(Reuters) - Beijing took advantage of the disarray at the height of the 2008 financial crisis, as Wall Street slashed jobs, to poach top Chinese financial talent from overseas to help reform its stock markets.
This summer, the China Securities Regulatory Commission needed them more than ever because a year-long market boom had imploded in a few weeks and the government was desperate to keep the crisis from widening.
However, the best and brightest returnees, known in China as “sea turtles”, had already left for the private sector, disillusioned and disappointed.
A former CSRC official, one of a group of 20 high-profile returnees, recalled the regulator’s appeal to make “sacrifices for the motherland”.
“We moved our families back to China and gave up high-paying jobs, because we wanted to contribute,” he said.
He said the group was sent for special training at Jinggangshan, a former revolutionary base that Mao Zedong had used during the Chinese civil war.
Their idealism soon turned to cynicism. Their pay was a fraction of what they could earn in the private sector, and the CSRC did not seem to value them.
“Several years passed, and none of us got promoted,” said the official. “Some of us didn’t even obtain a concrete position.”
“Just at the time they needed people with both domestic and international experience, those most internationally experienced people were forced out,” said Liu Li-Gang, China economist at ANZ.
The CSRC did not reply to requests for comment.
Brain drain
Among those who left were Tang Xiaodong, former head of ABN AMRO’s exotic credit derivatives, who served in various roles at CSRC, including driving reforms to foreign investor access programmes; Li Bingtao from JP Morgan Chase’s global treasury department, who joined the CSRC planning committee; and Luo Dengpan, former student of Nobel Prize-winning economist Robert Shiller, who took charge of CSRC’s institutional innovation department.
None of them replied to requests for comment.
Insiders, who spoke to Reuters, pointed to a rising wave of resignations within the regulatory apparatus over the last 12 months, just when sound advice was most needed.
“Nearly every week, there are people submitting resignation letters, and the pace of people leaving appears to be accelerating,” said an official at the Shanghai Stock Exchange.
Chinese fund managers say the exodus left Chinese markets in the hands of people who do not understand markets.
“They don’t have the same level of expertise as they did in recent years,” said a senior Chinese derivatives trader at a foreign bank in Hong Kong.
He said that led to misguided, counter-productive policies, such as the crackdown on derivatives and “malicious” short-selling, which only accelerated the sell-off.
“It’s not that they aren’t smart,” said an executive at a major fund, who communicated regularly with the CSRC. “The difference is they don’t have financial expertise.”
An official still at the CSRC said regulators failed to grasp the significance of the surge in margin finance used for stock speculation that many warned was destabilising the markets.
It is also criticised for botching reforms of the IPO market. It reopened the market in early 2014 after a year’s suspension, but, under new pricing guidelines, IPOs were inadvertently made one-way bets that sucked funds from the wider market. After a surge in summer IPOs was partly blamed for setting off the crash, the CSRC suspended them again, indefinitely.
Catalogue of failures
Such failures have tarnished the government’s credibility, not least with investors that trusted Beijing to rescue the market in July and bought back into it.
Government directed Rmb900bn (US$140bn) into stocks, but indices continued to fall after a brief hiatus, wiping out all the year’s gains, and more than US$4.5trn in market value – more than Germany’s GDP.
The heavy-handed intervention also damaged the credibility of China’s public commitment to financial reform.
Analysts were not surprised when global stock index compiler MSCI delayed adding Chinese equities to its benchmark emerging-markets index, a move that might have brought billions of foreign dollars to the PRC markets.
Former officials said most of the returnees left due to frustration over their lack of influence over policy, limited opportunities for promotion, and low pay. Others spoke of resentment of colleagues.
Some were effectively forced out due to the fallout from Beijing’s anti-corruption drive, which led to salary cuts for senior staff and a campaign against “naked officials” (those who move family members and assets overseas in case the official is arrested).
“They can get high pay outside at lower risk, higher return. Why not?” said Oliver Rui, professor of finance at the China Europe International Business School in Shanghai.
