China needs an overarching financial regulator to help maintain financial stability as the world’s second-largest economy opens up its capital account to the world.
Roller-coaster markets, bungled attempts to prop up prices, and mixed policy messages illustrate why a unified body is urgently needed.
A super-regulator could be created by merging the country’s three main financial regulators for securities markets, banking and insurance under the control of the central bank. This would provide integrated regulation and communicate the rules clearly to market participants.
“It would certainly be more efficient, having to deal with just one regulator,” Christopher Lee, the chief ratings’ officer for Greater China corporate ratings at Standard & Poor’s, said at FinanceAsia’s Borrowers & Investors Forum in Hong Kong.
One body would be better positioned to oversee China’s increasingly complex financial institutions, which are branching out into online and offline products that fall under the remit of all three.
It would also be able to spot systemic problems as they arise, such as the excessive use of debt as investors binged on securities and banking products prior to the popping of the stock market bubble last summer.
Japan’s Financial Services Agency is one example of an integrated regulator that oversees an entire financial sector and is respected by bankers.
Other countries have also empowered one regulator above others in the wake of the 2008 global financial crisis to better combat systemic risks. The UK for example has handed more power to the Bank of England, although some bankers have criticised the model for double regulation (and fines) by the Financial Conduct Authority, accountable to the Treasury, and the Prudential Regulation Authority, part of the central bank.
To be sure, a giant regulator could create its own version of internecine bureaucratic infighting and would likely be riven by conflicts of interest, as was the case with the People's Bank of China when it was in charge of regulating banks and monetary policy. However, it would also be a valuable chance to streamline policy and update regulation.
A co-ordinated response and single voice is particularly necessary now, given the challenges China faces in rapidly liberalising its financial markets.
The actions of China Securities Regulatory Commission, China Banking Regulatory Commission, and China Insurance Regulatory Commission have at times appeared to be working against the liberalisation of markets or have abruptly reversed policy.
Central government has talked about allowing free markets more say in how the economy allocates capital. However, when the Shanghai stock exchange benchmark index dropped by 43% between June 12 and August 26, government agencies proceeded to buy stocks.
The CSRC introduced a circuit-breaker mechanism at the start of the year, only to scrap it four days later. And even as China looks to gradually liberalise the renminbi, the PBoC has at times this year still intervened in the offshore market to prop it up.
At a practical level, the different agencies seem to have been embracing liberalisation at a different pace. The CSRC has been more reform-minded, say, than either the CBRC or CIRC.
“I think it is a good thing – some coordination between departments. Since August last year we saw different departments have different policy changes,” Sean Chang, head of Asian debt at Baring Asset Management, said at the conference.
The exact benefits of a super-regulator are unclear though, as a lot would depend on the people in charge. The most progressive agency, the CSRC, has also come under fire in recent months for its handling of market volatility.
PBoC takeover bid
Regulatory reform is an ongoing process in China as the country’s markets continue to evolve.
In 2013 the State Council, or cabinet, instructed the PBoC to coordinate meetings on monetary and financial supervision. Indeed the Communist Party’s 13th five-year plan for 2016 to 2020 calls for greater coordination between regulators.
Even so, it seems talk of drastic reform has accelerated since the summer’s stock market rout.
Pan Gongsheng, the PBoC's deputy governor, told reporters in early March that the Chinese authorities are studying a reform plan. And Chi Fulin, president of the China Institute for Reform and Development, proposed to the annual meeting of the Chinese People's Political Consultative Conference that the three regulatory agencies should be merged.
A consensus seems to be emerging that the PBoC will take a leading role in any merged entity. It has long been viewed as first among equals, even though all four regulatory bodies report to the State Council.
Some of the groundwork appears to have been laid for a takeover.
The PBoC said it would launch a macro assessment system in 2016 to detect risks building in the financial sector.
When the CSRC’s head Xiao Gang was replaced after months of criticism for his mishandling of the country’s stock market turmoil, he was replaced by Liu Shiyu who has spent most of his career at the PBoC, rising through ranks and becoming deputy governor in 2006.
However, one banker who deals frequently with China's regulators cautioned not to read to much into this move as top officials in China rotate around the top financial instititutions and they are all government officials.
What is clear is that market participants struggling to plan ahead in the absence of clear policy direction would welcome the creation of a super-regulator.
“The Chinese regulatory regime is super-fragmented. They need a coordinator. We’ve found [that] even within the same organisation they don’t talk to each other at all – even within the same department,” said Ricco Zhang, director Asia Pacific at International Capital Market Association at the conference. "They focus on different work streams and don’t talk to each other to share information. So we feel very frustrated as we end up repeating the same thing."
