New securities regulator installed amid haze and hope

China's stock market has been among the weakest part of the nation's economic rise, and the securities regulator is among the most thorny ministerial posts in the country's bureaucratic system.

The tricky job is now the repsonsibility of banking veteran Xiao Gang.

On March 17, Xiao took the reins of the China Securities Regulatory Commission (CSRC), replacing Guo Shuqing as the authority's seventh chairman in history.

Innovative reform is badly needed in China's stock market which is overwhelmed with insider trading and a lack of transparency. Striking a balance between making aggressive reforms and maintaining market stability will be Xiao's test.

Reform-minded Guo took many bold moves to tackle persistent ailments by cracking insider trading and weeding out bad candidates for initial public offering (IPO). His 18-month tenure, however, leaves many missions unfinished.

At an inauguration meeting held Sunday, the also reform-minded Xiao, the former Bank of China (BOC) chairman, pledged policy continuity.

But the market reacted coldly.

The benchmark Shanghai Component Index lost 1.26 percent Monday, as investors feared the replacement could slow reforms in the sector.

Xiao is not expected to take bolder steps than Guo, as he is notably risk-averse with his 30 years of service in the banking industry before he joined the CSRC, said Li Daxiao, a Yingda Securities analyst.

However, innovative reform is needed.

According to the Organization Department of the CPC Central Committee, which is in charge of staffing high-ranking CPC officials, Xiao is young but decisive and pragmatic, reform-minded with shrewd perspectives on macro-economic and financial affairs, according to media reports.

Although Xiao's policy thinking remains unknown, his concern about the shadow banking system may offer a hint of his future plans.

During the just-concluded annual parliamentary session, he said shadow banks posed defaulting risks in a number of projects which needed to be controlled.

A hefty share of China's new credit is, de facto, supplied by non-banks or through off-balance-sheet vehicles of regular banks.

In December, Xiao wrote an op-ed in the English language China Daily saying that the quality and transparency of Wealth Management Products (WMPs) is "worrisome." Adding, "To some extent, this is fundamentally a Ponzi scheme."

Insiders expect Xiao to rein in shadow banks' securitization activities, even though he used to express favor in encouraging eligible commercial banks and brokerages to diversify their product lines in such areas.

Another thorny issue facing Xiao is how to patch up the approval system for IPO and when to restart it.

China's IPO market has been frozen since October due to a poor quality of applicants. Pending applicants for the Shanghai and Shenzhen exchanges has risen to more than 800 firms.

Xiao must find the right time and scale for the regulator to withdraw its function of scrutinizing applications to give the market a bigger say, Cangshi Securities Research Center, owned by Sina.com, said in a research report to clients.

China's newly-inaugurated Premier Li Keqiang on Sunday pledged to streamline government functions and curb its power to walk a fine line between government and the market.

The Cangshi report said the market's worries about slowing reform maybe overblown.

"The central authority has sent a clear signal to relax controls. The securities regulator should follow suit," reads the report.

In addition, Xiao is widely expected to further open the market to international investors by expanding the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme and QFII program.

With fluent English skills, Xiao has rich experience in dealing with foreign investors. During his ten years of service in BOC, the nation's fourth largest lender, he introduced foreign strategic investors and led the bank's listing in Shanghai and Hong Kong.

He completed those landmark moves within three years, which underscores his "iron fists," an insider told China Business News.

"As China's economy is experiencing a major transformation, the opportunity is enormous, and the challenges are also unprecedented." Xiao said previously.