HUI FENG |

Beijing’s two-day closed door meeting on finance and regulation was concluded on 15 July 2017.  Dubbed the National Finance Work Conference, government chiefs from all relevant agencies have gathered every five years since 1997 for the key event in order to set the tone for finance and regulation in China.

The signal from the Conference is clear.  There will be a strategic shift with regard to the central purpose of financial regulation, from liberalisation in the form of encouraging financial innovation, to an emphasis of systemic risk and regulation.

Notable developments in Chinese finance in recent years have been the rise of shadow banking (in the form of wealth management products and inter-bank lending) and internet-based finance.  However, Beijing increasingly came to realise the associated risks and potentially systemic damages the unfettered deregulation may bring to financial stability.

The new emphasis of financial regulation has thus turned to ‘regulation’ instead of ‘finance’.  There are two pillars for the strategy.  First, finance, it is argued, must serve the real economy rather than becoming its own game.  The second pillar is waging a national deleveraging campaign to bring down unsustainable debt levels, especially that of the corporate sector.  Chinese president Xi called on the central bank, the People’s Bank of China (PBoC), to play a stronger role in managing the country’s financial markets and in averting systemic risks.  To achieve this, the Bank has been given the power to implement a macro-prudential framework among other watchdogs and financial institutions.

In relation to the new emphasis on the strategic shift to more stringent regulation, a major cabinet-level institution was announced.  The new institution, called Financial Stability and Development Committee (FSDC), will be established under the State Council.

The aim of the Committee was said to help improve the effectiveness of regulation and address regulation challenges brought by increasingly mixed financial services under a previously fragmented and segmented system.

The new FSDC is bound to be a compromise.  The administrative office of the FSDC will be  stationed under the PBoC, which effectively means the Bank will have the strongest influence on its decision making.  On the other hand, it is still not clear who will chair the committee, the premier, or the deputy premier, or the vice premier holding the finance portfolio.

Nevertheless, the committee will include chiefs of the usual institutions, such as the three prudential regulators, the Ministry of Finance, and the National Development and Reform Committee.  However, more importantly, insiders reveal that the committee will include a wider array of institutions, such as party and even judicial and military organs, to reflect the impact of finance on social and political stability.  However, this setting will make it very complicated when it comes to decision making.  The Committee was established to increase the efficiency of supervision and coordination, but it may well end up doing the opposite.

Zhou Xiaochuan, governor of the PBoC, will certainly step down from the governorship later this year or early next year.  The recent conference was meant to be his last major effort in achieving his institutional vision for the central bank before his retirement.  He did not get what he wanted, i.e. a colossal central bank that brings financial regulation under one umbrella; the new FSDC is actually prone to more bargaining and inefficiency.  Nonetheless, the Bank’s role has been strengthened in the overall regulatory regime.  Coupled with the macro-prudential framework that the Bank has been championing in recent years, this will become one of the most important legacies of Zhou for his successor.

AUTHOR

Dr Hui Feng is a member of the Griffith Asia Institute.