At the National Financial Work Conference held on July 14-15, China’s leadership announced that it will set up a financial stability and development committee to improve the coordination of financial regulations. So far, no details have been released on the functions and composition of the new committee, but it sends a clear message that the central government will strengthen its control over the financial sector.
Under the current institutional arrangements, China’s financial regulations fall under the administration of four separate agencies, including the People’s Bank of China (the central bank), the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission. But with increasingly mixed and complex financial services and products, the fragmented and segmented system is now obsolete. The lack of a centralized financial regulatory body often leads to over-regulation in some areas while a lack of coordination has left loopholes in others.
In the meantime, economic growth is the top priority of governments at all levels. This causes distortions in financial regulation when it is bent to allow for more growth in the short term, without a comprehensive long-term perspective. This has fueled the growth of trillions of dollars of risky financial products and led to a high level of financial leverage.
Between 2008 and 2016, China’s monetary supply experienced remarkable growth, with an average annual increase of 16 percent. The corporate debt-to-GDP ratio also increased from 80 percent to 127 percent, posing a serious threat to China’s financial stability.
Given the continued economic slowdown, there have been serious concerns over the systematic financial risks China may have to face. The China Insurance Regulatory Commission, for example, warned during the meeting that the insurance industry faces multiple risks, ranging from liquidity pressures to reputation management. Last year, Chinese insurers used leveraged money to buy shares in listed companies, which triggered acute volatility in the market.
The China Securities Regulatory Commission has also stepped up its crackdowns on violations of securities laws and regulations, including insider trading and market manipulation. In the first half of 2017, the CSRC fined 113 violators, and handed out 6.36 billion yuan (US$939m) in fines, a 50 percent increase on the entire year in 2016.
With the proposed establishment of a financial stability and development committee, the central government should further coordinate its regulatory policies. Rather than subjecting regulatory policies to short-term needs to stimulate economic growth, the government should strive to establish a regulatory regime under a strategy that serves the long-term health and sustainability of the economy.