China’s Twin Peaks Financial Reform Is a National Strategic Imperative: Liu Xiaochun


A researcher from a leading Shanghai-based think tank says the restructuring of China’s financial regulators unveiled at the 2023 Two Sessions in March is considered a national strategic priority due to the critical economic role of the finance system.

In a report written for Sina, Liu Xiaochun (刘晓春), deputy-head of the Shanghai New Finance Research Institute, highlighted the indispensable role of the finance sector in the process of economic modernisation since the outset of the Industrial Revolution.

“Modern economies and the modern world originated from the Industrial Revolution, but the driving force behind it can be said to be finance,” Liu writes. “Without the boost from modern finance, the Industrial Revolution would not have been able to take off.

“Today, finance has become the main means and carrier for effectively allocating resources. At the same time, the operation of the modern economy is also built upon a financial infrastructure based on bank accounts. When we enter the stage of high-quality development, we must fully recognize the vital role of finance in the economic and social spheres.”

According to Liu, this is the reason that financial security should be considered a strategic imperative, alongside reforms of the financial regulatory system.

“Financial security not only concerns the economic security of a country internally, but also the political and economic security of a country internationally. Finance has become a tool and field of competition or even struggle between countries and regions.

“Financial regulatory reform is a key focus of recent reforms to party and state institutions, and it will have a huge impact on the high-quality development of China’s financial industry in the future.

“It is precisely for these reasons that it is necessary to enhance the strategic positioning of finance and elevate the level of strategic management of finance. Strengthening the comprehensive and unified management of finance by the party, ensuring high-quality development of finance, and guarding against systemic financial risks have become national strategies.”

The 2023 Two Sessions Financial Reforms

The recent 2023 Two Sessions congressional event held in March saw the unveiling of the biggest overhaul to China’s financial regulatory system since 2018.

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.

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).

Reforms Aim to Achieve “Twin Peaks” Financial Regulation in China

Liu Xiaochun says that the reforms are part of efforts to create a distinctive Chinese-style “two peaks” financial regulatory system, that clearly distinguishes between macro-prudential regulation and regulation of the conduct of institutions.

“The separation of macroeconomic regulation and financial regulation in institutional settings is only formal, and in the future, the two need to be effectively distinguished in specific operations.

“When facing major economic risks, macroeconomic regulation and financial regulation need to cooperate and coordinate, but they must also adhere to the boundaries of their respective functions.”

At the core of this agenda will be conferring the Chinese central bank, being the People’s Bank of China (PBOC), with responsibility for macro-prudential regulation.

“This institutional reform further clarifies the responsibilities of the central bank and regulatory agencies to ensure that the central bank can formulate monetary policy and conduct macro-adjustment in a more focused and professional manner.

“The cancellation of regional branches of the People’s Bank of China (PBOC) and the restoration of provincial branches are aimed at streamlining the internal management system of the central bank.

“With the widespread application of fintech, the decrease in cash in circulation, and the improvement of transportation conditions in county areas, coupled with the separation of regulatory functions, the necessity of county-level branches of the PBOC has diminished. These adjustments are consistent with the idea of strengthening the central bank’s focus on monetary policy and macro-control functions.”

New Super Authority Aimed at Achieving Full Regulation of Chinese Finance Activity

Liu says the launch of the new State Administration for Financial Regulation (SAFR) is for the purpose of achieving comprehensive regulatory coverage of all forms of financial activity.

“In the past, institutional regulation was the main focus, resulting in so-called industry-specific regulation, which provided arbitrage opportunities for different market entities and was also one one of the contributing factors to financial risks.

“Shifting from institutional regulation to functional regulation achieves unified regulation of the same types of operations, eliminating the arbitrage opportunities formed by industry-specific regulation.

“Additionally in the past, regulatory agencies sometimes lacked powers of enforcement. In theory, regulatory agencies regulated legal financial institutions that obtained licenses, and illegal financial activities and institutions had been banned, and there was no need for regulation.

“This has led to the following phenomena: first, new forms of finance had no recognition from regulatory agencies and could not be legalized, leaving them outside of regulation. Secondly, illegal financial activities were not under institutional regulation and were also outside of regulation.

“Establishing the SAFR can eliminate this blank space.”