Two and a half peaks – Kommersant

This week in China, the National Financial Regulatory Administration (NAFR) will begin the direct execution of its functions. With the creation of a new regulator, the People’s Bank of China is already becoming a purely issuing bank, which, apparently, simplifies the task of transitioning to a modern monetary policy. The Commission on the Securities Market under the State Council of the PRC, which has been upgraded in status, will be a counterweight partner to the NAFM, although the new commission will apparently then claim the role of a “mega-regulator” in the PRC.

The reform of financial regulation in China, announced at the XX Congress of the Communist Party of China in March 2023, has formally taken place. On May 10, 2023, Li Yunjie, the former Executive First Vice Governor of Sichuan Province (2022-2023), was elected Chairman of the CPC Party Committee in the newly established NAFR party organization, and on May 19 he was appointed its director. On May 18, Chinese state television broadcast a report that a sign had appeared on the building of the NAFR headquarters. In reality, the NAFR will be fully operational by the end of the summer of 2023, however, the administrative events around the reform have already taken place.

The process of transformation of the “Soviet” system of monetary regulation in the PRC itself began in 1978, when the People’s Bank of China (then the only bank in the PRC, similar in function to the State Bank of the USSR in the 1970s) transferred the functions of a loan to four state-owned banks and went to work according to a model somewhat similar to central banks in market economies. People’s Bank is legally an executive department (analogous to a ministry) of the State Council of the People’s Republic of China (government). In 2003, some of its supervisory functions were spun off into a separate Commission on the Banking Market as a government agency under the State Council of the People’s Republic of China (they are often referred to as “semi-ministries”), in 2018 this commission was merged with the same Commission on the Insurance Market into a single China Banking insurance regulatory commission. Five years later, NAFR was created on its basis. The status of the latter is lower than that of the People’s Bank, but the State Council of the People’s Republic of China, like it, is directly subordinate to the NAFM. The same status – direct subordination to the State Council of the PRC – will be received by the Securities Market Commission of the PRC.

The 2023 reform involves the advancement of the PRC towards a “twin peaks” model of financial market regulation – within its framework, the issuing national bank and the financial mega-regulator work in parallel. As part of the reform, the People’s Bank of China will de facto transfer the leadership of nine regional offices to NAFM, which, in fact, were local “banking regulators” in groups of provinces in China, but macroprudential supervision, in addition to monetary policy, will remain in its functions. The Securities Commission will not join the NAFR, at least for the time being, although it will cede to the NAFR the powers to protect the rights of investors.

Nevertheless, the task of the NAFM is to take away from the People’s Bank of China and centralize the regulatory functions that were “blurred” earlier in the regions, including the protection of Chinese retail investors. Without a system of regional “regulators,” the People’s Bank’s powers will be primarily issuance, and this, presumably, will allow it to move faster towards full convertibility of the yuan. Li Yunjie, who worked for two decades at the state-owned commercial banks CCB and ICBC before joining the civil service, has the ability to make even more out of NAFM – the “main” financial regulator of the market. The powers of the new commission are to supervise the activities of financial holdings in the PRC. Let us recall that following the results of the 20th Congress of the Communist Party of China, both the head of the People’s Bank, 65-year-old Yi Gang, and the 66-year-old Minister of Finance of the People’s Republic of China, Liu Kun, retained their posts. Li Yunjie was born in 1970, his chances of becoming the “king” of the Chinese financial market and strengthening the central government’s control over the country’s financial sector, ousting regional authorities from it, are high in the next years.

According to BNP Paribas analysts, in 2017–2018, the reason for continuing the reform of financial regulation in China was the rapid and uncontrolled development of p2p platforms in the country, with integration into corrupt areas, which ended in a crisis in the sector. Now the task set before the NAFM is a new centralization of supervision over the financial market, the elimination of regulatory arbitrage at the provincial level and the unification of the rules of the game in the Chinese financial sector. For investors, especially external ones, NAFM is more of an ally, although the creation of the commission is clearly focused on the ideas of self-sufficiency of the PRC market and its development based on domestic rather than foreign investment.

Dmitry Butrin