Two Sessions Outlines Bold Restructuring of China’s Financial Regulatory System – Creation of New Super Regulator, Scaling Back of Chinese Central Bank’s Duties

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China’s annual Two Sessions congressional event for 2023 has outlined bold plans for the overhaul of China’s financial regulatory system, including the creation of a new high-powered authority for financial regulation and supervision, and the scaling back of the roles and responsibilities of the Chinese central bank and China’s securities regulator.

March 7 saw the release of the “State Council’s Proposal on Submitting the State Council’s Institutional Reform Plan for Review” (国务院关于提请审议国务院机构改革方案的议案), just following the commencement of the Two Sessions congressional event over the weekend.

The Reform Plan contains a number of sweeping and ambitious proposals, including:

  • The establishment of the State Administration of Financial Regulation (国家金融监督管理总局).
  • Deepening reform of the local financial regulatory system.
  • Conversion of the China Securities Regulatory Commission (CSRC) into an authority that is directly under the State Council.
  • Coordinating and promoting the reform of the branches of the People’s Bank of China (PBOC).
  • Improving the state-owned financial capital management system.
  • Strengthening the unified and standardized management of staff in financial regulatory departments

According to the Reform Plan, the new State Administration will an authority directly under the State Council that is responsible for “undertaking unified responsibility for the supervision of the financial industry outside of the securities industry; strengthening institutional supervision, behavioral supervision, functional supervision, across-the-board supervision, and ongoing supervision; bearing overall responsibility for the protection of the rights and interests of financial consumers, strengthening risk management and prevention and disposal, and investigating and dealing with violations of laws and regulations in accordance with the law.

The State Administration of Financial Regulation will also take over PBOC’s daily supervisory responsibilities for financial holding companies and other financial groups as alongside related financial consumer protection responsibilities, as well as the China Securities Regulatory Commission’s (CSRC) duties with regard to investor protection.

“Financial holding companies were originally under the supervision of the People’s Bank of China (the Chinese central bank), but now they are handed over to the State Administration of Financial Regulation,” said Zeng Gang (曾刚), director of the Shanghai Institution for Finance and Development, to state-owned media.

“This means that irrespective of whether financial holding companies were launched by financial entities or non-financial entities, they will all all fall under supervision by a single authority, which will help achieve the unification of regulatory conduct and avoid regulatory arbitrage. This is a very important change.”

According to Zeng, the reform will lead to further strengthening of China’s current “twin peaks system” of prudential supervision and conduct supervision.

Dong Ximiao (董希淼), chief researcher of China Merchants Union Finance, said the reforms will serve to further strengthen the development of a “twin peaks regulatory system with Chinese characteristics.”

“The State Administration of Financial Regulation will be in charge of financial supervision other than the securities industry, which helps to reduce regulatory gaps and regulatory overlaps, and the implementation of behavioural and functional supervision,” Dong said.

“The People’s Bank of China will mainly be responsible for monetary policy and macro-prudential regulation…stripping financial holding company supervision, consumer rights protection and other responsibilities from it will improve branch reform and help to build a modern central bank system.”

The Reform Plan outlines sweeping changes to the regional offices of PBOC. Regional branches, branch business management departments, business management departments directly under the head office and central branches in provincial capitals are all slated for removal.

In their stead, the Reform Plan outlines the establishment of province-level branches in 31 of China’s province-level administrative entities, as well as the cities of Shenzhen, Dalian, Ningbo, Qingdao and Xiamen. The Beijing Branch of the People’s Bank of China will retain the title of the Business Management Department of the People’s Bank of China, while the Shanghai Branch of the People’s Bank of China and the Shanghai Headquarters of the People’s Bank of China will conduct official duties jointly.

The implementation of the Reform Plan will mark the biggest overhaul to China’s financial regulatory system since March 2018, when the “one committee, one bank, and two commissions” system (一委一行两会) replaced the “one bank, three commissions” system (一行三会) that had been in place since just after the turn of the century.

China’s financial regulatory system since 2018 has consisted of the Financial Stability and Development Committee, the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory System.

Prior to 2018, financial regulation was conducted by the People’s Bank of China alongside the China Banking Regulatory Commission – which was established in 2003, the China Securities Regulatory Commission, which was established in 1992, and the China Insurance Regulatory Commission, founded in 1998.