China sets up new financial regulator

Written by Felix Yang || November 15 2017

Two weeks after the 19th Communist Party of China (CPC) national congress, the Chinese state council set up the Financial Stability and Development Committee (FSDC), as the institution to ensure the stability of the financial system and provide solutions for future development.

China has experienced rapid development in its financial environment and the market size has grown dramatically since the 1990s. The “Big Four”, China’s four state owned banks, are already the biggest banks in the world in assets and Both the Shanghai and Shenzhen Stock Exchanges are among the world’s top 10 stock exchanges. In light of the growing complexity of financial systems in China, the risks among different institutions and internal markets have inevitably become more difficult to manage. For example, the risks among regulatory arbitrage, shadow banking, internet finance, real estate and government bonds have raised many concerns under the existing supervision system. To gain better control on such issues, the government decided to establish the FSDC.

During the FSDC’s first meeting, Mr Ma Kai, the vice premier of the State Council, who was also appointed as the director of FSDC, emphasized the tasks at hand and the plan going forward, especially the new capacities for risk control in regards to financial risks. Led by high ranking officials from the State Council, the FSDC will ensure the highest level of financial stability and development in China, governing over the existing “one bank three commissions”[1]. From now on, the Chinese Financial Industry’s supervision system will consist of “one committee, one bank and three commissions”.

The FSDC’s main tasks include: monitoring the policies made by the Chinese government, coordinating the monetary and fiscal policies, and enhancing market supervision. Among all the responsibilities, the most important one for the FSDC is to coordinate the function and operation among other financial regulatory parties. The areas affected will cover financial policy, fiscal policy and industrial policy. This is due to the fact that these major policies are made and operated by different departments, therefore conflicts with one another may happen from time to time if there are no efficient arrangements in place. The Committee can foster a more harmonious relationship by improving the communication between different departments. As a result, it will improve the distinct regulation systems by avoiding any repetition of similar regulations. It will also decrease the amount of unregulated areas and avoid speculations on Regulatory Arbitrage.

The FSDC will also affect the current supervision system for financial markets in China, the balance of “one bank three commissions”. It is expected that the process of policy making ought to be managed by each institution itself. The FSDC will be updated regularly and keep the records. When the regulation concerns different markets, the central bank can cooperate with different commissions under the organization of FSDC.

The FSDC’s office is currently located at the central bank, which shows a close relationship between these two parties. In the past, the central bank took a higher level position in setting regulations and arranging the financial markets, which has similarities to FSDC. In the future, the PBOC will focus on its role as a central bank whereas, each of the other three commissions will be positioned more specifically in order to ensure the efficiency of future regulations.

 

[1] The People’s Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission, China BankingRegulatory Commission