China's financial reforms mitigate risks and improve supervision
Dong Shaopeng

Editor's note: Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies, a think-tank of the Renmin University of China. The article reflects the author's opinions and not necessarily the views of CGTN. It has been edited for clarity and brevity.

China's national legislature on Friday approved a plan on reforming the institutions of the State Council. 

The reforms to the financial regulatory system attracted public attention, specifically the establishment of a national financial regulatory administration, which will be put in charge of all non-securities financial industry supervision; in addition, the China Securities Regulatory Commission (CSRC) will also be adjusted to become directly administered by the State Council, in order to strengthen its role of regulating capital markets. 

This is a pivotal overhaul in the process of China's financial supervision and development and will help improve the coordination, stability and innovativeness of financial supervision.

The 20th CPC National Congress had proposed to "transform government functions, improve the government responsibility system and organizational structure," while "deepening structural reform in the financial sector, modernizing the central bank system, and strengthening modern financial regulation. We will reinforce the systems that safeguard financial stability, place all types of financial activities under regulation according to the law, and ensure no systemic risks arise." 

On the subject of financial regulations, CPC General Secretary Xi Jinping had this to say at the December 2022 Central Economic Work Conference, "Finance matters to the overall development. It is necessary to coordinate the prevention of major financial risks and moral hazards, consolidate the responsibilities of all parties, deal with them in a timely manner, and prevent the formation of regional and systemic financial risks. It is necessary to strengthen the centralized and unified leadership of the Party Central Committee on financial work and deepen the reform of the financial system." The latest reforms are an important step to implement the decisions of the Central Committee in building a modern financial system and optimizing the institutional mechanism for financial supervision.

The establishment of a national financial regulatory administration is an inevitable requirement for the rapid, coordinated and innovative development of China's financial market, which will address the shortcomings of a cross-sector, cross-market and cross-industry coordination regulatory mechanism and close regulatory loopholes, regulatory arbitrage, regulatory lag and other challenges. After its establishment, all non-securities financial services, including banking, insurance, trust, financial leasing, and various financial institutions and financial activities will be united within a single regulatory system. This will enable the coordinated use of limited regulatory resources, strengthen the effectiveness of professional supervision, strengthen the prevention and mitigation of cross-sector, cross-market and cross-industry financial risks, maintain a fair and just market, ensure the rule of law for market entities, promote sound competition in accordance with market demand, thus contributing to the real economy, promote innovation and development, and preventing and mitigating risks.

Over the last few years, some institutions have cooperated with licensed financial institutions to carry out financial businesses, and some avoided financial regulations while engaging in financing business. These activities are potential risk factors and even triggered debt defaults, seriously undermining financial and social stability. This is why it is necessary to further improve the centralized financial regulation system, so that all financial services are licensed to operate, all financial transactions are subject to supervision, closing regulatory gaps arising from cross-field, cross-market, cross-industry activities, resolving regulatory risks and misalignment caused by overlapping supervision, and utilizing regulatory resources for normalized supervision. Under the new regulatory mechanism, both financial operators and other business entities are encouraged to compete in accordance with the law and industry norms, providing quality products and services. Meanwhile, efforts will be made to detect signs of risk in a timely manner, track the development of risks, strengthen the ability to mitigate risks in a timely manner, and ensure no systemic risks arise.

The reforms will make the CSRC, formerly a public institution, directly administered by the State Council, while corporate bond issuance review responsibilities, formerly handled by the National Development and Reform Commission, are transferred to the CSRC. This aims to strengthen the CSRC's statutory responsibilities as a securities and futures market regulator, and strive to improve administrative efficiency and credibility. Secondly, all participating entities, business activities, risk monitoring and mitigation functions in the capital market are placed in a unified regulatory system to achieve comprehensive and unified supervision of the direct financing market.

The well-established structure has been formed in China's exchange markets, covering the main boards, the Science and Technology Innovation Board (STAR Market), the ChiNext stock market, the NEEQ (National Equities Exchange and Quotations) and the Beijing Stock Exchange, providing platforms to support the listing and sustainable development of qualified enterprises. China has also succeeded in the systematization, standardization and synergy of rule-making and regulatory enforcement in issuance and listing, information disclosure, continuous supervision, restructuring and de-listing, and supervision and enforcement work. These have solidified the institutional foundation for the development and growth of the stock markets and effective prevention and resolution of risks. Centralized and unified supervision has also been implemented in the fund market and futures market. However, the unified supervision of the bond market is still not complete. Through these institutional reforms, for both listed and unlisted enterprises in financial and other industries, their bond issuance will come under the supervision of CSRC, which can realize the holistic and streamlined supervision of issuance review, information disclosure, continuous supervision and risk prevention, forming a unified and standardized bond market system, better serving the real economy and better competing internationally.

These reforms also include the adjustment of the People's Bank of China's regional branch system, setting branches according to administrative regions. In terms of local financial supervision, the reform strengthens the central authority of financial management, establishes a local financial supervision system based on the local offices of the financial management department under the central department, and optimizes their set-up and staffing. Local governments are directed to set up financial supervision agencies dedicated to supervisory responsibilities, while no longer allowing other organizations to use names such as "Financial Work Bureau", "Finance Office", and so on. At the same time, the reforms strengthen the unified and standardized management of financial management staff and bring the staff of financial regulators into the standardized national civil service management.

All these initiatives fully reflect the requirements of strengthening the centralized and unified leadership of the CPC in financing, improving and optimizing the regulatory system and mechanism, strengthening the standardized construction of the regulatory team, and accelerating the construction of a modern financial system with Chinese characteristics. 

We believe that through these latest reforms, the coordination, stability and innovativeness of China's financial supervision will be further strengthened, the overall effectiveness of supervision will be significantly enhanced. The financial system will advance together with the construction of a unified national market, the construction of a modern industrial system, the process of high-level scientific and technological self-reliance and self-improvement, and the process of high-level opening up to the outside world, guiding China's further modernization.

(Cover image via CFP)

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