China's former securities regulator Liu Shiyu is probed over family members' alleged insider trading and favouring hometown IPOs, sources say


Liu Shiyu, China's former securities regulator, is being investigated for allegedly fast-tracking initial public offerings (IPOs) of small banks in his hometown and also of having family members who bought bonds at below-market prices, according to sources and media reports.

The investigation of Liu, announced Sunday in a vaguely worded statement that said he had "turned himself in" and was "collaborating with investigations", shocked industry insiders and regulators in China's financial market.

The investigation marks the highest-ranking official in China's stockbroking industry to take the fall, only four months after he stepped down as chairman of China Securities Regulatory Commission (CSRC) to head the All-China Federation of Supply and Marketing Cooperatives, a Soviet-era holdover of China's centrally planned economy that operates a network of 30,000 agricultural collectives.A picture of what might have brought about Liu's fall is beginning to appear.

It is partly tied to a network of banks in his hometown of Guanyun county in Jiangsu province, according to several financial industry sources, and a report by Chinese financial media outlet Caijing. Before CSRC, Liu spent most of his career in the banking system, including acting as chairman of the Agricultural Bank of China and as a deputy governor of the People's Bank of China (PBOC).

Liu Shiyu, China's former top securities regulator, turns himself in as part of corruption investigation

Five small to mid-size banks went public during the eight months from February to November in 2016, when Liu was ruling the securities watchdog with a firm hand.They were Bank of Jiangsu, Jiangyin Rural Commercial Bank, Wuxi Rural Commercial Bank, Jiangsu Changshu Rural Commercial Bank, and Jiangsu Suzhou Rural Commercial Bank. In addition, Zhangjiagang Rural Commercial Bank went public in January 2017 while Zijin Rural Commercial Bank went public this January.

The banks' shares all fell on Monday amid a declining market, after the announcement of the probe into Liu's affairs.

To be sure, the number of Jiangsu-based companies that cleared the CSRC's listing hurdles " 131 during Liu's tenure at the top from February 20, 2016 until January 25, 2019 " did not come at the expense of the 132 companies from Zhejiang, or the 162 companies from Guangdong that got listed during the same period, according to data by Shanghai Wind.Several of the Jiangsu banks had sold bonds with prices below market to accounts controlled by Liu's family members, according to a senior banking official who has had extensive dealings with Liu, speaking on condition of anonymity.

That would make for easy profits when they either sold the bonds to the market or held on to them until maturity, as the return would be much higher. The bond products included some from Kangde Xin Composite Material Group, sources say.

Kangde Xin is under investigation over its bookkeeping after defaulting on two bonds worth 1.6 billion yuan in December, and its owner was arrested on May 12.

Liu, 57, made many enemies during his three years of leading the securities watchdog. Holding a doctorate in economics, Liu first trained as a hydraulic engineer at Tsinghua University.

He is probably best remembered for the colourful language that he used " cutting a different profile from Chinese officialdom " to describe the country's asset buyers and financiers, calling them "poisonous pests," and "evil monsters".

His very first press conference soon after taking over paved the way for a krackdown of China's leveraged buyouts, whose impact is still being felt. It also contributed to the downfall of his fellow regulator Xiang Junbo, who was arrested for corruption and fired as head of China Insurance Regulatory Commission (CIRC) months after Liu took office.

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Liu tried to stabilise China's volatile stock markets through intense scrutiny of listed firms and record-high fines to punish wrongdoing. He went after "crocodiles" " high-powered financiers who pocketed billions by manipulating the market " as he vowed to protect retail investors.

Veteran banker and former chairman of the Industrial and Commercial Bank of China Yi Huiman replaced Liu as the CSRC chairman on January 26.

"The message is clear that the krackdown on corruption promoted by president Xi Jinping is real," said Shaun Rein, managing director of Shanghai-based China Market Research Group. "There is far-reaching corruption in the regulatory field, and Xi wants to create a more even play field."

However, with the regulators still having so much power in their hands under an approval-based regulatory system where the authority decides whether and when a company can go public, corruption accusations can be hard to avoid, he said.

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A change of that depends on a thorough reform " but China is holding it off, due to the trade war with the US, Rein said.

Many questions about the Liu investigation remain unanswered, including whether Liu is accused of benefiting financially from misdeeds, or simply is being probed for being associated with family members allegedly engaged in wrongdoing and for favouring hometown banks in what can be a lengthy IPO process in China.

Also unknown is who within Liu's family is accused of any misdeeds, and whether any of them are being talked to by anti-corruption authorities. Liu could not be reached for comment, and the CSRC spokesman's office declined to comment.

Liu joins a growing list of senior officials caught up in Xi's anti-corruption campaign, launched when he took over as China's head of government in 2012.

The National Supervisory Commission " the top anti-corruption agency of China " also revealed this month that former Yunnan province Communist Party boss Qin Guangrong had surrendered and was being detained for further investigation.

More than 5,000 cadres have turned themselves in since Xi's second term began in late 2017, according to NSC's annual report in February.

Previously, the highest ranking securities regulator brought down in an anti-corruption investigation was Yao Gang. Yao, a former vice-chairman of the CSRC, was sentenced to 18 years in jail for taking bribes and insider trading last year.


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