China’s central bank more potent as regulator

New system of meetings set to make People's Bank of China pre-eminent among financial sector overseers and comes as infighting declines

PUBLISHED : Thursday, 22 August, 2013, 12:00am
UPDATED : Thursday, 22 August, 2013, 5:03am

The mainland's central bank, led by Zhou Xiaochuan for more than a decade, is set to become more powerful as turf wars between financial industry regulators come to an end, analysts say.

Beijing on Tuesday announced a new system of joint meetings of the sector's watchdogs. It said the governor of the People's Bank of China would chair conferences at which the banking, securities, insurance and foreign exchange watchdogs would discuss financial sector policy and regulation.

Market participants and government insiders have long stressed the need for a "super regulator" to co-ordinate financial industry policymaking and regulation.

If you are the bank regulator, will you prioritise what banks need?

The meetings are intended to standardise work on cross-sector financial products, market innovation, information sharing and control of both regional and systemic risk. The also aim to maintain stability in the financial sector.

Such co-ordination was absent when Hu Jintao was president and Wen Jiabao was premier.

That was largely because of behind-the-scenes power struggles between the central bank governor and the chiefs of the other financial industry regulators, especially Liu Mingkang, the chairman of the banking watchdog, who retired in late 2011.

"When Liu was in charge [of the China Banking Regulatory Commission], many saw him as a very powerful man. The CBRC could make its own calls on a lot of things, and sometimes the decisions were not necessarily in the best interests of the central bank's monetary policy," said a veteran mainland banker who asked not to be named.

Zhou remained PBOC governor after Xi Jinping succeeded Hu. Liu's successor as CBRC chairman, Shang Fulin, had taken a lower profile, bankers with working ties to Shang said.

The 2008 global financial crisis changed Beijing's thinking on how to supervise the financial industry. Some Western countries, Britain, for example, tried to divide their financial supervision systems, rather than have a "super regulator" controlling everything. Western central banks are nowadays playing bigger roles in the development of their financial industry.

Officials at China's central bank and banking regulator have disagreed at times.

"Banks are always under pressure to grow their business, while the central bank may ask you to slow down, to avoid overheating the economy," the veteran banker said. "If you are the bank regulator, will you prioritise what banks need or just take orders from the central bank?"

Liu Ligang, the chief China economist at ANZ Bank in Hong Kong, said the joint financial conference system "will allow the central bank to better co-ordinate with the other regulators to monitor financial sector risk".

He added: "As financial innovation tends to move faster than financial regulation - and as derivative products often operate in the grey areas of existing regulations in the banking, equity market and insurance industries - close regulatory co-ordination can help identify risks earlier on and prevent blind spots."

Zhou told mainland media at a forum in Shanghai last month that he believed the market understood how the PBOC had handled the interbank liquidity squeeze in June, considered the worst cash crunch to hit the banking system in decades.

At the time, some mainland bankers complained in private that the central bank had reacted too slowly and that the CBRC had not offered timely advice.

Still, some analysts say Zhou should avoid regulating the mainland's financial system with a heavy hand.

"Over-regulation and regulatory zealousness could hinder financial innovation, which could also stifle the development of China's financial sector," Liu said.

"So, regulators must strike a fine balance between regulation and financial development."