Executive Summary 

  • The Financial Stability and Development Committee (FSDC) aims to ensure better regulatory coordination by unifying and issuing policies designed to reduce financial risk.
  • Xi’s trusted ally Liu He is likely to be appointed as the FSDC head during this year’s Two Sessions. Several former anti-graft officials have also been installed in the three Commissions, strengthening anti-corruption oversight and clearing the way for further structural reform.
  • In 2018 the FSDC will coordinate efforts to open up China’s financial sector to foreign companies, target financial risks at the local level, while keeping a tight grip on all financial activities and financial institutions.
  • Foreign companies that have or plan to enter partnerships with Chinese financial firms should carefully review the exposure to FSDC identified financial risks of their local partners, and conduct careful due diligence, as cooperation could be disrupted unexpectedly by potential FSDC probing.

FSDC in Action

In August 2017, APCO forecasted that FSDC will achieve successful oversight over the PBOC, CBRC, CSRC, and CIRC, at a time when many doubted the Committee’s effectiveness. APCO listed three indicators to look out for: unified policies led by PBOC, the appointment of a close Xi ally, and replacement of senior regulatory heads in the three Commissions. Since then there have been significant developments in all three indicators.

1. Unified Policies Issued By PBOC

In November 2017, the PBOC and the three Commissions jointly released a draft policy regulating China’s 15 trillion-dollar asset management sector.[1] The draft policy aims to tackle issues in asset management products (AMPs), which has been a hotbed for financial risk. These include high leverage ratios, little risk reserve funds to buffer potential defaults, and re-investments in other risky financial products. AMPs issued by banks, insurers, brokerages and trust firms will all now come under the same scrutiny.

FSDC is also seeking to coordinate policy releases amongst financial regulators. Fighting for spheres of influence and seeking to expand their own portfolios, financial regulators previously raced to issue lax policies to loosen up restrictions for institutions under their management, which contributed to mounting financial risks.

Under the leadership of FSDC, regulators now seek to supplement and support each other’s work. In Dec 2017 and Jan 2018, CBRC released two policies aimed at reining in trust loans and entrusted loans, which jointly account for 15% of China’s aggregate financing. The specific measures limit banks’ ability to channel funds through trust firms, and asks non-bank asset managers to stop financing loans. Backing up CBRC’s initiative, CSRC provided ‘window guidance’ to asset managers under its jurisdiction (securities firms and brokerages), to limit the funding of entrusted and trust loans.

2. The Appointment of a Close Xi Ally

The cabinet-level FSDC is currently chaired by vice premier Ma Kai, who oversees the economy and financial sectors. It is highly likely that Xi’s close ally Liu He will replace Ma as the new chairman of FSDC, with any decision to be announced during the 2018’s Two Sessions.[2]

Liu is a reformer and one of the drafters of the five-year plans that underpins China’s economy. He is also the mastermind behind supply-side reform, being the first to mention the concept in Oct 2015 at a work inspection in Guangdong.[3] Often working behind the scenes, Liu was elected into the 25-member Politburo at the 19th Communist Party Congress, and currently heads the General Office of Central Leading Group for Financial and Economic Affairs and vice minister of the National Development and Reform Commission (NDRC).

Liu’s speech at the World Economic Forum in Davos recently received wide attention. Liu echoed Xi by stating that preventing and resolving major risks will be one of the three critical battles China will fight. Liu was also the first member of the leadership to give an initial timeline of three years for bringing China’s leverage “under effective control”.

3. Replacement of Senior Regulators in The Three Commissions

To clear the way for structural reform, Xi has placed trusted veteran anti-graft officials in senior positions within the financial regulators to strengthen oversight. These appointments include:




Li Xinran (李欣然)

September 2017

Lin Guoyao (林国耀)

September 2017

Zhou Liang (周亮)

December 2017

Appointed head of discipline inspection at the CBRC. Li had participated in top-level corruption investigations including that of Bo Xilai while working at the CCDI.

Appointed to head discipline inspection at the CIRC. Lin is a former municipal official in the coastal province of Fujian.

Appointed as vice chairman of CBRC where he will be overseeing joint-stock banks, policy banks, policy research and information technology. Zhou previously led the organization department of CCDI.

To support FSDC’s work, CCDI also included ‘fighting corruptions of financial loans’ for the first time in its communiqué on 13 Jan 2018. Issued once every five years after the key Communist Party Congress, this sends a strong message to the financial sector that crackdowns will persist and intensify in 2018.[4]

FSDC in 2018

FSDC will likely focus on three areas in 2018:  


Continue Financial Tightening Measures


Push for Financial Market Opening


Regulate Local Government Financials

FSDC’s work so far has been deleveraging, fighting financial risks, and strengthening coordination amongst existing financial regulators. This will continue throughout 2018, with FSDC keeping a tight grip on all financial activities.

FSDC will likely lead efforts to lift China’s market barriers for foreign banks, brokerages, securities and insurance firms in the second half of 2018. The central leadership is motivated to roll out this initiative to boost FDI, and to improves domestic firms’ corporate governance by bringing in global expertise and standards.

FSDC will exert influence on local finance regulators to clean up debt and prevent financial fraud. While central leaders are confident in reducing financial risks at its own pace, as the state owns most of the lenders and borrowers, the potential for localized financial crises to spread nationwide remains a concern.

Key FSDC Personnel

Other than Liu’s expected appointment, the naming of other committee members will likely only come during the Two Sessions in March. The PBOC, CSRC, CIRC and CBRC will likely nominate one representative each to the committee as vice-chairpersons.

PBOC’s head of the Financial Stability Bureau (FSB) Zhou Xuedong deserves special attention as the committee is formed. The FSB is leading the coordination between FSDC and other financial regulators and was the main bureau responsible for drafting the asset management policy. Zhou has previously served as the deputy head of FSB when he led the drafting of rules overseeing credit-reporting companies and third-party payment service providers. Zhou rejoined FSB as its head in Oct 2017, signaling his enhanced presence in FSDC in the future.

Implications for Foreign Companies

The establishment of FSDC and tightened financial regulations will be beneficial for foreign companies in the long term, as a healthy financial market will reduce the risk of disruptive macroeconomic crises that might destabilize both China and global markets. So far the government has also proven its ability in combating risk without sparking panic in the markets.  

Foreign companies that have or plan to enter partnerships with Chinese financial firms or local financial regulators should carefully review the exposure to FSDC identified financial risks of their local partners, and conduct careful due diligence, as cooperation could be disrupted unexpectedly by potential FSDC probing.

Foreign financial firms should closely monitor the progress of financial market opening to identify and maximize potential opportunities. Foreign financial firms already operating in China should adapt to the tightening financial atmosphere in China, and keep up with the new policies and draft policies aimed at regulating financial activities and products.

Yvonne Yu
Yvonne Yu

Yvonne Yu is a project consultant in APCO Worldwide’s Beijing office, specializing in researching government and regulatory policies. Read More