Cap­i­tal De­ci­sions

China’s reshuf­fle of its fi­nan­cial reg­u­la­tory sys­tem sug­gests a more sys­tem­atic ap­proach, a gov­ern­ment con­sul­tant says

NewsChina - - SPECIAL REPORT - By Jiang Xuan

China has em­barked on a ma­jor reshuf­fle of its fi­nan­cial reg­u­la­tory au­thor­i­ties in re­cent months, com­bin­ing the na­tion's bank­ing and in­sur­ance watch­dogs and set­ting up a fi­nan­cial com­mis­sion un­der the State Coun­cil. Some ob­servers say the move in­di­cates a new ap­proach un­der a con­sol­i­dated cen­tral lead­er­ship. But as the re­form is not yet com­plete, un­cer­tain­ties re­main among in­vestors over the fu­ture shape of fi­nan­cial reg­u­la­tion in China.

Newschina in­ter­viewed Pro­fes­sor Huang Yip­ing, an economist and vice-di­rec­tor of the China Cen­ter for Eco­nomic Re­search un­der Pek­ing Uni­ver­sity, to hear his ob­ser­va­tions about the re­forms. Serv­ing as a mem­ber of the mon­e­tary pol­icy com­mit­tee of China's cen­tral bank, Huang has been con­sulted on the on­go­ing fi­nan­cial re­form and of­fers an in­sider per­spec­tive.

Newschina: Un­der the cur­rent re­forms, the China Bank­ing Reg­u­la­tory Com­mis­sion and the China In­sur­ance Reg­u­la­tory Com­mis­sion have merged, but the power of draft­ing laws re­lated to the two sec­tors has been trans­ferred to the cen­tral bank. How sig­nif­i­cant is the change in terms of China's over­all ap­proach to fi­nan­cial reg­u­la­tion?

Huang Yip­ing: You could say that with the in­sti­tu­tional reshuf­fle, China has adopted a “twin peaks” reg­u­la­tion model cen­ter­ing on two func­tional pil­lars – mon­e­tary pol­icy and pru­dent reg­u­la­tion. Un­der the new in­sti­tu­tional ar­range­ment, the cen­tral bank will be re­spon­si­ble for mak­ing mon­e­tary pol­icy, con­duct­ing pru­den­tial macro-level reg­u­la­tion, and en­sur­ing poli­cies are co­he­sive, while the new Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion will fo­cus on mi­cro-fi­nan­cial be­hav­ior within the mar­ket to en­sure its fair­ness and trans­parency, and will im­ple­ment var­i­ous poli­cies launched by the cen­tral bank.

We made the new ar­range­ments by draw­ing on the ex­pe­ri­ence of many ad­vanced economies, such as the UK and Aus­tralia, which we be­lieve will help us to en­sure the sta­bil­ity of the fi­nan­cial mar­ket.

NC: An­other key el­e­ment is the es­tab­lish­ment of the Fi­nan­cial Sta­bil­ity and De­vel­op­ment Com­mis­sion (FSDC) un­der the State Coun­cil. It ap­pears that the FSDC will share an of­fice with the cen­tral bank. How will the func­tions of the FSDC dif­fer from that of the cen­tral bank?

HY: In re­port­ing di­rectly to the State Coun­cil, the FSDC has a higher sta­tus within the ad­min­is­tra­tive hi­er­ar­chy than the cen­tral bank. Its main func­tion is to co­or­di­nate poli­cies in dif­fer­ent ar­eas, in­clud­ing the mon­e­tary, fis­cal and fi­nan­cial fields. Though it shares an of­fice with the cen­tral bank, it will be staffed by of­fi­cials from the State Coun­cil and other depart­ments. Some of its func­tions may over­lap with the cen­tral bank's, es­pe­cially in pol­i­cy­mak­ing and reg­u­la­tion. This ar­range­ment is mainly meant to re­solve the lack of co­or­di­na­tion be­tween dif­fer­ent reg­u­la­tory agen­cies in the pre­vi­ous sys­tem.

NC: Yi Gang, the new gov­er­nor of the Peo­ple's Bank of China, has said China faces se­ri­ous po­ten­tial fi­nan­cial risks, such as a high rate of fi­nan­cial lever­age [in­vest­ing with bor­rowed money] and “fi­nan­cial chaos” in some places. How does this re­late to the re­form?

