On Wednesday Beijing fired YI Huiman, the head of the China Securities Regulatory Commission (CSRC). His replacement is WU Qing, a deputy at CSRC who is highly experienced (having formerly run the Shanghai Stock Exchange) and well-regarded in financial circles.
The move aims at signaling that China’s leadership is unhappy with the recent handling of the equity market (Beijing took a similar step in early 2016). Coming on the eve of the Lunar New Year holiday, with markets closed February 9-15, Beijing likely hopes for something of a fresh start with investors when they come back from the holiday. But the practical effect of this move is very limited on its own.
First, in China’s system the head of the CSRC has major constraints on his authority. For example, Wu would not be able on his own to command a much more forceful degree of intervention by the “national team” in the market, let alone launch a rumored market stabilization fund (which very well may not happen). That requires decisions at the vice premier/premier and in some cases at Xi’s level. Wu can do a significant amount at the operational level but it isn’t clear that this promotion will usher in a wholesale change in approach.
Wu has a reputation for tough enforcement from his time at the Shanghai Stock Exchange. That is not a negative, but it is worth noting that Beijing’s response to the equity downturn has included tough talk against market manipulation and short selling. It will be interesting to see how Wu balances a “crackdown” approach with measures that could be more effective in improving sentiment.
The second and more fundamental point is that the key issue hanging over China’s equities is the weak macroeconomic climate, with soft private sector demand and deflationary/disinflationary pressures dragging on the outlook for corporate earnings. While the recent equity market selloff overstates the degree of economic weakness – China is not facing a crisis – a sustained rebound will likely depend on convincing signs that the growth outlook is improving. Beijing’s incremental approach to stimulus is unlikely to deliver powerful catalysts on this front, though it will of course be very important to monitor signals as we approach the start of the annual National People’s Congress on March 5. (See HERE for our take earlier this week on the PBOC’s expanding balance sheet).
The equity market matters less for China’s macroeconomy – and Xi Jinping’s political reaction function – than investors often assume. Beijing is eager to be seen as responding to investors’ concerns but will not let the equity market dictate major decisions about stimulus and the direction of macro policy. If selling pressure subsides, China’s leadership will likely continue to muddle through this period of market weakness rather than undertake big shifts in policy.
