Opinion: Regulatory Reorganization Crucial to Health of Financial System

The merging of the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission into the China Banking and Insurance Regulatory Commission (CBIRC) naturally has attracted a lot of attention outside of China as it involves major changes across two important areas of finance.

Yet perhaps the most important thing is how this will change the relationship between regulators and the central bank, the People’s Bank of China.

Fifteen years ago, responsibility for supervising and regulating banking institutions was taken from the central bank and given to the then-newly formed CBRC. This development had far-reaching consequences, and led to the rebuilding of the previously inefficient financial regulatory model into a comprehensive and professional banking system that is in line with international standards. State-owned banks were also commercialized around this time.

The move to strip the central bank of regulatory duties allowed it to maintain a high degree of independence and gave it the space to provide an objective assessment of regulatory effectiveness on such matters as the development of “shadow banking.”

As banks hold more than 80% of China’s financial assets, supervising them is a crucial part of maintaining the health of the financial regulatory system. This means that if banking regulators do not have the necessary grip on the macroprudential levers or if they even end up working in the interests of the same institutions they are meant to oversee, the system will inevitably be distorted.

Major challenges have emerged in the past decade, however. Illegal fundraising through the shadow banking sector and through online peer-to-peer lending platforms has been rampant, and there are deep-seated reasons for the lack of necessary supervision mechanisms and rules that have allowed it to occur.

Reforms to address these challenges are happening everywhere, and are not simply a matter of combining or separating division and departments within an institution. Firstly, the CBIRC’s chairman now also serves as party secretary of the central bank, which helps ensure that the two bodies are much more in step with one another.

Second, the central bank will be responsible for collecting fundamental financial statistics and maintaining a database, which should help ensure that monetary policy is closely aligned with monitoring large financial institutions and their behavior.

Third, the greater streamlining of financial departments with the central bank will reduce conflicts and friction when it comes to implementing policies. The benefits of this were seen in the recent introduction of new asset management rules and new regulations for financial holding companies.

Fourth, the central bank can entrust the China Securities Regulatory Commission to enforce actions across markets, such as carrying out inspections in the bond market, helping the central bank avoid excessive involvement in regulation.

Fifth, greater cooperation between the central bank and local regulators will also prove beneficial and avoid allowing gaps in their approach to addressing local financial challenges.

All of these changes are far-reaching, though it won’t be clear for a while what their lasting effects will be. However, these trends indicate that the government is aware of the need for greater supervision and cooperation across the financial system, and perhaps set the stage for further reforms to the financial system.

Ling Huawei is an editor at Caixin Media.

Translated by Ke Dawei (daweike@caixin.com)