All three adopt different standards in areas ranging from eligible investor recognition to risk control.

Combining them into a single unified financial watchdog is seen as key to reining in risks posed by the China’s multi-trillion dollar shadow financing sector, and its possible knock-on effects in the broader lending market.

In a sign that the process of merging the functions may already be under way, Liu Shiyu, chairman of the CSRC, said his organisation would work closely with other bodies as it tries to strengthen the regulation of capital markets.

He added that the People’s Bank of China is currently leading collaborative efforts between the central bank and the three main regulators to draft unified regulatory rules on asset management products.

“The CSRC is actively cooperating with them,” he said.

“Regulatory arbitrage is a key problem in the country’s financial system,” said Chen Shujin, the chief financial analyst with Hong Kong-based Huatai Financial Holdings.

“Institutions can always innovate products in a more loosely regulated area”, or innovate products in a grey area not covered by the disparate regulation, Chen said.

Speaking at a press conference in Beijing on Sunday, Liu also vowed to find and “get even with” wrongdoers whose financial transgressions undermine markets and hurt small investors.

Advances in technology mean every financial transaction now leaves a digital trail, leaving no hiding place for financial malfeasance and regulatory breaches, he said.

“In the age of modern analytics, especially with the wide use of big data and cloud computing, any person or any institution who has breached laws or rules at whatever time to hurt small investors and disrupt market order will be on record,” Liu said.

“For all these records, no matter old or new, we will cling to every clue we found. The old tricks don’t work any more.”

Liu warned industry players not to become “barbarians”, “demons”, “evil creatures” or “financial crocodiles”, terms he has used previously to describe aggressive stock acquirers undertaking leveraged buyouts of listed companies.

“I was shocked by the chaos that I saw in financial markets after I came into office in CSRC.

“These barbarians, demons, evil creatures and financial crocodiles have taken advantages of loopholes in the system and grabbed what they want by cheating or forcing [their actions] under the cloak of legality, at the expense of small investors.

“The CSRC’s function is to conduct the regulation. How can we ignore that? We willget even with those financial crocodiles who have hurt small investors.”

When pressed, Liu refused to name any of the companies he was referring to.

Banks are not allowed to invest proceeds from wealth management products in property or the stock market directly, but they can use the funds to buy a product under a securities company. That type of transaction is overseen by the CSRC, which has looser rules for investing in property and equities than its bank industry counterpart, said an executive at a Shanghai- based bank who declined to be named.

Fitch says some 36 per cent of outstanding credit in China, or 34 trillion yuan (US$5.55 trillion), lies outside banks’ loan portfolios, a huge pool of money which market participants find difficult to track and which could cause a serious credit crisis in the event of a steeper economic slowdown.

Trust companies, mutual fund houses and various asset management schemes run by securities firms have been the main intermediaries through which capital under “wealth management products” (WMPs) or “asset management” has flowed to non-standard debt assets.

Analysts warn that any crackdown should be very carefully controlled. Systemic risks could be triggered because the financial institutions have been heavily investing in each other in the past few years, analysts with Guotai Junan Securities said in a research note.

“Deleveraging measures should be weighed carefully, given the financial system is fragile,” the note said.

Some industry players say if the set of new regulations came into effect, it could ruin their business.

The new set of PBOC-led draft rules proposes a ban on implicit guarantees, in which wealth management products promise a minimum or guaranteed principal for investors.

“Under fierce competition, WMPs offer a higher yield than deposits, and a principal guarantee is a major way for us small banks to ensure deposit growth. If the guarantees were broken, massive deposit emigration is likely,” said Wen Lei, an employee with the financial market department under Guangdong Jiangmen Ronghe Rural Commercial Bank.

Ji Linghao , an analyst with Huachuang securities, said such a ban would be “harsher” than previous regulations drafted by a single regulator, and would challenge prevailing practises in the asset management sector. For example, capital pooling, a practice that puts together various products with different maturities, could be banned by the new rules.

China has been mulling the idea of creating a super regulator under a unified umbrella for at least 10 years.

The idea gathered support in the summer of 2015, when a bull run abruptly ended on the Chinese stock market, wiping out trillions of yuan of value in the space of two days.

The current supervisory structure dates back to 2003, when a regulatory body was created for each of three types of finance: equities, banking and insurance. Advances in technology, faster flow of capital and an increasingly interwoven financial industry have created fresh challenges for the regulators, and fuelled calls for their functions to be merged.