China’s central bank is forcing the leaders of the country’s stock exchange, banking, insurance and foreign exchange regulatory bodies meet on a regular basis, in a bid to improve financial market supervision and force individual agencies to work together, say economists.
On August 20, the People’s Bank of China (PBoC) announced the creation of an inter-ministry committee meant to better “support each other” on monetary and financial policy, as well as hedge against risks stemming from a lack of coordination.
The group will include high-ranking members of the China Banking Regulatory Commission (CBRC), Chinese Insurance Regulatory Commission (CIRC), China Securities and Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (Safe), and will be led by PBoC governor Zhou Xiaochuan.
The group, which may also choose to include the leaders of the National Development and Reform Commission (NDRC), Ministry of Finance (MoF) “and other relevant departments”, will meet quarterly or on an as-needed basis to implement the State Council’s agenda.
While the new committee does shift any power or responsibilities away from existing regulatory bodies, economists believe that it does aim to better align regulators’ often diverging interests in what is an particularly fragmented market.
“In principle the heads of each of these organisations should be communicating with each other, but in practice I don’t know if this is entirely the case,” said one Greater China economist. “It’s a well-known issue that, in the context of the China’s regulatory framework, the different regulators don’t communicate well and don’t often work together well. They have different thoughts, different views and different end goals.”
In China’s bond market alone, the authorities that manage debt issuance by state-owned enterprises (the NDRC) are not the same ones that allow local governments to sell debt (the MoF). And companies must seek the approval of a different regulator to sell short-term debt (the National Association of Financial Market Institutional Investors [Nafmii]), and bonds listed from corporates are segregated to an entirely different bond market (by the CSRC).
This matrix has caused confusion in the past. In March, the CSRC issued a draft on allowing non-listed corporates to issue private placement bonds for the first time, though private placements issuance is typically overseen by Nafmii.
Likewise in February, the CSRC issued policies on private equity and venture capital funds’ registration, which the NDRC has traditionally managed. The overlap caused confusion, leading the State Commission Office for Public Sector Reform to issue guidance in July that the CSRC would oversee these funds.
“This committee is meant to better coordinate the works of these agencies so they don’t have contradictory rules,” said Tao Wang, a China economist at UBS. “There’s a need to have more awareness on what each other is doing on a timely basis – regulators are making decisions across markets that are very much linked to one another.”
If the CBRC tightens rules on banks’ off-balance sheet activities, this will have an impact on overall credit, and then on monetary policy, which is the PBoC’s concern. “And then if Safe tightens rules on export documentation – which it did earlier this year – then the impact on foreign exchange inflows means less money going into the market, which directly impacts money market liquidity. This directly affects the PBoC and the CBRC,” added Wang.
Striving for coordination
China economists applaud the PBoC for taking the step to bring these regulators together, noting that closing inter-agency communication gaps will help the central bank’s progressive leader further liberalise the financial markets.
“Governor Zhou is very reform-minded and this effort to improve communication between ministries reflects the new leadership’s agenda to liberalise the financial markets,” said a Hong Kong-based economist, noting that enacting changes are clearly easier if the key regulatory bodies agree on policy.
The PBoC aims to continue liberalising interest rates and introduce a deposit insurance scheme. Yet, while Zhou has been a proponent of these reforms for years, other agencies have reportedly caused inertia, he notes.
Creating a higher-level committee to emphasise the State Council’s key reforms may help balance the conflicting views.
“We hear that the CBRC and the MoF have a lukewarm attitude to [interest rate liberalisation] because it increases the costs for banks,” said the economist. “Creating a higher inter-ministry committee can help put everyone on the same page and may call out agency heads whose agendas conflict, which we’ve all heard anecdotes on.”
However, analysts question whether the exercise will be enough to keep each regulator’s interests in check as the new committee won’t alter any of their power or scope. One economist notes that PBoC leaders have tried opening communication channels through similar initiatives over the past decade, but discussions have tended to break down as agencies revert back to protect their interests.
Instead the PBoC’s new initiative can at best create a clearer communication channel between the State Council and China’s top financial regulators, giving the new leadership a better understanding of what developments to prioritise.
“It’s possible this will just be easier from a paperwork perspective: instead of the State Council receiving five or six different proposals from each of the financial regulators, they’ll get one that presents all the views from these agencies,” said the Hong Kong-based economist. “It’ll help present a simpler picture of what reforms needed to be made in each part of the market, but China’s regulators aren’t simple at all.”