China is giving its central bank the power to write the rules for the financial sector, as part of a swee-ping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries.
The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be mer-ged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People’s Bank of China, according to a proposal unveiled during the National People’s Congress.
A new regulatory structure with the PBOC as the pivot is emerging as the annual legislative meetings progress through their second week. Still to come are personnel appointments, including the expected anointment for Politburo member Liu He as a Vice Premier in charge of financial and economic affairs, making him President Xi Jinping’s go-to official as he seeks to avert a financial crisis after years of rapid credit growth.
“The PBOC has more power: It has added the role of lawmaking to its previous role as the adviser on monetary policy,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The PBOC’s role will largely be policy making and the newly merged bank and insurance regulator will mainly be the policy executor. And the other thing for sure is that Liu He will play a more important role in China’s reforms.”
Global hedge fund managers such as Kyle Bass have been scathing in their assessment of financial danger in the world’s second-largest economy, pointing to a ever-growing pile of debt and ballooning assets in recent years in the shadow-banking industry. China is among economies most at risk of a banking crisis, the Bank for International Settlements said in a study, citing early-warning indicators including household borrowing.
“Finance is core to a modern economy and we must pay high attention to prevent financial risks and safeguard national financial security,” the text of the proposal published on Tuesday said, adding that it’s intended to reconcile overlaps in regulatory oversight.
The regulatory changes echo wider moves unveiled to consolidate the power of the Communist Party and tighten Xi’s grip over China. “Strengthening the party’s leadership in all areas of work is the primary task of deepening the reform of the party and state institutions,” Liu wrote in an article on the reforms published by the People’s Daily newspaper.
China announced the creation of a Financial Stability and Development Committee in July, and since then watchdogs overseeing banks, insurers and the stock market have intensified efforts to clamp down on shadow financing and other perceived risks. Regulators have focused on curbing the growth of wealth management products, trust products, and interbank liabilities, which fuel a vast parallel-financing industry.
Other signs of the growing power of the central bank include the PBOC’s adoption of a so-called Macro Prudential Assessment framework, to better gauge risks in the entire financial system as well as the health of individual institutions. Off-balance sheet wealth management products and other shadow banking activities were later included in the MPA.
The CBRC under Chairman Guo Shuqing has also shown its teeth by slapping a record fines on financial institutions for offenses such as concealing the true extent of their bad loans. The CIRC’s chairmanship, on the other hand, has been vacant since Xiang Junbo was removed in April amid a corruption probe.
Morgan Stanley sees yuan still behind yen by ’27
While China’s financial markets are likely to develop significantly over the coming decade, use of the nation’s currency in the global financial system will continue to lag behind, according
to Morgan Stanley.
“While the yuan could move into No. 4 in global foreign-exchange trading over the 10-year horizon of our report, it is unlikely to challenge the yen for leadership in Asia in this regard,” Morgan Stanley analysts wrote in a note on the future of Asian finance to 2027. The dollar and euro are first and second most-traded currencies.
The forecast reflects the view of a number of observers that China’s role in the global economy will continue to vastly outweigh its currency’s presence in financial markets. A botched 2015 move to embrace greater volatility in the yuan spooked investors around the world, and spurred Chinese officials to tighten capital controls, rather than loosen them.
Lately, with the yuan on the rise again, hints have come that regulators will ease up on controls.