Analysis: China’s new financial watchdog more action-oriented

By China Plus commentator Luo Dan

Domestic and international observers are mulling over the possible repercussions of a key financial conference in China, with financial stability a key concern according to some media reports. 

Addressing the National Financial Work Conference that ended last Saturday, Chinese President Xi Jinping announced the setting up of a special commission under the State Council to oversee financial stability and development.

President Xi pledged the country would resolutely deepen financial reforms including improving financial regulation coordination and shoring up weak links in supervision.

China's rapidly expanding financial industry is being placed under greater regulatory scrutiny as authorities step up efforts to curb widespread malfeasance in the sector.[Photo: Xinhua]

He also said China's central bank would play a stronger role in macro prudential management and guarding against systemic risks.

The conference has been convened every five years since 1997 and is widely seen to set the tone for financial reforms.

Although details of the Financial Stability and Development Committee are yet to be published, banking officials and observers have already warmed to the new body.

The People’s Bank of China, the country’s central bank, was among the first government agencies to reaffirm the importance of such a new financial institution.

Lu Lei from the bank’s financial stability department says the new commission will help coordinate different financial regulators, address relevant loopholes and guard against systemic risks in the financial sector. All are aimed at better propping up China’s real economy.

According to Lu, systemic risk is generally controllable; however, risks fueled by non-performing loans, liquidity, shadow banks, property bubbles, government debts and Fintech are on the rise.

Observers say financial risks could also come from overseas, partially due to global uncertainties, such as the policies of US President Donald Trump, raised interest rates by the Federal Reserve, Britain’s divorce from the European Union, and economic recession in some developing countries. All these could trigger risk aversion and result in a sharp price increase or decrease in commodities like gold, oil and iron ore. All these factors place greater pressure on China to tackle financial risks.

The risks are also reflected by shocking data. Media reports say China’s financial assets totaled some 330 trillion yuan in 2016, while the country’s gross domestic production (GDP) stood at 67 trillion yuan last year. Therefore, de-leveraging, or paying off existing debt, is a must to stabilize the financial sector. 

The new financial committee is seen by many observers as a super-regulator. Its proper title is the ‘Financial Stability and Development Committee of the State Council,’ China’s cabinet. The other four players in the country’s existing financial supervisory system are also ministerial-level, including the People’s Bank of China, the China Insurance Regulatory Commission, the China Banking Regulatory Commission and the China Securities Regulatory Commission.

A higher-level government institution is usually imbued with great power and that is also true of the new Financial Stability and Development Committee. 

Before the inception of the new committee, the People’s Bank of China was responsible for helping to organize a quarterly meeting with the three regulators in securities, banking and insurance sectors.  

However, analysts say such a mechanism is more discussion-oriented and less inclined towards actually making decisions. That’s to say, the four participants could reach consensus during the meeting but no one is going to oversee its implementation, let alone enforce any action. That is mainly because the central bank is at the same administrative level as the other three, and none can hold another accountable.

The new financial committee will surely address this problem, as accountability is one of the key words raised by China’s top leadership. Under this principle, judicial officials will be punished for mishandling of legal cases and local officials will be subject to naming-and-shaming or demotion for poorly implementing plans of central authorities, including environmental protection. Therefore, the newly established committee will serve as deterrent to both financial companies and regulators.

Analysts say full-coverage supervision is expected to be another major feature of the Financial Stability and Development Committee, as no single regulator is capable of monitoring the complete capital flow in China’s complex financial system. For instance, the new committee could help plug loopholes that some shadow banks, or non-banking intermediaries, have exploited.

There are some reassuring signals for China’s economic performance. Soon after the conclusion of the National Financial Work Conference, the Chinese authorities released the latest economic figures with a growth rate of 6.9 percent in the first half of 2017, well above the government's full-year target of around 6.5 percent. 

In light of this, it’s advisable that the newly established financial committee should contribute to this good momentum and take tangible action to serve the real economy. That could be done by helping channel more financial resources to the most needed sectors such as small and startup businesses, rural development, the country’s drive to push development via innovation and fight against poverty.

To sum up, actions speak louder than words. The new committee has a lot to do, not only in terms of financial stability, but to also encourage broader economic and social stability, in the world’s most populous country.