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Chinese Vice-Premier Ma Kai (second from right) is set to retire in March, paving the way for one of President Xi Jinping’s chosen officials to run the new super regulatory body. Photo: AP

Analysis | What Beijing’s super regulator means for China’s economy

Committee to have great powers over financial affairs, with the potential to reduce turf wars and infighting among watchdogs, analysts say

China has officially launched a super powerful supervisory body as the key institution to keep financial crises at bay in the coming years.

China under President Xi Jinping’s rule has avoided a financial meltdown over the past five years, but the US$12 trillion economy is under constant threats of financial turmoil stemming from excessive credit and debt, plus lax market oversight.

Xi said at a key national financial work conference in July that a new committee must be created to oversee a fragmented regulatory system and to whip watchdogs into staying alert.

The result was the Financial Stability and Development Committee under China’s cabinet, the State Council.

Four months after Xi ordered its creation, the committee has convened its first meeting under Ma Kai, a vice-premier set to retire next March, paving the way for one of Xi’s chosen officials to run the committee during the president’s second five-year term in office and beyond.

The man likely to succeed Ma to head the committee is Liu He, Xi’s “trusted economic lieutenant”, according to a research note by Sun Hung Kai Financial analysts. Liu has secured a seat on the 25-member Politburo, creating an opportunity for his election as a vice-premier at the annual meeting of China’s legislature in March.

A report by state-run news agency Xinhua on Wednesday did not name any other members on the new committee or publish pictures of its first meeting.

But Xinhua confirmed the committee would have the authority to supervise China’s monetary policy and financial regulation, to guide local authorities on financial matters and to question financial regulators and local Communist Party officials if it sniffs anything awry.

“This role definition grants the committee great power in financial affairs in parallel to China’s top economic planner,” Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said. Lu was referring to the National Development and Reform Commission, which has extensive powers over a range of issues, from approving subway construction projects to screening China’s overseas investment deals.

Lu said the new financial committee would be even more powerful since it was headed by a vice-premier, giving it a higher political ranking than a ministry. This in turn could help to reduce turf wars and infighting among regulators, Lu added.

The existing financial regulatory framework, overseen by the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, proved not only inefficient but also dangerous at times, according to analysts.

In a stock market rout in 2015, which tarnished Beijing’s global reputation as a capable market administrator, a vice-chairman and an assistant chairman at China’s securities watchdog were later found to be colluding with speculators to undermine the central government’s market rescue efforts.

The former chairman of China’s insurance regulator, Xiang Junbo, was found to have issued special licences to well-connected tycoons allowing them to amass huge piles of funds to speculate in stock markets or to spend lavishly overseas.

Meanwhile, China’s regulators were incapable of spotting and curbing illegal fundraising schemes. One Ponzi scheme fleeced about 900,000 investors of US$9 billion in roughly 18 months before the scheme was busted by the police.

At the financial meeting in July, Xi told the country’s cadres that preventing risks, mainly in the financial sector, was now one of the top three tasks for China along with environmental protection and poverty alleviation.

The financial committee will be the main institution to answer Xi’s demand for financial stability and security.

But doubts remain on whether the new committee can tame the country’s debt juggernaut.

Zhou Xiaochuan, China’s central bank governor for the past 15 years, said in an article published last week that the country had deep-rooted problems that could lead to financial troubles down the road. For instance, local governments were constantly pressuring the central bank to ease monetary policy, regardless of the economic conditions, Zhou wrote.

Gary Liu, president of the China Financial Reform Institute research group, also questioned how successful the new body would be.

“A considerable regulatory scope will not guarantee success for the panel,” Liu said. “It is still a coordination body, legally speaking.

“The new panel is not a legal entity like the Bank of England. So it will still be very difficult for it to coordinate when regulators have conflicting interests.”

Henry Chan Hing Lee, an adjunct research fellow at the National University of Singapore’s East Asia Institute, said backing from the highest levels of government was crucial. “Whether the new super-body will work depends on the capability of its leader, the political backing he enjoys and his political will,” Chan said.

How the head of the super-body would act during a time of crisis and when there was no political consensus among the top leadership, would be the acid test of the committee’s effectiveness, Chan said.

Central bank chief Zhou said at the annual meeting of the International Monetary Fund in Washington last month that the committee would focus on problems of China’s shadow banking, asset management sector, internet finance and financial holding companies.

These areas, with rampant irregularities and regulatory loopholes, are where the businesses of banks, insurers and securities brokerages are tightly intertwined.

This article appeared in the South China Morning Post print edition as: Powerful supervisory body seeks to curb crises