China Overhauls Financial Regulatory Regime to Control Risks

China plans to strengthen oversight of its $60 trillion financial system by setting up an enlarged national regulator while taking some duties away from the central bank.

(Bloomberg) — China plans to strengthen oversight of its $60 trillion financial system by setting up an enlarged national regulator while taking some duties away from the central bank.

The new body will absorb its banking and insurance watchdog and oversee all financial sectors except the securities industry, according to a plan announced at the National People’s Congress Tuesday. It will take over functions including oversight of financial holding companies such as Ant Group Co. from the central bank.

“The purpose of the new regulatory body is to make sure that it encompasses some of the blind spots in regulating illicit practices in finance, and under one umbrella to make sure that there’s no room for shrugging off responsibilities,” said You Lanqiang, a fund manager at Pingtan Strategic Asset Management Co.

The shake-up will give the Communist Party a firmer grip on the sector and centralize key policy decision-making under President Xi Jinping in his precedent-defying third term. It marks the latest development in a decade-long effort to push for consolidation — or at least greater cooperation — among China’s financial regulators, and follows an earlier merger of the banking and insurance watchdogs.

The China Banking and Insurance Regulatory Commission will cease to exist after the overhaul, while the China Securities Regulatory Commission will be elevated to become a government agency directly under the State Council, according to the plan. 

The moves are aimed at “solving the long-standing conflicts and issues in the financial area,” according to the plan. The new authority will be focused on stepping up oversight of financial institutions and cracking down on violations, it said. 

The fact that the CSRC remains independent shows “that the authorities see the size of the stock market and its role in the economy rising in the years to come as the pool to absorb household assets, taking over the baton from property in the coming years,” said You. 

Other key points include:

  • CSRC takes oversight of corporate bond issuance from the National Development and Reform Commission
  • The PBOC will cut its county-level branches
  • Staff at regulators including PBOC and the new authority will be paid on par with the nation’s public servants
  • The number of employees at central government departments will be slashed by 5%

Beijing pledged to effectively prevent and defuse major economic and financial risks this year, according to the government work report delivered by outgoing Premier Li Keqiang on Sunday. Authorities will continue to deepen financial reforms, step up regulation and make sure all parties involved assume the full responsibilities to guard against both regional and systemic financial risks, according to Li. 

Last year at the annual Central Economic Work Conference, Xi called for deepening financial reforms and the strengthening of the Communist Party’s “centralized and unified” leadership over financial work. 

The Chinese leader in 2018 gained more direct control over the levers of money and power after he launched a sweeping government restructuring plan that saw the merger of China’s banking and insurance regulators. 

Overall risk in the financial system is controllable, PBOC governor Yi Gang told a press conference last week. The number of financial institutions rated as high risk has more than halved from the peak, according to the latest data from the central bank, with the total assets of highly risky institutions accounting for just 1% of the total. 

–With assistance from April Ma and Yujing Liu.

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