China may keep CSRC as a standalone watchdog as urgency eases on creating super regulator
Discussions are still ongoing as to whether to fold the banking and insurance regulators under the purview of the People’s Bank of China, officials said
China’s government is likely to maintain the securities regulator as a standalone agency, pushing back against public opinion and an increasing call to amalgamate the country’s three financial services watchdog bodies into a “super regulator”.
The China Securities Regulatory Commission (CSRC), the overseer of the world’s second largest equities market, is likely to continue operating separately from the central bank, two regulatory officials told the South China Morning Post.
Discussions are ongoing whether to combine the China Banking Regulatory Commission and the China Insurance Regulatory Commission under the supervision of the People’s Bank of China, the two officials said.
The current supervisory structure dates back to 2003 after China became a member of the World Trade Organisation, where the People’s Bank of China has the mandate to implement monetary policy, manage the country’s exchange rate while managing the national mint. A regulatory body was created for each of three types of finance: equities, banking and insurance.
More than a decade since their establishment, Chinese regulators find themselves challenged by the high-speed flow of international capital, technology and intersecting businesses in the financial industry, where some insurers now run banks, while banks’ funds increasingly find their way into the equity markets.
Criticisms swirled last summer, when a bull run abruptly ended on the Chinese stock market, wiping out trillions of yuan of value in two days. The securities regulator was caught flat footed and unable to tamp down a market rally that was fuelled by easy financing.
To share information and better coordinate regulatory responses, economists and state-run think tank academics recommended that the three watchdog bodies be combined.
“Lot’s of people think the announcement （of a merge of the regulators）would be made this summer, but it did not happen until today, suggesting there must be some debate among the top leadership regarding what should be the best outcome,” said Liu Ligang, Citigroup’s chief China economist and managing director.
China’s financial regulatory bodies could be restructured in three different ways, Liu said.
The first extreme scenario is a merger of all three into a super regulator under the purview of the People’s Bank. A second option involves the banking regulator under the central bank’s jurisdiction, while the third possibility maintains all three watchdogs as standalone bodies coordinated by a new State Council agency that facilities the sharing of information, he said.
“The CBRC should fall under the PBOC, so that monetary policy can transmit effectively to the real economy,” Liu said. “If everything falls under the PBOC, the capital market may have difficulties to develop.”
China needs “competition” between the capital markets and the banking system “to drive the development of China’s financial market and liberalisation”, he said.
Chi Fulin, president of the China Institute for Reform & Development, who is also a member of the Chinese People’s Political Consultative Conference (CPPCC), proposed a merger of the three regulatory bodies.
In November, when delivering the government’s five-year development plan, president Xi Jinping pointed out that “recent volatilities on the capital markets” was proof that China’s existing financial supervisory structure was ill-equipped to nurture the industry’s development, and needed to be reformed to prevent systemic risks.
The calls for coordination grew louder in summer, as a shareholders’ tussle for control of China Vanke Co., the country’s largest land developer, intensified and went public.
Vanke’s turmoil began in December 2015 when a consortium led by Baoneng Group -- a little-known private property and insurance conglomerate based in Shenzhen -- built up a stake of 25.4 per cent in Vanke, becoming the largest shareholder of the developer.
Baoneng’s purchases of Vanke’s yuan-denominated A shares were financed by insurance premium it collected from policyholders and so-called asset management plans, a form of grey market lending by banks, according to a report by state news agency Xinhua.
“The key to the Vanke tussle is whether Baoneng was compliant with regulations in the source of its financing used for acquiring the stake,” said Liu Shuwei, an economics professor at the Central University of Finance & Economics.
It’s difficult to unravel the regulatory issues “because of the fragmentary regulatory framework in China,” Liu said. “There are also gaps in the legal system.”
China also needs to revise the current financial laws, similar to the Dodd-Frank Wall Street Reform & Consumer Protection Act, which was signed into US federal law in 2010 following the financial crisis two years earlier.
“If you look at the US’ post-crisis reform, the same structure basically remains, but they did more on the legal side,” he said. “In the UK, the banking regulation went back to the Bank of England after the crisis, in addition to new laws being issued.”
In the US, Fed oversees banks and large financial institutions, while the securities and derivatives market, the housing financing market are under other agencies.
In the UK, the Bank of England has acted as a super regulator since the 2008 crisis. In addition to the existing monetary policy committee, it now has two others that keep an eye on financial stability and individual companies.
In China, the securities regulator and the central bank will intensify their communication through the secondment of key personnel, said a CSRC official who declined to be identified.
Earlier this month, the PBOC and the CSRC agreed on joint regulation, whereby CSRC inspectors would be invited to help the central bank oversee bond issuance, information disclosures and the transactions of bonds in the interbank market, two traders informed of the regulations told the Post.
There are signs that the CSRC is seconding officials to the central bank.
Liu Shiyu, a former PBOC vice governor, was appointed by the government as the CSRC’s chairman in February, taking over from Xiao Gang, who was largely blamed by public opinion for enacting an ill-conceived equities circuit breaker that caused the stock market to tumble a month earlier.
Last week, the CSRC announced that the central bank’s former head of financial stability was appointed assistant chairman of the securities regulator.
To be sure, the urgency to reorganize China’s regulatory structure has been reduced, as the country’s stock market appears to be bottoming out, said Citi’s Liu. Most of the 12 per cent decline in the benchmark Shanghai Composite Index this year had taken place during the first quarter, he said.
“In the first quarter, the policy priority was to boost growth,” he said. “Now we are focused on structural reform, while the reformulation of the regulatory structure seems less urgent.”