In China, talk of ‘super-financial regulator’ is cheap – until next crisis hits

PUBLISHED : Wednesday, 15 March, 2017, 8:33am
UPDATED : Wednesday, 15 March, 2017, 8:33am

Financial crises are said to come once a decade – the Black Monday market crash of 1987, the Asian contagion in 1997 and the global financial crisis of 2007. If true, we’re about due for a hit.

And if a crisis is looming, China must be especially cautious given it’s the world’s second-largest economy, with capital markets full of shadow bankers and “crocodiles”– Beijing’s term for high-rolling insider traders.

One way to deal with these risks is through establishing a super-financial regulator. It would enable different regulators to act in harmony, rooting out financial risks that stem from the country’s unregulated fund flows across banking, securities, insurance and trust firms.

“The current regime [of separate regulation] no longer suits a rapidly growing financial industry and cannot prevent the outbreak of potential systemic risks,” said Yin Zhongqing, deputy director of the financial and economic affairs committee under the National People’s Congress.

Yin backs a merger of the national banking, securities and insurance regulators to create a body similar to the Financial Conduct Authority in Britain. “There is little difference on whether it should be changed, the differences are mainly on how,” he said.

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The search for an effective financial regulator has been a hot topic at the gathering of the National People’s Congress over the past two weeks after Chinese President Xi Jinping made risk prevention a top priority for 2017, a year that will see a key leadership reshuffle.

On Friday, Zhou Xiaochuan, governor of the People’s Bank of China, admitted that “there is not enough communication among regulators to sense the overall market risks”.

Zhou added the “financial regulatory coordination mechanism may be improved to a more effective level when consensus is reached”.

China has witnessed an era of financial liberalisation in the last decade since Beijing rolled out a massive stimulus to bolster growth amid the financial crisis.

The shadow banking sector boomed as the central bank unleashed an unprecedented amount of money into the banking system, and new financial products mushroomed in the name of innovation, bypassing oversight from regulators and endangering financial stability as witnessed in the 2015 stock market rout.

At the same time, China doesn’t have foreign remedies, such as the Dodd Frank bill in the United States or the Financial Stability Committee in Europe, to tame the risks. The central bank under Zhou is drafting an umbrella regulation to look after the country’s 60 trillion yuan (US$8.7 trillion) asset management business.

When Beijing created the securities regulator in 1992 to supervise the nascent stock market, it was meant to encourage the development of the domestic securities industry.

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Along similar lines, authorities split part of the central bank’s oversight into the China Insurance Regulatory Commission and the China Banking Regulatory Commission (CBRC). But the structure has grown outdated amid the free flow of funds across different ­sectors.

“The regulation should follow money rather than entities,” Yin said.

“The current regulatory coordination mechanism can’t see the source and destination of funding as well as their capital structure, since no one is willing to share their information.”

But merging existing agencies is proving much harder than creating new government bodies.

“No one said [the three regulators] must be merged,” said Liu Mingkang, the first chairman of the banking regulator after the CBRC was created in 2003.

“The central government is now talking about enhanced coordination and communication among financial regulators,” Liu told the South China Morning Post on the sidelines of the annual meeting of the NPC and the top political advisory body in Beijing. “I agree too.”

Mainland authorities created a cross-ministerial “coordination mechanism”, led by the central bank, in 2013, but the mechanism is more of a talk shop rather than a powerful regulatory body.

“No matter how the financial regulatory regime changes, the role of the People’s Bank of China to implement monetary policy and safeguard financial stability will never change,” said Wu ­Xiaoling, a former deputy governor of the central bank and now a lawmaker.