China’s banking, insurance watchdogs likely to merge in massive financial regulatory overhaul

China is considering plans to merge its banking and insurance watchdogs to bring more order to a fragmented regulatory system and to heed President Xi Jinping’s calls to reduce financial risk.

Sources with knowledge of the matter told the South China Morning Post that proposals were being considered to amalgamate the China Insurance Regulatory Commission (CIRC), which has been headless since its chairman was put under investigation for corruption in April, and the China Banking Regulatory Commission (CBRC), which is chaired by veteran financial official Guo Shuqing.

While no formal announcements have been made on the subject, a statement issued on Wednesday evening at the end of the 3rd plenary session of the 19th Central Committee of the Communist Party suggested significant changes to both the party and government apparatus were in the pipeline.

“The institutional and functional settings of the party and the state … are not fully up to the demands of a modern state governance system,” the statement, carried by state media, said.

A revamp of the financial regulatory system is very likely to be part of the changes discussed at the three-day meeting of the party’s top cadres.

Guo Tianyong, a veteran Chinese banking industry watcher who teaches at the Central University of Finance and Economics in Beijing, said there was a strong rationale for merging the insurance and banking watchdogs.

“There are problems with the existing regulatory structure,” he said. “Each regulator acts on its own … resulting in big loopholes and rampant regulatory arbitrage.”

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If the merger goes ahead, the consolidated agency, along with the central bank and China Securities Regulatory Commission (CSRC), would report to the Financial Stability and Development Committee, a new agency set up in November at Xi’s behest, a source said.

The committee is headed by Vice-Premier Ma Kai, but he is expected to make way for Xi’s top economic aide Liu He after China’s annual legislative sessions, which open in Beijing next week.

“The idea is that the newly merged agency will monitor institutions, and the China Securities Regulatory Commission will oversee the market,” a source said on condition of anonymity.

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Xi has been keen to overhaul the nation’s financial regulatory framework since its failings were thrown into sharp relief by the stock market crash in the summer of 2015, when trillions of yuan were wiped off the value of shares in a matter of days.

The collapse was partly blamed on a the emergence of a group of conglomerates that blurred the lines between banking, securities and insurance, and created huge financial risks for the wider economy.

In the early days of the Financial Stability and Development Committee, Ma was reported to have engaged in daily exchanges with the four financial regulatory bodies.

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If the merger of the insurance and banking regulators does go ahead it will be the biggest shake-up of China’s regulatory system since the creation of the China Banking Regulatory Commission in 2003, which was formed partly as a result of commitments made after the country joined the World Trade Organisation two years earlier.

The aim of the streamlined agency will be to help implement China’s deleveraging campaign, by reining in those financial institutions that have driven a massive expansion of the shadow banking sector in recent years.

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Since the 2015 stock market crash, efforts have been made to tighten control over the financial system, especially in the insurance sector.

The CIRC has been without a chairman for almost a year since Xiang Junbo was put under investigation for violating party discipline. And just last week, disciplinary authorities initiated criminal proceedings against Wu Xiaohui, the chairman of the country’s top insurance company, Anbang Group, and put the firm under the management of the CIRC.