April 20, 2017 6:38 pm JST

Chinese financial stocks hit hard by 'regulatory storm'

Fears of further shackles on profits send share prices tumbling across China

KEIICHIRO MORIYASU, NQN staff writer

HONG KONG -- Financial stocks are faring increasingly worse on Chinese stock markets due to a wave of stricter regulations by banking, securities and insurance authorities.

Investors fret that a tighter grip, including curbs on high-risk trading, would leave financial companies with their hands tied and strip them of profit opportunities.

Financial stocks tend to cause big swings on stock markets because of their large market capitalization. On Wednesday, the benchmark Shanghai Composite Index fell sharply from Tuesday, extending losses for the fourth straight day to sink to the lowest level in about 10 weeks. The index moved sideways on Thursday.

Flurry of directives

"Seven instruction guidelines in the last 10 days," read a headline on Wednesday by Xinhua News Agency, China's state-owned media outlet, reflecting the soggy mood in the country's financial markets. 

Since Guo Shuqing, a bureaucratic heavyweight, became chairman of the China Banking Regulatory Commission in late February, the organization has issued a barrage of notices to banks, urging them to cut the risk of wrongdoing and mismanagement.

On April 7 came an opinion on the improvement of the quality and efficiency of banking business that underpins the real economy. Then, on April 10, another opinion was issued regarding measures designed to minimize risks related to banking business. On April 12 banks received a notice intended to counteract insufficient supervision and improve efficiency. One local media outlet called it a "regulatory tightening storm."

Securities and insurance companies are also seeing their regulatory environment tightened. The China Securities Regulatory Commission's Chairman Liu Shiyu told executives of stock exchanges at a meeting on Saturday that, "We must fight, in a decisive manner, behavior that could disrupt market order. We must not loosen the reins." Liu apparently had in mind a recent abnormal spike in the prices of stocks related to new city construction as well as the possibility of market manipulation.

At the China Insurance Regulatory Commission, Xiang Junbo was dismissed as chairman amid criticism that too much deregulation stoked speculative trading by insurers. He is expected to be replaced by someone outside the insurance industry, according to the South China Morning Post, a Hong Kong daily.

Bureaucrats are increasingly tightening their grip on financial industries because of the policy of the Chinese central leadership. Premier Li Keqiang said in March that he would be "highly on the alert for financial risks."

With a quinquennial party congress coming up this fall, it is imperative for China to stay on an economically steady path. For the time being, it has no tolerance for fears about wobbly financial institutions or turbulence in the financial markets.

Shadow banking targeted

Wary of stricter regulations, investors are offloading financial stocks. The CSI 300 Banks Index, a gauge of leading mainland-listed banks, tumbled 5% in the last two weeks to a six-month low.

Market players including Xiong Li, a strategist at Daiwa Capital Markets Hong Kong, think tighter banking regulations are targeted at wealth management products, where some of China's shadow banking exists. According to Xinhua, such high-yielding, off-balance sheet financial products sold by banks have reached 30 trillion yuan ($4.35 trillion), giving banks juicy profits. Investors fear stricter regulatory control could hamper banks' performances.

Investors shunned not just banking stocks but securities and insurance issues. Moreover, fears have spread to the bond market, the primary destination of money invested in wealth management products. Selling grew in anticipation that investors would move to offload their bond holdings. Despite very low interest rates in most developed economies, the yield on China's 10-year government bond has been rising since the start of April. The side effect of severe regulatory tightening is being felt on the markets in many different ways.

The biggest victim of the tightening -- if, indeed, too much control ends up destroying the markets -- would be China's Communist leadership itself. The clampdown on shadow banking would gradually subside, and the markets would calm down at some point, said Daiwa's Xiong.

Still, at a time when investors in the developed world are preoccupied with North Korea, the Middle East and the future of European politics, it is worth keeping an eye on the risk of "sell in May" that is quietly spreading throughout China today. 

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