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China economy

Is a UK model ‘with Chinese characteristics’ the answer for financial regulation?

Researchers say British system introduced in 2013 could be a good reference for Beijing as it tries to shake up oversight and control risk

PUBLISHED : Thursday, 29 March, 2018, 9:09pm
UPDATED : Thursday, 29 March, 2018, 11:27pm

China could adopt a UK-style financial regulatory system “with Chinese characteristics” to fix its loopholes, a group of researchers advised Beijing.

The idea, raised by academics from Tsinghua University and the London School of Economics and Political Science, comes amid a shake-up of China’s fragmented financial oversight system that will see two regulators merged and the central bank given more clout as Beijing tries to rein in the industry.

President Xi Jinping has listed financial risk control as a priority for the country after a stock market rout in 2015 and unprecedented capital flight, and bureaucrats have been scrambling to find a systematic approach to maintain stability.

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But many questions remain unanswered about the new system, including the specific power of a newly formed financial stability committee, as well as the chain of command for supervision of the industry.

The move this month to split the roles of governor and party secretary of the People’s Bank of China added to confusion over Beijing’s institutional arrangements to keep the risk of a financial meltdown at bay.

Zhou Yanli, a former vice-chairman of the insurance regulator which was merged with the banking watchdog this month, told a seminar about the researchers’ proposal on Wednesday that Beijing was still looking for a solution.

“The coordination of China’s banking, monetary, interest rate and exchange rate policies is not easy and all of these areas need further reforms,” he said.

The United Kingdom’s financial services regulatory structure introduced in 2013 – part of London’s answer to the 2008 financial crisis – could be a good reference for Beijing, according to the research report written by Zhou Hao from Tsinghua and three LSE academics. The research was sponsored by the British embassy in Beijing.

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With China’s economic and financial security at stake, the issue is a top priority for Beijing as a poorly designed regulatory model could exacerbate risks in the world’s second biggest economy, where total debts are about 260 per cent of gross domestic product.

The UK model has two regulators – the Financial Conduct Authority overseeing all financial service providers and the Prudential Regulation Authority that looks after key financial institutions. They come under the central bank’s Financial Policy Committee that keeps watch for broader risks.

According to the researchers, a key “Chinese characteristic” for a system based on the UK model would be giving teeth to the Financial Stability and Development Commission. The agency has convened just one meeting under former vice-premier Ma Kai, in November, and whether it should be a coordinator or wield real power is still being debated.

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New vice-premier and Xi’s trusted ally Liu He is set to head the commission.

But the researchers say it should be led by one of the seven members of the powerful Politburo Standing Committee that includes Xi and Premier Li Keqiang.

In a separate report released at the seminar, Tsinghua’s National Institute of Finance Research said Beijing’s crackdown on financial irregularities in 2016 and 2017 had lowered the likelihood of a financial crisis in China.

The institute used CATFIN – a measure of the collective catastrophic risks for the banking industry and the economy – to calculate China’s crisis risk, and found the situation was improving, although banking remained its biggest “systematic risk”, according to Zhou, an economist with the US Federal Reserve for over a decade.

The report named Shanghai Pudong Development Bank, Bank of Beijing, China Ping An Group, Ping An Bank, China Merchants Bank and Industrial Bank as particularly risky lenders. The banks did not immediately reply to requests for comment.