China Releases Draft Version of Financial Stability Law, Outlines Establishment of Financial Stability Guarantee Fund

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China has just seen the release of the draft version of a new law on financial stability that outlines the creation of a specialised national fund to ward off systemic risk in the finance system.

The “Financial Stability Law (Draft)” (金融稳定法(草案)) released on 30 December call for the establishment of a financial stability guarantee fund that will provide reserve funds for the disposal of financial risk, and be subject to “overall management via overall coordination measures.”

According to state-owned media reports, the financial stability guarantee fund will raise funds from entities as designated by the State Council, including financial institutions and financial infrastructure operators.

The People’s Bank of China (PBOC), being China’s central bank, will be permitted to use reloans to provide liquidity support to the financial stability guarantee fund. Where financial institutions borrow from the fund, they will be required to provide qualified forms of collateral.

PBOC first commenced drafting of the “Financial Stability Law” in April 2022. In addition to the financial stability guarantee fund, other provisions of the draft also stress the need to include all forms of financial activity within the purview of regulatory scrutiny, as well as the disposal of financial risk in accordance with the principles of the market and the rule of law; maintaining the lawful rights and interests of market entities, and the prevention of moral hazard.

The State Council will be responsible for the drafting of any further measures on the management, usage and supervision of the financial stability guarantee fund.

“The prevention of financial risk is the perennial theme of financial work,” said Liang Si (梁斯), a researcher from the Bank of China (BOC) Research Institute.

“In recent years, China’s prevention and dissolution of financial risk has made breakthrough developments. Outstanding problems in shadow banking and online banking have all been rectified, and there has been positive progress in the appropriate disposal of problematic financial institutions and the prevention of the disorderly expansion of capital.

“However, it must be noted that China’s the mission of preventing and disposing of financial risk in China remains immense…changes in financial risk display the traits of of being highly covert, diffuse and variable.”