China's anti-corruption campaign

Anti-graft arrests will not stop China’s financial liberalisation

The arrest of Liu Shiyu, former chairman of the China Securities Regulatory Commission, is unlikely to derail the programme to open up China's financial markets.
Crackdown on China's financial sectors.
Crackdown on China's financial sectors.

China’s financial liberalisation is likely to continue despite the arrest of a former top securities regulator and a crackdown on its banking and insurance sectors.

Liu Shiyu, a former chairman of the China Securities Regulatory Commission (CSRC), is under investigation for corruption, the joint website of China’s two anti-graft agencies, the National Supervisory Commission and the Central Commission for Discipline Inspection, announced late on Sunday night.

On May 17, the China Banking Regulatory and Insurance Commission (CBIRC) had published a notice that it would tackle chaos and irregularities in the banking and insurance sectors.

In all likelihood, the investigation of Liu and the crackdown on banking and insurance, announced only a few days apart, are part of a coordinated action by Chinese authorities. The finance sector has been a target of Chinese anti-graft investigators for some time.

“The liberalisation of China’s financial markets will continue because it is absolutely necessary for the country’s development, quite apart from the actions of any individual,” said Dane Chamorro, a Singapore-based senior partner at international risk consultancy Control Risks.

China’s financial liberalisation is prompted by national interest and strong demand for access to the nation’s huge markets by foreign investors and asset managers. “This is a mutually desired outcome for both sides,” he added. 

Mainland China’s $13 trillion bond market, and stock markets with a capitalisation of over $6 trillion, are the third and second largest in the world respectively.

As part of China’s ongoing financial liberalisation, Chinese regulators are allowing more foreign financial institutions to set up shop in the country. In March, the Chinese government granted JP Morgan and Nomura approval to set up majority-owned brokerages to tap the onshore Chinese capital markets. 

It is unlikely that the investigation of the former top securities watchdog will make foreign financial firms less likely to set up branches in mainland China. If and when more details emerge, however, specific risks or uncertainties may come to light which foreign financial institutions may need to consider.

The official statement - just one sentence long - did not mention details of Liu’s alleged wrongdoing. The statement alleges that Liu has violated Communist Party discipline (a Chinese government euphemism for corruption) and has violated the law, indicating he will be charged in court.

The statement said that Liu voluntarily surrendered to the authorities and is cooperating with the investigations of the two Chinese anti-graft watchdogs. This suggests that the Chinese anti-graft agencies are investigating other suspects.

The investigation of Liu is unlikely to have much impact on China’s securities sector, since he stepped down as CSRC chairman earlier this year.

Liu’s current position is chairman of the All-China Federation of Supply and Marketing Cooperatives, a state operator of thousands of agricultural collectives. He was chairman of the Agricultural Bank of China from 2014 to 2016.

Enforcement and fines by the CSRC have increased since Liu took charge of the regulator in 2016. “Liu’s investigation is a sign that very serious issues remain to be addressed,” said Alex Nasr, a Hong Kong-based director of global risk management consultancy Blackpeak.

During his tenure as CSRC chairman, Liu vowed to nab “financial crocodiles”, a Chinese term for extremely wealthy individuals with the economic power to wreak havoc in the markets. These financial crocodiles should not be allowed to “suck the blood of retail investors,” Liu said.

One unnamed risk consultant goes so far as to claim that the investigation of Liu for corruption shows that his tough talk against financial crocodiles was a front to deflect attention from his own actions.

What is certain is that Liu was slow to initiate reforms while he was CSRC chairman. In February last year, he delayed a new system of initial private offerings (IPOs) based on registration by IPO candidates until 2020. China’s current IPO mechanism is based on approval by the CSRC, whereas the registration-based system is more in keeping with the practices of developed markets.

At that time, Wu Xiaoling, head of a fintech research institute at Tsinghua University, expressed great regret over the delay.


Other top Chinese financial regulators have fallen from grace in recent years. In September last year, former CSRC vice chairman Yao Gang was jailed for 18 years and fined Rmb11 million ($1.6 million) for taking bribes and insider trading.

In 2017, Xiang Junbo was dismissed as head of the China Insurance Regulatory Commission (CIRC) for corruption. After Xiang’s dismissal, the Chinese government merged the CIRC with the China Banking Regulatory Commission to form the CBIRC. In a Chinese court last summer, Xiang pleaded guilty to accepting $3 million in bribes.

Despite Xiang’s dismissal in 2017, China’s insurance and banking sectors remain risky and chaotic. There are still frequent violations of regulations related to loans and investments: non-performing assets are covered up or sold illegally; some insurance salesmen have misled customers; while corporate governance at the smaller banks and insurers are weak, a spokesman for the CBIRC said.

This year, the CBIRC plans to reduce the amount of irregularities in the banking and insurance sectors, improve corporate governance in banks and insurers, and guide funds towards financing small enterprises and to curb financial risks.

“These investigations are an indication that, while corruption remains a major issue in mainland Chinese financial markets, the Communist Party appears to be very serious about addressing it,” said Nasr.  

This article has been corrected in paragraph 12 to show Liu left his position at CSRC earlier this year

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