China’s financial regulators brace for circuit-breaker blow back

Whispered talk China’s State Council is about to consolidate the sprawling array of regulatory bodies charged with overseeing financial markets

PUBLISHED : Tuesday, 12 January, 2016, 7:00pm
UPDATED : Tuesday, 12 January, 2016, 7:16pm

Speculation swirled on Tuesday that China’s State Council is to strengthen its oversight of financial markets, following criticism of missteps that led to heightened market volatilities, including a botched introduction of a market-calming circuit breaker mechanism.

But analysts said plans of “coordinating” the central bank and the securities watchdog can hardly work to support the nation’s battered stock market.

Reuters and Bloomberg cited unnamed sources last week as saying the Chinese cabinet is to set up some new organ, to better coordinate the nation’s economic and financial authorities, as leadership “is very unhappy about the stock market crisis.”

An abrupt scrapping of a circuit breaker by the China Securities Regulatory Commission (CSRC) within four days of its introduction last week coincided with a sharp drop in equity prices, estimated to have wiped out all the gains made in 2015.

The People’s Bank of China (PBOC), on the other hand, has been criticised for giving mixed signals. After sitting on the sidelines for most of last week as the yuan traded in Hong Kong devalued by 1.75 per cent, the PBOC swept into action this week, pushing up the yuan interbank lending rate in an effort to punish currency speculators.

“It is likely that the central leadership requires some emergency plan to take care of the chaotic capital markets. But it would not work by setting up some special organs ‘coordinating’ the central bank and the securities watchdog,” said Gary Liu Shengjun, executive deputy director of the CEIBS Lujiazui Institute of International Finance.

“Some people attributed the sharp devaluation of yuan as the reason for the landslide in the stock market last week. But that is not something the central bank should be considering. China’s central bank is already weak in maintaining policy independence, and it makes no sense for them to fine tune policies according to stock market performance,” he added.

Said Professor Paul Gillis of Peking University: “most of the current problems in the market are due to a bubble, and regulators can do little to prevent bubbles.”

“China is struggling with how to properly regulate markets... but the real problem was the irrational exuberance that took the market too high. There are only two cures for that - companies grow into their valuations, which is tough in the present economic climate, or the stock prices come down. So far, stock price declines seem to be the only option that is working.”

Scholars and officials have been in discussion about how to restructure China’s regulatory regime over the capital markets since November, after a stock market meltdown in June and a sudden yuan devaluation in August.

Possible plans include merge the three official regulatory bodies, namely the China Banking Regulatory Commission (CBRC), the CSRC, and the China Insurance Regulatory Commission (CIRC), to better deal with financial innovation and operation of mixed business (for instance investment banking and commercial banking) by institutions.

There are also proposals from think tanks to upgrade the PBOC into a super regulator that works above the three commissions.

China’s current structure of regulation can be traced back to a policy paper entitled “One Bank and Three Commissions”, introduced after the financial crisis in 1997. The policy paper laid out responsibility based on the nature of the targets they oversee.

These restructuring plans, although longer term, is definitely a step in the right direction to better deal with financial innovation and operation of mixed business such as investment banking and commercial banking by institutions, Liu said.

Chinese President Xi Jinping proposed reforming the current financial supervision system in the Suggestions to the Thirteenth Five-Year Plan to “hold the bottom line of preventing any financial crisis.”