Banking & Finance

China’s regulators say increased scrutiny is the basis for reforms, innovations

Chinese regulators stress that strengthening financial regulation and deleveraging do not contradict with deepening reforms

PUBLISHED : Tuesday, 20 June, 2017, 3:23pm
UPDATED : Tuesday, 20 June, 2017, 10:53pm

China’s financial regulators, in trying to steer the country’s banks, brokers and insurers towards financial innovations, are walking a thin, fine line.

On the one hand, they must push the world’s second-largest capital market with 231.9 trillion yuan (US$34 trillion) of deposits and assets to develop depth and breadth. On the other hand, they need to steer them away from the speculation and excessive exuberance that’s become a hotbed for graft and malfeasance.

“China’s financial reforms aren’t too fast, but relatively backward, and China’s financial innovations aren’t overdone, but relatively insufficient,’’ said Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission (CBRC) at the Lujiazui Forum in Shanghai on Tuesday.

“Financial reforms and innovation that must be conducted cannot be shaken or halted, because of the occurrence of financial irregularities and risks.”

Wang’s view was echoed by the nation’s regulators overseeing the securities and the insurance industries, who also called for the further opening up of the capital markets and expansion of the financial sectors to serve the world’s second-largest economy and the national Belt and Road trade initiative at the two-day financial forum.

The regulators’ stance may ease investor concerns about the pace of China’s financial reforms and innovation at a time when the state-led deleveraging drive to eliminate excessive money is drying up liquidity in the financial system and sending stocks and bonds plunging. Data from the central bank showed that China’s broadest measure of money supply last month grew at the slowest pace on record.

Financial reforms and innovation that must be conducted cannot be shaken or halted, because of the occurrence of financial irregularities and risks
Wang Zhaoxing, CBRC

Rural and city commercial banks have shelved new business development plans to focus on identifying and cleaning up irregularities within existing businesses, Hua Chuang Securities said a research note in June, quoting on-site talks with banks.

An earlier study from Founder Securities also showed that banks in Beijing have mostly halted their innovation business plans, to align with the tightened regulation, reflecting a possible setback on innovation as result of the ongoing increased scrutiny.

There are already incipient signs that top policy makers are softening their stance towards deleveraging. The central bank has already injected funds into the financial system through the medium-term lending facilities and reverse-purchase agreements to ease the money crunch.

“Strengthening financial oversight, crackdown on financial irregularities and prevention against financial risks don’t contradict deepening financial reforms and pushing forward financial innovation,’’ CBRC’s Wang said at the forum.

China needs the expansion of the insurance industry to support the nation’s further integration into global trade and resource allocation, according to Huang Hong, vice chairman of China Insurance Regulatory Commission.

Yet, the insurance industry is still dwarfed by the banking sector, with 90 per cent of the financial assets coming from lenders, and insurers making up a mere 6 per cent. Chinese insurers are also lagging behind global rivals in size.

China’s premiums account for 4.2 per cent of the nation’s economy, compared with 8 per cent for developed nations and the 6.2 per cent global average.

Huang said the risks of the insurance industry was under control after the regulator tightened the rules particularly on universal life insurance policies, which are similar to banks’ wealth management products in generating short-term returns to holders and blamed for funding a spate of hostile takeovers for big listed companies.

Still, stability is the pre-condition for any further reforms and innovation in the financial industry, said Jiang Yang, vice chairman of the China Securities Regulatory Commission.

“Without a stable market environment, market reforms on their own cannot be pushed forward smoothly, let alone the purpose of serving the real economy,” he said at the forum.

“We need to put prevention against financial risks at a more important position to resolutely avoid big ups and downs, and hold onto the bottom line of no occurrence of systemic risks.”