With many changes in financial and technology regulations, Chinese president Xi Jinping is preparing to maintain financial stability at home as he tries to compete with the US in technology.
The changes, revealed this week at the annual meeting of the country’s rubber-stamp parliament, are sweeping changes by the State Council, China’s cabinet, and government ministries.
Undertaking the move is a desire by Xi and party leaders to exert tighter control over the country’s levers, analysts say, as China’s president begins an unprecedented third five-year term.
What changes have been made to the supervision of the financial sector?
One of the most significant changes is the replacement of China’s banking watchdog, the China Banking and Insurance Regulatory Commission, with a new agency to oversee the financial sector.
The securities market will be handled as before by the market watchdog, the China Securities Regulatory Commission, but everything else will be the responsibility of the new national financial regulatory administration.
The agency will also take over some supervisory functions of the People’s Bank of China, the central bank, including monitoring state conglomerates such as Citic Group and fintech companies such as Alibaba’s Ant Group. It will also take over some consumer protection work from the CSRC.
The CSRC’s mandate will be expanded to include the review of corporate bond issuances, giving more visibility to the bond market issued by local governments, an area that attracts attention due to its high debt.
The changes are a step towards a more international “twin peaks” model of financial regulation, with one agency covering market conduct and consumer protection and the other focusing on financial system stability and policy, analysts said.
Why now and what will be the economic impact of these changes?
While financial regulation was once managed out of a single department at the PBoC, as the economy has evolved, so has the regulatory system.
Many agencies at the national and local level have failed to follow new types of business and emerging risks, from consumer payment applications or peer-to-peer lending.
“The main goal is to consolidate the regulatory framework because in the past, many non-banking financial industries have developed rapidly,” said Shen Jianguang, chief economist at JD.com.
An expanded central regulatory body will also play a greater role in overseeing local financial activities.
“In the past, there was a lack of supervision,” said Zheng Zhigang, a professor of finance at China’s Renmin University. He pointed to the scandal that caused a local bank run last year as an example of the need for stricter regulations. “Establishing new institutions clarifying the responsibilities of the financial supervision system.”
This should also free up the central bank to focus on monetary policy making and macroprudential supervision.
Zhang Ning, an economist at UBS, suggested that “the government is trying to distinguish between macroprudential regulation and microregulation” as part of the change. “The government’s focus is on increasing efficiency and reducing large financial risks.”
Why is China overhauling technology regulation and how can it reinvent China’s research?
Tech companies have come under pressure from Washington over export controls that bar US companies from selling advanced chipmaking equipment to Chinese groups.
In this context, Beijing has charged a new Communist Party science commission, answering to Xi, with the responsibility of catching up with the west in terms of innovation and science. It will work with the revived Ministry of Science and Technology.
“Faced with tough global science and technology competition and external containment efforts, we must correct the leadership and management of science and technology,” said Xiao Jie, a high-ranking State Council official, when introducing the reform on Tuesday.
The restructuring would focus the party’s control over the country’s technology development efforts and create a “new type of state system” to achieve breakthroughs, he said. The Ministry of Science and Technology will aim to build a national laboratory, monitor projects, facilitate technology transfer and promote technology workers, the State Council said.
“China is concerned about the future of technology under a tight chip blockade from the US and its allies,” said Graham Webster, a China expert at the Stanford Cyber Policy Center.
“For years we have seen the emphasis of bureaucracy in the online world, but that is built on chips,” he said. “Now there is a rebalancing of the bureaucracy to promote basic science and deep industrial capabilities.”
China will also establish a national data administration to utilize the country’s vast amount of information, create a national big data plan and lead the digitalization of the economy and the country.
The bureau will be placed under the state planning body and take on some data-related functions from China’s powerful internet regulator, which will remain the watchdog overseeing the big tech group.
Will there be more reforms?
With parliamentary meetings until next week, more changes could happen.
Analysts will monitor the announcements of Communist party bodies in parallel to monitor the financial sector and other areas.
This would give Xi direct control over government bodies, according to analysts. The institutional reform is “part of a broader effort to improve the party’s leadership during the socialist modernization of the country”, the party leader said last week.
Also important are the people in charge of the various agencies, with the National People’s Congress expected to vote on appointments later this week.
Top candidates to lead the new financial regulatory body include Yi Huiman, the current head of the respected CSRC, people familiar with the matter said.
Additional reporting by Xinning Liu in Beijing