Caixin: Drawing line between government and markets is key in reforming China’s financial industry

Asia Unhedged likes today’s editorial on Chinese financial website Caixin Online:

Reforming Chinese financial industry oversight requires more than a buzzword

Integration is the first and last word in campaign to revamp supervision, but drawing a line between government and markets is equally important

The bulk of a proposed economic development plan for the next five years, which the Communist Party’s Central Committee unveiled after its fifth full meeting on October 29, was dedicated to governance of financial markets.

In a keynote speech at the meeting, the party’s general secretary, Xi Jinping, cited drastic fluctuations in the equity market in recent months as highlighting the need for a sound financial oversight regime. “We should follow a market-oriented path of reform to put in place a modern financial governance system that requires greater integration and better coordination and enforcement,” he said, while putting extra stress on the need to integrate the efforts of regulators.

The current approach, which involves the central bank and the commissions overseeing banking, securities and insurance, has generally worked well since it was introduced over a decade ago. But the divisions with this arrangement have also caused problems, such as periods of ineffectiveness and a lack of coordination and information-sharing among regulatory bodies.

During a national conference on financial matter in 2007, officials and academics proposed a major shake-up of the “one bank and three commissions” framework as a way to strengthen governance, but the proposal was largely ignored.

The financial sector has come a long way in recent years, as the Internet spawns more and more new products and services that have little regard for a nation’s borders. Meanwhile, regulators have often been caught off guard by the risks inherent in these advances. A credit crunch in June 2013 that saw the Shanghai Interbank Offered Rate shoot up 30 percent from its usual level of less than 3 percent and the stock market rout in last summer were manifestations of these problems.

As such, we do indeed need to develop an all-encompassing system of oversight that keeps systematic risks at bay. The Central Committee was right to emphasize the need for integrated efforts in financial governance because we have learned firsthand that regulators have failed to tackle market woes over the years largely due to a lack of cooperation and coordination.

As early as 2004, the China Banking Regulatory Commission was tasked with leading efforts to form a system of joint consultation with the China Securities Regulatory Commission and the China Insurance Regulatory Commission to improve oversight. The People’s Bank of China and several ministries, including the Ministry of Finance, were invited to be part of those talks.

Four years later, the State Council told the agencies involved in the consultation process to meet three times a month to improve coordination. In 2013, the cabinet changed the arrangement by giving the central bank a leading role in the system, but it stopped short of introducing clear guidelines for how these agencies should work together in key areas while still operating independently in their own jurisdictions. Problems with governance of financial markets are underscored by the fact that all three commissions have their own set of policies on asset securitization.

Integration is the watchword in the government’s push for reform in this arena because it will allow for oversight of key financial institutions and firms involved in payments, clearance and trust businesses. Regulatory agencies also need to work closely to improve oversight of data centers at financial institutions.

The question is which central government department should lead these efforts. Many scholars have suggested that the central bank play the leading role under the “one bank plus three commissions” structure, thus bringing China in line with major economies around the world. Others argue that a brand new body should be created that outranks both the central bank and the commissions, but this proposal has raised concerns about creating a whole new layer of red tape.

Both ideas will be difficult to move forward given that they involve government organs. Both the central bank and the three commissions are already ministry-level agencies. Integration that involves downgrading and cuts in official ranks for employees will be met with resistance, possibly undermining the effectiveness of any changes. The people working for the central bank and the commissions are qualified professionals, but many are also government officials, meaning they will be torn between political ambition and a desire for an orderly financial market.

Since the global financial crisis, the world’s major economies have strengthened their financial governance regimes. China can certainly learn from these countries as it strives to develop a sound mechanism for financial oversight of its own. However, China’s problems are much more complicated than any other country’s because of the huge amount of red tape involved here. Much more than a simple drive for integration will be needed to get the job done.

Ultimately, financial oversight bodies must also be reformed so they stop acting like bureaucracies and instead become true watchdogs of the market. A good place to start would be for legislators to introduce a law that clearly defines the boundary between the government and the market.


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