Draft law heralds enhanced financial safety net

The People’s Bank of China, the central bank of China, started soliciting public views on the draft Financial Stability Law last week. The draft law proposes the establishment of a financial stability guarantee fund to help maintain the country’s financial security and stability.

The introduction of the law will contribute to the establishment of a sound market-based and legalized risk prevention and resolution mechanism, contribute to the improvement of China’s financial safety net, and maintain the overall stability of the financial system.

The establishment of a financial stability guarantee fund will provide a basis for better dealing with financial risk events, and have strategic and fundamental significance for maintaining financial security and stability.

The essence of the planned law is risk management. With the increasingly complex economic development situation, there are growing uncertainties and risks. The work of preventing financial risks is more important and more arduous, as financial risks are inherently sudden, complex and interrelated.

As well as their own inherent dangers, they may also have serious spillover effects. Once a problem occurs in a part of the system or an institution, if it cannot be handled and rescued in time, the crisis may be contagious and quickly spread. The current financial product transaction structure is complex, the transaction scale is large, and the financial network is close. Some financial risks are often hidden rather than transparent, and it is easy to form chain transmission, including mutual influence and transmission among banks, stock markets, bond markets, and enterprises. Therefore, it is necessary to establish a sound financial system and legal system, weave a financial safety net, reduce the occurrence of financial risks to the greatest extent from the mechanism, and maintain financial security and stability.

The introduction of the Financial Stability Law and the establishment of the Financial Stability Guarantee Fund will help solve the problems of unclear responsibility distribution among different departments, and improve the working mechanism for financial stability through a top-level design.

Since 2017, the financial authorities have dealt with a number of risk events, providing rich practical experience for the formation of this law, and it has the potential to develop into a comprehensive legal system.