China’s Financial Overhaul Expected to Pave Way for Greater Role for Capital Markets

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Analysts and observers expect the sweeping overhaul of China’s financial regulatory framework to have major implications for the country’s capital markets by placing the securities regulator under the direct authority of the State Council and making it responsible for the review of corporate bond issues.

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 Proposal outlines major changes to China’s financial regulatory framework, including the creation of a new super financial authority in the form of the State Administration of Financial Regulation (国家金融监督管理总局) (SAFR), that will take over the some of the functions of the People’s Bank of China (PBOC), being the Chinese central bank.

SAFR will also take over some of the duties of the China Securities Regulatory Commission (CSRC), which will be placed under the direct authority of the State Council.

The plan marks the biggest overhaul of China’s financial regulatory system since 2018, which saw the integration of the China Insurance Regulatory Commission (CIRC) with the China Banking Regulatory Commission (CBRC) into a new larger regulator, the China Banking and Insurance Regulatory Commission (CBIRC).

Chinese state-owned media is abuzz with discussion and messaging on the implications of the regulatory overhaul. Some observers say the move marks the start of the “One Bank, One Administration, One Commission” (一行一局一会) era of financial regulation in China, in reference to PBOC, SAFR and CSRC.

This stands in contrast to the “One Committee (the Financial Stability and Development Committee), One Bank (PBOC), and Two Commissions (CBIRC and CSRC) ” system (一委一行两会) that had been in place since March 2018, and the “One Bank (PBOC), Three Commissions (CBRC, CSRC and CIRC)” system (一行三会) that had been in place since just after the turn of the century.

Adjustments pave way for greater role for China’s capital markets

Observers say that placing CSRC under the direct authority of the State Council – the highest authority in the Chinese government hierarchy, will lead to more focused regulation of capital markets. In tandem with IPO registration reforms, this will help to pave the way for a greater role for capital markets in the Chinese financial system.

“The comprehensive registration system and the institutional reform of the China Securities Regulatory Commission will promote the improvement of China’s new securities regulatory system and promote the standardized and market-oriented development of the capital market,” said Tian Lihui (田利辉), dean of the Financial Development Research Institute of Nankai University.

“The separation of securities industry supervision and the adjustment of the China Securities Regulatory Commission to an institution directly under the State Council indicate that the irreplaceable role of the capital market in the process of industrial transformation and upgrading will become more prominent,” said Dong Dengxin (董登新), director of the Finance and Securities Research Institute of Wuhan University of Science and Technology, to state-owned media.

“Whether it is industrial transformation and upgrade or financial structure transformation and upgrade, there is an urgent need to increase the share of direct financing.”

The current set of adjustments to China’s financial regulatory structure will also see a key to regulation of the Chinese corporate bond market. CSRC will take over responsibility for the review of corporate bond issuance from National Development and Reform Commission (NDRC), China’s state-planning agency.

“[This] indicates that in the future, both the stock market and the bond market will play a role in driving market-oriented reforms, increasing financial inclusion, proving more support for the real economy, helping to accelerate the increase in the share of direct financing and optimization of the financial structure,” said Dong Dengxin.

Tian Lihui’s said the move indicates that the “unified and standardized development of China’s corporate (enterprise) bond market is taking shape, which we can expect to promote the formation of a new pattern of financing in the Chinese market.”