China’s ‘super regulator’ fails to impress

Analysts say Beijing’s new financial stability committee is unlikely to bring radical reforms, at least in the short term

PUBLISHED : Tuesday, 18 July, 2017, 9:00am
UPDATED : Tuesday, 18 July, 2017, 9:00am

The creation of a financial stability committee has demonstrated the top leadership’s desire to avoid a financial crisis, but also exposed Beijing’s limited ability to make radical changes within its bureaucracy, analysts said.

The idea of merging the central bank with the regulators for banking, securities and insurance into a super regulator was discarded. Instead, Beijing has decided to create a new agency – the Financial Stability and Development Committee under the State Council – dodging the unpleasant job of streamlining the existing regulatory institutions.

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The launch of the committee was one of the major decisions made at the National Financial Work Conference over the weekend. It is expected to enhance coordination among regulators to avoid vacuums that lead to market turmoil, such as the stock market rout in the summer of 2015.

However, few details of the committee were disclosed after President Xi Jinping announced its formation.

Guo Tianyong, a professor with the Central University of Finance and Economics in Beijing, said the day-to-day operations of the committee were likely to be controlled by the People’s Bank of China, and that committee posts would be filled by officials from existing regulators. “It’s not right to say that China has created a new ministry,” Guo added.

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Larry Hu, head of Greater China economics at Macquarie Group, wrote in a note that the committee “is far from the ‘super regulator’ which had been speculated [about] by the market for more than a year”, and that the impact from the conference would be “fairly modest” for the near future.

At the work conference, Xi urged financial institutions to disclose their bad assets, continue to cut debts at state-owned enterprises and strictly control new local government debt.

However, radical reforms were out of favour because they could bring new risks, analysts said.

“The reform appears to be incremental, as a major organisation shake-up could create a regulatory vacuum as well as new risks ahead of the 19th party congress,” Standard Chartered economists Ding Shuang and Kelvin Lau wrote in a note.

“We see the ... mechanism as a positive step towards tackling regulatory arbitrage, although the devil is probably in the details.”

Andrew Collier, managing director of Orient Capital Research, said the work conference fell well short of its ambitions.

“Clearly, there was infighting between bureaucracies and a lack of agreement on how to reduce financial risk overall,” Collier said.

Beijing might want to tighten control over credit, but local governments and banks preferred to keep it flowing “against all odds”, he added.