Analysis: Xi’s capital market crackdown has a 2022 timeline

It has been a tumultuous month for the Chinese capital market. First, ride-hailing giant Didi Chuxing went public on the New York Stock Exchange on June 30.

Four days later, as the U.S. was in the middle of its long Fourth of July weekend, internet regulators suspended downloads of Didi’s app in China.

On July 6, Beijing released an eight-chapter, 30-point official document, “Opinions on strictly cracking down on illegal securities activities in accordance with the law.” The document included, among other things, restrictions on domestic companies listing their shares overseas.

“If people look only at Didi, they will misunderstand,” one Chinese source said. While the moves may seem sudden, “they are political, comprehensive, profound and well-thought-out.”

Since autumn, the Chinese Communist Party has been advocating “the prevention of disorderly expansion of capital.”

The crux of the matter is this: President Xi Jinping has tightened his grip over every aspect of society, and the only field outside his control is populated by the private tech giants who hold huge amounts of corporate data and personal information.

The party is concerned that if these private companies are let loose, the matter could boomerang and deal a blow to the country’s capital markets, where these tech companies wield strong influence.

In a nutshell, Xi wants to dye China’s capital markets in his color.

There are several elements of the document that deserve attention.

First, it was released jointly by the general offices of the party and the State Council, China’s government.

The involvement of the party’s General Office is particularly significant as the organization is a political nerve center that works out of Beijing’s Zhongnanhai area — where Chinese leaders have their offices.

The office, equivalent to the office of the White House Chief of Staff, is under Xi’s direct control. In effect, it is a huge secretary’s office, a key body that deals with everything from security details for China’s leaders to keeping track of the leadership team’s health.

The current head of the party’s General Office is Ding Xuexiang, a Politburo member who always accompanies Xi on inspection tours. Li Zhanshu, chairman of the Standing Committee of the National People’s Congress, China’s parliament, and one of Xi’s closest aides, formerly served as chief of the party’s general office.

Such arrangements are not new. Ling Jihua was the right-hand man of former President Hu Jintao; he also served as the head of the party’s General Office and was a power broker during Hu’s 10 years in power. He quickly fell from grace after his 23-year-old son crashed an expensive Ferrari 458 Spider; the son died.

Ling was purged at the beginning of the Xi era and received a life sentence for bribery.

Taking full control of the party’s General Office is crucial to surviving a power struggle in the Zhongnanhai area.

Secondly, Chinese media outlets have been describing the release of the July 6 document as “the first time in the history of the capital market” that such a special document has been jointly issued in the name of the Office of the party’s Central Committee and the Office of the State Council.

By emphasizing the historic nature of the document, they are hinting it is a decision that takes on exceptionally important political overtones.

What’s in an office name?

Supervising the securities market has always been the job of the China Securities Regulatory Commission, under the State Council, which reports to Premier Li Keqiang.

This time, however, the clampdown on illegal securities activities will be overseen by an office under Xi’s direct control. It seems to be an unprecedented direct intervention in the capital markets by the party.

A new “leading small group” will also be established to eradicate illegal activities in the capital markets. It will reportedly hold its inaugural session soon.

Under the new group, the party’s Publicity Department, the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security, the Ministry of Justice, the Ministry of Finance as well as the China Securities Regulatory Commission will work together.

Furthermore, the July 6 document brims with political phrases. The first clause of the first chapter states that the guiding principle for the new regulation will be “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era,” Xi’s eponymous ideology.

Phrases such as “top-down design” and “zero tolerance” for illegal activities also appear. The term “zero tolerance” is reminiscent of Xi’s signature anti-corruption campaign, which shifted into high gear in 2013. Xi himself preferred the term.

Another of the document’s political aspects is that it has set 2022 as the first mile marker toward the restoration of order in the capital markets. 2025, the last year of the current Five-Year Plan, would have been a more natural goal post. It is clear that the whole plan has eyes set on the party’s all-important 2022 national congress, where Xi will seek an extension of his rule.

The political aspect deepens with the involvement of public security forces.

“The China Securities Regulatory Commission will work with the public security organs to resolutely crack down on illegal activities such as ‘pseudo-market value management’ and effectively purify the market ecology,” Xinhua quoted an official as saying.

This evokes memories of a major incident that took place in July 2015 that rocked the securities industry.

At the time, there were news reports of people killing themselves as they suffered serious losses due to a collapse in stock prices. China’s stock markets saw panic selling; the benchmark Shanghai Composite Index tumbled 8% at one point. In a surprise move, Xi and his leadership team mobilized senior public security officials to carry out last-resort price-keeping operations.

A team of investigators led by the then vice minister for public security entered the building of the China Securities Regulatory Commission in Beijing’s financial district and declared a strict crackdown on malicious short selling. The team then flew to Shanghai, China’s economic center, and began to investigate trading companies and others on suspicion of illegally manipulating stock prices.

At the time, Xi’s power base was still weak. People around him suspected that what happened in the securities market was the result of an attempt by forces resisting the increasingly fierce anti-corruption campaign to put pressure on the leader’s political faction.

Six years on, strong suspicions still linger in Xi’s inner circle and have been a driving force in the pursuit of “orderly” capital markets.

The aforementioned Chinese source compared the document to a wielded sword, saying it will do damage at home and abroad.

The first target is China’s domestic market. But the party looks determined to export its “Chinese-style rule by law” to international markets as well.

Xiao Gang, a former chairman of the China Securities Regulatory Commission, has stressed in an interview with Chinese media that foreign countries are “not a sanctuary beyond the reach of Chinese laws.”

There are concerns in China that if domestic companies are required to disclose information under U.S. laws after a New York listing, management data and personal information might be exposed. The recent series of moves within China is partly aimed at establishing a legal system that allows the country to cope with such a possibility.

Despite being the world’s second-largest economy, China still imposes strict restrictions on capital transactions. If, under the banner of “preventing the disorderly expansion of capital,” it attempts to impose its rules on activity in free and capitalist nations, it will inevitably cause serious friction.

On Wall Street, traditionally filled with China optimists, distrust of the Xi administration has grown in the wake of the Didi debacle. Investors are puzzled by why Beijing would take actions that look to divide the U.S. and Chinese capital markets.

All roads lead to 2022. Since politics is heavily involved, it is impossible to explain the developments from a purely economic angle.

Author: Katsuji Nakazawa*, Nikkei Asia

* Katsuji Nakazawa is a Tokyo-based senior staff writer and editorial writer at Nikkei. He spent seven years in China as a correspondent and later as China bureau chief. He is the 2014 recipient of the Vaughn-Ueda International Journalist prize for international reporting.