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Central Banks

People’s Bank of China to expand mandate into policing the bond market, with CSRC’s help

The move is a significant first step toward the creation of a ‘super regulator’ that can eventually oversee banking, securities and insurance

PUBLISHED : Sunday, 04 September, 2016, 4:34pm
UPDATED : Sunday, 04 September, 2016, 10:36pm

China’s central bank will extend its mandate beyond monetary policy to include policing the country’s 50 trillion yuan (US$7.5 trillion) bond market with the help of the securities regulator, to instil discipline and prevent fraudsters and underwriters from roiling the financial industry.

The People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) have agreed on joint regulation, whereby CSRC inspectors will be invited to help the central bank oversee bond issuance, information disclosures and the transactions of bonds in the interbank market, according to two traders informed of the regulations.

The joint regulation will commence once an approval is given by the State Council, the two traders told the South China Morning Post.

The proposal, the first of its kind, will be a significant first step toward creating a cross-functional financial regulatory regime in mainland China, heeding the industry’s call for a ‘super regulator’ that oversees the disparate segments of banking, securities and insurance.

The CSRC wouldn’t comment on the issue while the PBOC couldn’t be reached for comment on Friday.

China’s bond market currently has three separate overseers, requiring debt issuers to obtain separate approvals from the PBOC, the CSRC and the National Development & Reform Commission (NDRC), a holdover from the era of Socialist centrally planned economic planning.

Oversight is further divided according the type of debt sold. The central bank’s National Association of Financial Market Institutional Investors (NAFMII), an industry consortium, is responsible for approving short- and mid-term bills traded on the interbank market.

The CSRC is responsible for bonds issued by the country’s publicly traded companies, while the NDRC reviews and approves long-term bond offerings that raise funds for mega industrial or infrastructure projects.

Only the CSRC has the personnel and the expertise -- with 200 inspectors on staff -- to focus on investigating market irregularities or curb securities fraud in the stock market.

Some of these CSRC inspectors will be invited by the PBOC to participate in the bond approval process while offering advice on how to target and punish issuers, traders or intermediaries who breach ethics.

The two regulatory bodies will also share a list of ‘problematic players’ to help them better police the interbank market.

“It could be a good sign that preparations are being made to create a super financial regulator,” if the plan is approved, said Wang Feng, chairman of Shanghai-based Ye Lang Capital. “It is an interesting thing to keep a close watch on.”

Discussions for creating a super financial watchdog has been swirling and ebbing between China’s financial policymakers for eight years, amid a recognition that the industry needs to consolidate the regulatory powers over banking, securities and insurance.

Last year’s stock market rout, caused by the rampant flow of funds from an unregulated ‘shadow banking’ system into the equity bourses, raised concern that the fragmented regulatory regime was ill-equipped to protect the financial system.

Adding to the worries, as many as 18 debt issues have defaulted on 38 bonds valued at 24.8 billion yuan in the first seven months of 2016, six of them by state-owned companies.

Some of these defaults are spilling over, and raising questions about the fiduciary responsibilities of Chinese banks.

In June, investors filed a complaint to the regulators, accusing the Industrial & Commercial Bank of China for dereliction of responsibility in not disclosing the financial woes faced by shipbuilder Evergreen Holding Group, in a 400 million yuan bond underwritten by the bank.