Analysis:China reshuffle could accelerate capital market reforms

In this file photo, China Construction Bank Chairman Guo Shuqing reacts during a news conference in Hong Kong June 24, 2010.

SHANGHAI (Reuters) - China's reshuffle of key financial regulators a year earlier than normal shows the country is trying to avoid policy paralysis that has plagued its leadership restructuring decisions in the past. The new watchdogs may now press on with much-needed reforms, especially to its stock markets.

With markets stagnant at home and a debt crises overseas, China cannot afford to have its reform calendar come to a standstill, as has often happened in the past in the months leading up to broader leadership reshuffles decided at the Communist Party's five-yearly congresses.

Normally, officials jockeying for a new appointment would spend the coming year trying to avoid any missteps that might derail their chances during leadership changes in the fall of 2012 -- when President Hu Jintao and Premier Wen Jiabao hand off their Party posts to a new generation of top leaders.

By announcing changes to the leadership of the securities, banking and insurance regulators over the weekend, Beijing will instead enable the new heads of those agencies to focus on the business of pushing ahead with reform.

In the case of capital markets in particular, that gives a green light to Oxford-educated Guo Shuqing, the new securities watchdog, to speed up liberalization, including the long-awaited launch of a stock exchange board for the listing of foreign companies.

Guo, who has served most recently as chairman of China Construction Bank, the country's second-biggest lender, and earlier as head of the foreign exchange regulator, has the right mix of connections and personality to push ahead with difficult reforms, analysts say.

"What the capital market needs is a tough decision-maker, and based on his character and experience, he seems to be a competent candidate," said Stanley Li, an analyst at Mirae Asset in Hong Kong.

As part of efforts to make Shanghai, China's commercial hub, an international financial center by 2020, the Shanghai Stock Exchange is planning to roll out a so-called international board which will allow foreign firms to raise funds in China.

The launch of the board, originally planned in 2010, has been stalled, however, which analysts say could be due to officials' failure to reach agreement over details such as how to deal with foreign exchange flows linked to the listings.

"Guo has an advantage in dealing with this issue due to his former role as head of the State Administration of Foreign Exchange (SAFE) ... and his background will help him co-ordinate these issues with his former colleagues," said Robin Huang, an associate professor in law at the Chinese University of Hong Kong who specializes in financial regulation.

MARKET-ORIENTED APPROACH

China has maintained tight control over capital flows, only permitting portfolio inflows under a quota system dubbed the Qualified Foreign Institutional Investor (QFII) scheme and outflows under a sister program called the Qualified Domestic Institutional Investor (QDII) scheme.

Freeing up those controls, which have helped shield some of the impact of global market turmoil but limit the flow of capital to where it is needed, is a tough task facing top leaders in Beijing, especially amid increasing uncertainties in the European and U.S. economies.

"Guo has adopted a market-oriented approach in the past, so his appointment will at least not slow down liberalization of China's capital markets, if not accelerate it," said Howhow Zhang, head of research at fund consultancy Z-Ben Advisors in Shanghai.

The appointment of Guo as new head of the China Securities Regulatory Commission (CSRC), announced on Saturday, is part of a broad transition of top officials that will run through the next 17 months ahead of President Hu and Premier Wen's official retirement in March 2013.

Saturday's announcement also included the appointments of outgoing securities regulator chief Shang Fulin as the chairman of the China Banking Regulatory Commission and Xiang Junbo, former chairman of Agricultural Bank of China, as the new head of the China Insurance Regulatory Commission (CIRC).

FURTHER INTEGRATION

The latest management reshuffle could accelerate the pace of integration in the financial sector as more insurance companies look to banking operations for growth and lenders seek access to the brokerage business, analysts say.

Ping An Insurance, China's second-biggest life insurer, has acquired Shenzhen Development Bank, while Bank of Communications is seeking regulatory approval in its bid for mid-sized brokerage Shanghai Securities Co.

"If you have a banking guy now regulating the securities industry, you would expect to see more business integration between the two sectors and more innovations," said Wang Dali, analyst at Southwest Securities Co.

Wang said that Guo is expected to apply his experience in risk-management to some high-leverage business at brokerages, such as margin trading and short selling.

Over the weekend, China's securities regulator published rules allowing brokerages to borrow money or securities from a newly-established securities financing company in a move that would potentially boost their margin trading and short selling businesses, although no time table was given.

Another issue Guo will have to tackle is strengthening corporate governance, as an increasing number of smaller start-up companies list on the booming Nasdaq-style ChiNext market in Shenzhen but without adequate oversight.

"There's increasing concern over the corporate governance of the ChiNext board companies," said Zhang at Z-Ben Advisors.

"Guo is expected to strengthen supervision over those companies without throttling their vitality, as he's a believer in market forces, not a micro-manager."

(Additional reporting by Koh Gui Qing in Beijing and Rachel Armstrong in Singapore; Editing by Jason Subler and Kavita Chandran)