HY: In the past years, the ef­fec­tive­ness of China's fi­nan­cial reg­u­la­tion has de­clined as a re­sult of var­i­ous prob­lems with the reg­u­la­tory regime. For ex­am­ple, it was di­vided into sev­eral sub-sec­tors su­per­vised by sep­a­rate and in­de­pen­dent agen­cies – sec­tors like banks, in­sur­ance com­pa­nies and the stock mar­ket. This cre­ated some se­ri­ous prob­lems. It means a lack of pol­icy co­or­di­na­tion be­tween the dif­fer­ent agen­cies. Fur­ther­more, as the fi­nan­cial

sec­tor evolves and the bound­ary be­tween the sub-sec­tors be­comes in­creas­ingly murky, some mar­ket ac­tiv­i­ties fell through the cracks into un­reg­u­lated ar­eas. As the dif­fer­ent sec­tors have be­come in­creas­ingly con­nected, reg­u­la­tory au­thor­i­ties fo­cused on their own sec­tors of­ten found it dif­fi­cult to track cap­i­tal flows in the mar­ket, which dam­aged the fi­nan­cial mar­ket's trans­parency. As a re­sult, the au­thor­i­ties had dif­fi­culty head­ing off po­ten­tial fi­nan­cial risks in the mar­ket. Fi­nally, and most se­ri­ously, the reg­u­la­tory agen­cies in each sec­tor were of­ten ex­pected to pro­mote the de­vel­op­ment of the sec­tor un­der their su­per­vi­sion, a goal that con­tra­dicted their role as reg­u­la­tor.

Rather than a reg­u­la­tory regime di­vided by fi­nan­cial sec­tors, the au­thor­i­ties needed an in­te­grated and sys­tem­atic ap­proach to tackle the is­sue of fi­nan­cial reg­u­la­tion. To deal with the sys­temic fi­nan­cial risk posed by the com­bi­na­tion of bad bank as­sets, ex­ces­sive lo­cal debt, and a high lever­age rate, a sys­tem­atic in­sti­tu­tional ar­range­ment was needed. This is what the on­go­ing fi­nan­cial re­form is about.

NC: Many are con­cerned the re­forms could squash fi­nan­cial in­no­va­tion, which is of­ten the source of fi­nan­cial risk. What is your view?

HY: I think that from a reg­u­la­tory point of view, we need to bal­ance the risk and op­por­tu­ni­ties pre­sented by fi­nan­cial in­no­va­tion.

On one side, fi­nan­cial in­no­va­tion can im­prove the dis­tri­bu­tion of cap­i­tal and op­ti­mize in­vest­ment. On the other hand, it can cre­ate ad­di­tional risk for the sta­bil­ity of the fi­nan­cial mar­ket.

One way to curb the po­ten­tial risk of fi­nan­cial in­no­va­tion is to es­tab­lish “reg­u­la­tory sand­boxes,” es­pe­cially in the field of in­ter­net fi­nance – that is, to set up test­ing grounds for new busi­ness mod­els.

The au­thor­i­ties could is­sue per­mits or li­censes to al­low emerg­ing busi­ness mod­els to op­er­ate in a lim­ited area or lo­cal­ity to see how they adapt to fi­nan­cial reg­u­la­tions. If they prove pro­duc­tive with man­age­able risk, the au­thor­i­ties could al­low them to ex­pand to other ar­eas.

NC: One ma­jor prob­lem in China's fi­nan­cial mar­ket is the high rate of lever­age. How­ever, many sec­tors ap­pear to have fi­nanc­ing dif­fi­cul­ties. How should the gov­ern­ment ad­dress the con­tra­dic­tion?

HY: It seems con­tra­dic­tory to have a high rate of lever­age and dif­fi­cul­ties find­ing fi­nance at the same time. But it's be­cause many fi­nan­cial trans­ac­tions are con­ducted be­tween fi­nan­cial in­sti­tu­tions, and the cap­i­tal in­volved has not en­tered the real econ­omy. Through­out much of 2017, the au­thor­i­ties tried to lower the rate of lever­age in the fi­nan­cial sec­tor and con­sid­er­ably re­duced the mon­e­tary sup­ply. But we haven't seen a cor­re­spond­ing de­cline in the growth of to­tal so­cial fi­nanc­ing (TSF) for 2017. As TSF mea­sures the fi­nance sup­plied to the real econ­omy, this sug­gests mea­sures to re­duce fi­nan­cial lever­age have not had a neg­a­tive ef­fect on the real econ­omy, as they mainly fo­cus on re­duc­ing cap­i­tal flows within the fi­nan­cial sec­tor. There­fore, I think it is pos­si­ble to re­duce fi­nan­cial lever­age and im­prove fi­nanc­ing in the real econ­omy.

Peo­ple ap­plaud as the Bank of China In­sur­ance Reg­u­la­tory Com­mis­sion was of­fi­cially launched, April 8, 2018

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