Confirming previous reports, overnight Caixin announced that China plans to merge the banking (CBRC) and insurance regulators (CIRC) and to form a new agency called China Banking and Insurance Regulatory Commission (CBIRC) in the biggest industry overhaul since 2003. Meanwhile, the CBIRC will hand its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries.
As Bloomberg notes, 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 (see below) 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.”
This is a further step to strengthen the coordination among regulators. A merged agency should be able to fix regulatory loopholes and strengthen the “look through” ability, which should reduce regulatory arbitrage. The merger is rather easier to complete, as regulatory oversights on banks and insurers are mainly rooted on capital adequacy.
And, as Deutsche Bank notes, it also suggests more clear responsibilities among agencies. The central bank is empowered with greater authority of policy formation and macroprudential oversights, while the CBIRC and existing CSRC mainly focus on micro-prudential for individual institutions. The PBOC, CBIRC and CSRC are all under oversights of Financial Stability and Development Committee (FSDC).
The nature of this restructuring is mainly about streamlining functions to alleviate two problems: the first being that multiple government agencies are in charge of the same issue which creates inefficiencies, and the second being there can be limited oversight on some issues, especially regulatory arbitrage in the financial sector.
While the total number of ministerial level and deputy ministerial level government institutions was reduced, this change is not of the same scale as the government restructuring in the late 1990s which massively reduced the number of government ministries, officials and functions.
Goldman notes that the merger of the banking and insurance regulators (CBRC and CIRC) was confirmed and has long been expected. So the real news is more about what did not happen: the CSRC did not merge with the CBRC and CIRC to form a “super regulator” as speculated by some media. Instead, the rationale is likely because the CSRC is regulating the market and the merged banking and insurance regulator will regulate institutions. Mergers of ministries are always difficult as it will imply fewer senior positions. Nevertheless this new regulatory body is more powerful than any of the regulators before, in our view. Besides the merger of banking and insurance regulators, drafting banking and insurance regulation is now part of PBOC's responsibilities, according to the plan.
The impact of this restructuring on the PBOC is mixed. On the one hand the central bank has been given more macro prudential responsibilities. But on the other hand, the increased influence is relative as the creation of a large regulator adds to a counterweight in the government.
The reduction of regulatory arbitrage opportunities is a new policy direction. Whether this is a positive for the long term development depends on how the government uses this power. If this is coupled with pro market reforms it will be a positive in our view. If it is coupled with conservative policies and less financial liberalization, it may lead to greater financial repression in our view.
The restructuring plan also streamlines responsibilities in other areas such as market supervision, environmental protection.
What is next? Here are some thoughts from Deutsche Bank:
- The key personnel of the new regulatory framework is likely to be determined soon. Reuters reported Liu He is likely to be Head of FSDC and Governor of PBOC in the same time.
- Local financial regulators will be empowered further.
- Regulators are likely to further hike market rates, issue/implement new regulations and crack down shadow banking, internet finance and financial holding companies.
Implications for the financial sector would be positive, with more coordinated actions, rising transparency and lower leverage. The change would benefit deposit-funded banks (big four, PSBC and CRCB), while wholesale-funded, shadow-banking-centric bans would suffer, resulting in a further slowdown in shadow banking credit creation.
Ultimately, this is what China's regulatory framework is expected to look like.