PBoC shines in regulatory shake-up

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China is bringing its banking and insurance watchdogs under one roof, and experts say the People’s Bank of China (PBoC) is the real winner, with an even broader mandate.

By Noah Sin

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In the spotlight: the China Banking Regulatory Commission's office in Beijing


Plans to combine the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC) were confirmed on March 13 by the State Council as part of a package to overhaul and consolidate some government departments. 

Speculation had begun when the Chinese Communist Party named the reform of government institutions, including of those regulating the financial markets, as one of its policy priorities ahead of March’s National People’s Congress in Beijing.

The new regulator, named the China Banking and Insurance Regulatory Commission (CBIRC), will be under the direct supervision of the State Council, Wang Yong, state councillor, told the National People’s Congress.

“It will regulate both the banking and insurance sectors, prevent and resolve financial risks, protect the legal rights of financial consumers and safeguard financial stability,” he said.

Yong added that the regulatory shakeup would help China resolve the lack of clarity in regulatory responsibilities and allow regulators to better prevent systemic financial risk – a key policy objective for the Chinese leadership.

“Finance is the core of the modern economy,” said Wang. “We must pay great attention to the prevention of financial risks and safeguard the financial security of our nation.”


Out of the shadows

One big risk is the shadow banking sector, according to Carie Li, economist at OCBC Wing Hang Bank.

“Banks have been selling wealth management products with guaranteed yield to investors, and entrusting insurance companies to invest with proceeds from these products on their behalf,” she says. “The insurance companies would then leverage and invest in riskier products. This sort of off-balance sheet activity has been expanding very quickly because the CBRC and CIRC failed to coordinate.”

Nicholas Zhu, senior analyst at Moody’s, says the merger is the government’s answer to this problem. 

“Consolidation could help contain the use of pass-through channels involving the banking and insurance industries,” he says in a memo. “We expect the merged regulator would adopt a more effective approach to regulating these activities.”

The view is shared by Betty Wang, senior China economist at ANZ, who reckons the new banking and insurance regulator will bring some of this activity back under control.

“The off-balance sheet activities of the banks are hardly regulated,” she says. “This money is being channelled from one part of the financial sector to another, and not supporting the real economy, which is where the government wants the capital to be.”


New regime

However, the new watchdog will not inherit the full policy portfolio of both the CBRC and the CIRC. The responsibilities of drafting important regulations and prudential supervision will be handed over to the PBoC, according to the State Council’s Wang.

This arrangement reflects where real power lies within the new regulatory framework, says ANZ’s Wang.

“There is no question that the PBoC and the Financial Stability and Development Committee (FSDC) will take the leadership role in coordinating and making policy,” she says. “The new regulator can help implement regulations more effectively, but it will not shape or change policies that have already been set out by the leadership and the central bank.”

China’s leaders have assigned the task of coordinating between financial regulators to the FSDC, which was formally launched last November. The committee sits within the PBoC and is led by vice-premier Ma Kai.

But ultimately, the direction of policy may hinge on just one man — Liu He, politburo member and a top economic adviser to president Xi Jinping, says ANZ’s Wang.

“Liu will be a very important person, whether or not he ends up as governor of the PBoC,” Wang says. “He will be designing major economic and financial policies, possibly from a senior role within the state council.”

The high ranking official, who has been tipped by analysts to succeed Zhou Xiaochuan, the outgoing PBoC governor, penned an article in the People’s Daily on March 13, arguing for the reform of government institutions and strengthening the Communist Party’s leadership in government affairs.