Executive summary

  • The new regulatory landscape borrows features from the UK model, including a more powerful central bank with policy-making responsibilities, and a merged banking and insurance commission tasked with compliance enforcement.
  • The restructuring aims firstly to tackle financial risks by ceasing regulatory arbitrage and ensuring better regulatory coordination. Secondly, it aims to prepare China for global financial integration by modernizing the previously outdated regulatory system.   
  • The newly inaugurated financial regulators are all experienced reformers who will likely work coherently to ensure effective financial oversight, as well as a steady financial market opening. 
  • Foreign firms should take advantage of the recently announced widening of China’s financial market while being aware of the tightened financial regulations. Comprehensive government engagement strategies should be developed for both central and local financial regulators.

China has embarked on an overhaul of its financial regulatory system since the “Two Sessions” in March 2018, focusing on enhancing coordination and establishing a sound supervision system. On April 2nd, 2018, President Xi Jinping reemphasized the importance of fighting the “three critical battles” during the first meeting of the Central Financial and Economic Affairs Commission, a powerful decision-making body which he chairs. The first of these “battles” is the need to safeguard against major financial risks.

Overall Oversight Committee

FSDC was officially established in November 2017 with Liu He as its Chairman. Its main role is to develop strategies for financial sector development and reform. In the short term, it seeks to tackle risks in four areas: shadow banking, asset management, internet finance and financial holding companies.

Strengthened Central Bank

PBOC’s role was elevated after the restructuring plan announced during the 2018 Two Sessions, as it absorbed policy-making powers previously held by the two banking and insurance regulators. It will also strengthen its ability to provide macroprudential management, allowing it to oversee all systemically important financial institutions and centralize the establishment of a financial database.

Newly Merged Commission

The previous Banking and Insurance regulators CBRC and CIRC have been merged to form CBIRC. Its role is limited to policy implementation and compliance enforcement.

Remaining Regulator

CSRC remains intact as China is still seeking to refine and open its securities and futures markets, which are still relatively immature and undeveloped compared to China’s banking and insurance sectors. The existence of CSRC is also needed to continue to generate more direct financing, which China currently lacks.

Provincial Regulators

Some provinces including Shenzhen, Jiangsu, and Shandong, have set up local Financial Supervision Bureaus to enhance financial oversight through clearer regulatory responsibilities per financial company type. These include oversight for private equity and small-loan firms, as well as online lending platforms. Financial supervision reform from the top is trickling down to the local level to prevent regulatory arbitrage.

Restructuring rationale

before restructuringThe obvious rationale for institutional restructuring is to safeguard against financial risks by ensuring better regulatory coordination among the various government agencies. Under the previous structure the PBOC, CSRC, CIRC and CBRC each worked largely independently, and sought to expand their respective sectors. This led to competition among the agencies that led to a lax regulatory environment and mounting risks. The lack of collaboration was partially responsible for the stock market crash in 2015, bond market crisis in 2016 and the severe debt crisis that befell financial conglomerates in 2017, such as Anbang, HNA Group and Fosun.

The new structure borrows from the UK’s “twin peaks” model, whereby the Prudential Regulation Authority (PRA), a subsidiary of the Bank of England, is tasked with macroprudential regulations, and an independent agent, the Financial Conduct Authority (FCA), is tasked with policy implementation and consumer rights protection. After the restructuring, the role of the PBOC is now equivalent to that of the PRA, and CBIRC together with CSRC assume the role of the FCA.

after restructuringAnother less obvious motivation for the restructuring was the need to prepare China for global financial integration, by modernizing the previously outdated regulatory system. The government leadership is highly motivated to open the financial sector as it will give China access to overseas capital for its economic development, provide more funding for the Belt and Road initiative, and import global standards and expertise that will help domestic firms’ internal controls. The prerequisite to financial opening, however, is to ensure the regulatory system can properly regulate foreign financial firms and protect against external shocks that come with such opening.

The personnel

Selecting a capable team is just as essential as the institutional reforms. The team selected to lead China’s financial regulation for at least the next five years looks promising, consisting of both reformers and experienced technocrats.

To ensure the smooth collaboration between PBOC and CBIRC, PBOC technocrat Yi Gang was made its new governor, with former CBRC head Guo Shuqing as its party secretary. This is on the departure of Zhou Xiaochuan, who had been both the bank’s governor and party chief for 15 years. The arrangement gives Guo the final say on strategic decisions, while Yi will oversee the central bank’s day-to-day operations. It is believed that Guo’s strong political and financial background will enable him to effectively coordinate policy between the PBOC and CBIRC, and Yi’s extensive PBOC experience will ensure continuity of current monetary policy.

Implications for  foreign companies

job descriptionsHealthier Market Environment

The newly formed financial regulatory landscape and appointed regulators are both positive developments for foreign companies in China, as the new regulatory structure will be better at detecting financial risks and sustaining a healthy capital market. The new personnel are also capable technocrats with a deep understanding of Chinese and international financial systems and will release regulations that are calculative and within market expectations. Monetary policies, for example, are likely to be pragmatic and aligned with central trends and market needs. 

Wider Market Access

The recent changes show that China is ready to deepen its integration with the global financial market. At the time of writing, China has already announced the removal of caps on foreign ownership of banks and asset management companies, as well as raising foreign ownership ceilings to 51% for brokerages firms, fund management, futures and life insurance companies.

China is also making incremental steps in liberalizing its capital account, such as resuming the Qualified Domestic Institutional Investor (QDII) and Qualified Domestic Investment Enterprises (QDIE) schemes, as well as increasing investment quotas under the Qualified Domestic Limited Partnership (QDLP) program. Foreign companies should closely monitor government announcements of reform plans to get a head start in terms of market entry.

Companies should nevertheless always keep in mind that China’s financial opening is more to serve its own agenda. Broader financial market access does not guarantee a level playing field, with protectionism persisting in more subtle ways.

Regulation Tightening

Foreign companies should familiarize themselves with the increasingly tightening financial environment and develop robust government engagement strategies with not only central but also local financial bureaus. The latter is especially important as the regulatory system is messier at the local level, and companies may experience sectorial stakeholder and regulator changes in the coming months as local governments enhance their financial scrutiny. Companies should keep abreast with regulatory changes in cities they operate.

This piece was originally published by AmCham Shanghai 

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