One of China’s leading economists has assembled a list of eight recommendations for further reform of the country’s financial regulatory framework, just after the Two Sessions congressional event unveiled a bold overhaul of the system.
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).
Huang Yiping (黄益平), profession of economics at Peking University’s National School of Development and an expert on Chinese financial services, writes that the latest overhaul will lead to the further evolution of a distinctly Chinese ‘twin peaks’ regulatory system.
“Twin Peaks” regulations was first adopted in Australia and the Netherlands, and refers to the establishment of separate agencies on the basis of their regulatory functions in order to separate prudential regulation from conduct regulation. The prudential regulator is responsible for maintaining the safe and sound operation of the financial system and institutions, while the conduct regulators is responsible for fair transactions and protecting the legitimate interests of financial consumers.
“This reform will strengthen functional supervision and behavioral supervision, and gradually build a ‘twin peaks’ regulatory framework with Chinese characteristics,” wrote Huang in a Sina post for the China Finance 40 Forum.
“Following these adjustments, China’s financial supervision will assume the form of “one bank, one general administration, one committee and one bureau” (“一行一总局一会一局”) (the People’s Bank of China, the State Administration of Financial Regulation, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange).
“According to the reform plan, the State Administration of Financial Regulation will be responsible for the supervision of the financial industry with the exception of the securities industry. It is worth noting that the financial consumer and investor protection functions that were scattered in the ‘one bank and two commissions’ in the past are now all assigned to the State Administration of Financial Regulation.”
Huang Yiping, alongside fellow economists Liu Xiaochun (刘晓春) and Wang Xun (王勋), outlined a total of eight recommendations for driving reform of China’s financial regulatory system:
- Accelerate up the development of legislation and systems for financial supervision, clarify the goals and responsibilities of supervision, and rationally distinguish between supervision and macro-control, supervision and economic development, and supervision and financial industry development. “The efficiency of China’s financial supervision is not high. There are both problems of ‘not managing what should be regulated’ and ‘regulating what should not be regulated.’ The former includes the risks of small and medium-sized banks and P2P, while the latter includes macro-stability and financial development. The rules and laws of financial supervision have not been well implemented, and financial stability is mainly propped up with the government’s support, but this approach is difficult to sustain in the long run.”
- Improve micro-prudential supervisory standards, and strengthen the routine and dynamic supervision of the daily business operations of financial institutions. “At present, the supervision of the business of financial institutions by regulator is mainly based on supervision of indicators and post-event supervision. Supervision of indicator is for observing the implementation of financial institutions’ supervision indicators. Generally, inspection and supervision are carried out when negative abnormalities are found. This is also a form of post-event supervision.”
- Further clarify the relationship between regulatory agencies and regulated institutions, and endeavour to separate administration, personnel, and interests. “On the basis of standardized supervision, regulatory agencies should create a fair market environment for the market and effectively protect the legal rights of financial consumers and investors.”
- Further improve the “dual-pillar” macro-control framework, clarify the boundaries of responsibilities and the division of powers and responsibilities for macro-prudential policies, and continuously enrich the macro-prudential policy toolbox. “The ‘dual-pillar’ framework is a policy innovation with Chinese characteristics, and it is also the direction of global policy reform. The main cause for it is that the Federal Reserve’s loose monetary policy before the global financial crisis caused major financial risks. Under the ‘dual-pillar’ framework, monetary policy is responsible for currency stability, while macro-prudential policy is responsible for financial stability. Both of them jointly support economic and financial stability. In order to ensure the independent and cooperative relationship between currency and macro-prudential policy decision-making mechanism, it is suggested that the main task of macro-prudential supervision should be to monitor and evaluate systemic financial risks, and on this basis, we should continue to enrich and improve the macro-prudential policy toolbox.”
- Unify the standards and policies for local financial supervision, clarify the matching of powers and responsibilities for local financial supervision, and strengthen the supervision and coordination between the central and local governments at all levels. “Formulate and implement nationally unified local financial regulatory standards and policies. First, because the regulatory capabilities of different regions are very different, many local financial supervision bureaus lack corresponding regulatory capabilities; second, policy differences can easily lead to regulatory arbitrage, and this problem has become more prominent as the degree of financial correlation in various regions increases; third, some local governments lack the willingness and ability to assume full responsibility for local financial risks, the central government still needs to share considerable responsibilities.”
- Support responsible financial innovation with financial regulatory innovation, and use digital technology to empower regulation; at the same time, greatly increase the investment in financial regulatory resources including preparation, funding and technology, and improve regulatory capabilities. “Achieving a dynamic balance between financial innovation and financial stability is a difficult problem faced by global regulators. The main goal of financial supervision is to maintain the sound operation of the entire financial system and protect the legitimate rights and interests of financial consumers through prudential supervision and conduct supervision.There is not necessarily a contradiction between regulation and innovation. Finding an appropriate balance between the two can achieve the mutually beneficial effect of regulation creating a suitable environment for innovation and innovation providing advanced means for regulation.”
- The central bank, regulatory authorities and the finance ministry should jointly build a national financial safety net, set up a financial risk disposal fund, as well as depend more on the market to replace the government’s implicit guarantee to prevent and resolve systemic financial risks. “Building and improving the national financial safety net is an important measure to build a modern financial system. In the past, the core of the national financial safety net was an implicit guarantee backed by national credit. With the continuous improvement of financial marketization and openness, this safety net can easily cause fresh instability. When the government will take action, how much responsibility it will bear, and how much losses institutions and investors will suffer – all of these are uncertain. At the same time, this set of safety nets characterized by implicit guarantees leaves room for local governments, markets, and market players to compete with the central government…such a game often magnifies financial risks and increases regulatory costs and implicit guarantee costs.”
- With regard to the institutional supervisory and regulation model, greater attention should be given to the role of functional supervision in improving supervision efficiency. Learn from the experience of the “twin peaks” regulatory model, and strengthen prudential supervision and conduct supervision. “Amidst continuous competition and innovation, the types of financial products and the scope of services provided by financial institutions are constantly changing, and the boundaries between financial institutions and the market are gradually beginning to overlap. Traditional institutional regulators will face the vexing situation of the coexistence of regulatory overlap and regulatory gaps. The meaning of functional supervision is that as long as different types of financial institutions carry out financial services of the same nature, they all face the same regulatory standards and regulatory bodies. This will not only effectively reduce the lack of supervision, but also help promote fair market competition and healthy competition.”