China’s new financial watchdog has work cut out for it

Stability committee is Beijing’s defence against a US-style meltdown of the banking system

PUBLISHED : Wednesday, 19 July, 2017, 10:33am
UPDATED : Wednesday, 19 July, 2017, 10:33am

Nine years after the fall of the US-based Lehman Brothers bank in 2008, which triggered a global financial crisis, China has a shield against its own Lehman moment: a financial stability committee.

While details of the committee are still shrouded in darkness, including who will head it and how much power it will have, hopes are high that the agency under the State Council can tackle the “seven types of risks” threatening the country’s financial stability.

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Borrowing pages from the US Financial Stability Oversight Council and Britain’s regulatory structure, Chinese leaders announced the launch of the Financial Stability and Development Committee after a key financial work conference over the weekend. The committee aims to improve policy coordination to avoid regulatory blind spots.

China’s financial sector faces excessive credit, rampant shadow banking and lax oversight after a decade of monetary easing. A stock market rout in 2015 was a reminder of the country’s financial vulnerability.

Lu Lei, head of the People’s Bank of China’s financial stability bureau, listed the seven types of risk building up on the mainland.

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“Risks from bad loans, liquidity management, shadow banking, external shocks, the real estate market, government debt and internet finance are on the rise,” Lu told People’s Daily on Monday. “Financial markets are rampant with irregularities, arbitrage and scandals, highlighting problems in the poorly coordinated regulatory regime.”

The central bank said on Tuesday it would establish an office to run the committee.

Beijing has been attempting for years to improve communication and coordination between the central bank and its financial watchdogs: the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission.

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A financial coordination mechanism was launched in August 2013 with Zhou Xiaochuan, the central bank governor, as its convener, but it proved toothless because it lacked executive power.

The jury is still out on whether the new committee can make a difference, according to Hu Xingdou, an economist at the Beijing Institute of Technology. “The creation of a new committee is like building a house on top of existing ones,” Hu said. “Such repetition will be proven useless.”

Andrew Collier, managing director of Orient Capital Research, said the committee, like the financial stability board in the United States, was a creature of politics.

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“The American board was created [along with] the Dodd-Frank Act after the financial crisis, but even the Dodd-Frank Act itself may die an early death,” he said.

The act is a federal law that places regulation of the financial industry in the hands of the US government.

The legislation, which was enacted in July 2010 in response to the global crisis of 2008, created regulatory processes to limit risk by enforcing transparency and accountability.