ugly meltdown last summer.
Although the CSRC launched a concerted effort to prop up the market by creating the so-called “national team” which bought nearly CNY2 trillion in shares from June through the end of the year, Beijing has been unable to restore a sense of normalcy.
The inability to stabilize mainland equity prices partly stems from the fact that 80% of the market is comprised of retail investors who are keen on selling any rips in a futile attempt to recover some of the $5 trillion that’s been wiped off the SHCOMP and the Shenzhen in the ongoing rout. Rampant uncertainty surrounding the country’s new FX regime hasn’t helped matters.
Going into the new year, China had tried everything to stop the bleeding up to and including arresting those suspected of contributing to the selloff even when the actions of the accused were perfectly legal. In a kind of Hail Mary maneuver, CSRC chief Xiao Gang dreamed up a circuit breaker which went into effect on January 4. The mechanism halted trading on the SHCOMP and the Shenzhen for the remainder of the trading day in the event the CSI300 fell 7%.
Put simply: the effort was a miserable failure. Apparently, it didn’t occur to anyone in Beijing that by halting trading for the entire day, the selling pressure would only build and spillover into the next session, creating an endless string of limit down halts as investors panic sell at the open. The circuit breaker was abandoned after just three days.
The fiasco was humiliating for CSRC chief Xiao Gang who on Saturday said elevated volatility in China is the result of an "immature market, inexperienced investors, an imperfect trading system and inappropriate supervision mechanisms." Now, apparently at a loss for how to right the ship, Xiao is ready to throw in the towel. “Xiao Gang, the embattled head of China's securities regulator, has offered to resign,” Reuters reported on Monday, citing unnamed sources close to the Party.
“The (Communist Party) central (leadership) is extremely unhappy with Xiao Gang. It is certain he will change jobs," one source said.
"Xiao Gang handed in his resignation last week," a “financial industry source” confirmed.
Xiao’s term as chairman doesn’t technically end until 2018, but we can’t exactly blame him for wanting to duck out early. As noted above, the CSRC’s efforts to keep the equity dream alive for the hordes of everyday Chinese who plowed their life savings into the market have been nothing short of unprecedented and at times bordered on the comically absurd. At one point for instance, the regulator simply halted trading in 75% of listed shares indefinitely. In another now famous boondoggle, Beijing arrested a journalist for printing a story that moved futures in the “wrong” direction.
It seems likely that Xiao has run out of ideas. It’s also possible that he fears for his freedom. After all, CSRC officials were among those arrested last year. Indeed, vice chairman Yao Gang came under investigation for graft shortly after a series of brutal selloffs in China rocked global markets in late August.
While Reuters says there are three candidates short-listed to replace Xiao, it’s not clear that i) anyone wants the job, or ii) that the Party will be willing to suffer further reputational damage by admitting that the country’s top securities regulator has effectively given up on the market.
WeChat pundits believe #CSRC's Xiao likely did offer to resign, but 1) no one wants to take the job; 2) can't let media/public opinion win.
— Wei Du ?? (@WeiDuCNA) January 18, 2016
So essentially, the Politburo would probably like nothing more than to have Xiao's head delivered on a silver platter (figuratively speaking we hope), but the optics around his exit would likely mean even more selling by the country's millions of semi-literate, newly-minted, over leveraged daytraders who would see the CSRC chief's ouster as still more proof of that the Chinese stock market is, in the words of one 48-year-old bank accountant from Kunshan, "a mess."
The CSRC said rumors of Xiao's resignation are unfounded.
"This information does not conform to the facts," the agency said, in a characteristically hilarious statement.
We shall see. In the meantime, anyone who's interested in trying their hand at corralling the most unruly equity market on the planet is encouraged to update their CV and send it to Xi. But be forewarned, this is one job where failure could land you in a Chinese prison for the rest of your days.