The China Securities Regulatory Commission and the People’s Bank of China have introduced a wave of measures to try and revive China’s fledgling financial markets over the past year.
The CSRC has sought to limit stock index futures trading, has banned short selling, cut margin ratios, banned insiders from selling large blocks of stock and detained several hedge fund managers for betting against the market. The regulator also tried to introduce a “circuit breaker” mechanism to limit stock market losses at the beginning of the year. However, this experiment failed in spectacular fashion when, after just three days of being in place, the CSRC was forced to deactivate the “circuit breaker” following three days of heavy selling as sellers all rushed for the exit at once.
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Today it has emerged that the CSRC’s inability to stabilize China’s markets has cost the regulators chairman his job. 57-year-old Xiao Gang tendered his resignation last week after the “circuit breaker” debacle.
It’s likely Gang was pushed to offer his resignation. Indeed, according to the Telegraph, a source close to China’s leadership was quoted as saying, “The (Communist Party) central (leadership) is extremely unhappy with Xiao Gang. It is certain he will change jobs.” And unfortunately, Gang’s downfall could signal the beginning of a new period of uncertainty for financial firms operating within China as rumors are already starting to circulate of a renewed clampdown on hedge funds.
China: Hedge fund clampdown
According to Red Pulse, an event-driven research firm in Shanghai covering market events impacting Chinese companies, a source has said that new investment companies might be banned from registering in Beijing. The source defined ‘investment company’s’ as firms registering names containing “investment”, “capital”, “asset”, “fund”, “asset management” or “financial leasing”. The source also suggested that the registration of investment projects related to equity investment, investment management, investment advisory, capital management, asset management and non-financing guarantee will be suspended, along with the registration of online financial platforms in Shanghai and Shenzhen from the beginning of 2016.
Hedge funds have exploded in popularity in China over the past year as wealthy individuals have sought to profit from the country’s buoyant, and volatile markets. According to the data released by Asset Management Association of China (AMAC), the total number of hedge fund managers registered in China has reached 24,625 by December 2015, a 69% increase from January 2015.
This growth has not gone unnoticed by CSRC, and the regulator is now working to improve its oversight of hedge funds and related parties. During its regular weekly conference on January 15, the regulator announced that it had CSRC investigated 141 hedge funds in 2015 and punished more than 30 institutions. The total amount of fines and confiscated funds for illegal financial activities reached RMB5.4 billion in 2015, 1.5 times the sum for the previous ten years. The CSRC went on to report that as the markets are still unstable, increasing the cost of financial crimes will be a priority for the regulator in 2016. At the meeting, tougher penalties for disseminating false information were also announced. For example, a person that published rumors about A-shares crashing on social media was fined RMB150,000.
Insurers to replace hedge funds
As the CSRC prepares to clamp down on the country’s hedge fund industry, another regulatory body, the China Insurance Regulatory Commission is preparing insurance companies to take on more risk and fill the void that will be left as hedge funds are shut down.
According to Red Pulse, on January 6 the CIRC announced measures to encourage insurance companies to launch debt investment plans, equity investment plans, and mezzanine funds with an aim for insurance assets to be invested in infrastructure projects and SMEs. Moreover, the CIRC encouraged insurance companies to set up new asset management firms.
These actions are just the latest in a string of insurance market reforms announced by the CIRC over the past two years. Since 2013, the regulator has: raised the proportion of investments allowed by insurance companies in equity markets; allowed insurance assets to be invested into P2P platforms and real estate and; insurance companies have been given the ability to launch private hedge funds.