In a series of regulatory maneuvers announced last week, China is bringing oversight of finance, tech and other areas more directly under the control of the central government.
The sweeping changes come as President Xi Jinping cements his grip on power, beginning a controversial third term as paramount leader and replacing his second-in-command with a closer loyalist.
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Among the sectors singled out for the biggest restructuring is China’s massive financial-services industry. Under new rules submitted at the annual meeting of the country’s legislature, a new regulatory body will be formed to absorb oversight of most financial areas outside of securities.
This includes the banking and insurance commission, some functions of the country’s central bank, and peripheral roles in the securities industry. The new Financial Regulatory Administration will be promoted to a body directly under the national cabinet, known as the State Council, according to published guidelines set to be ratified Friday.
“ In a third area being given heightened regulatory status, a new agency will be established to set and enforce rules for data gathering and sharing. ”
While core oversight of securities will remain separate, their regulatory body is also being upgraded to a direct State Council entity.
Analysts generally agreed the changes comport with a long-running trend that finds Xi aggregating power and replacing long-time technocrats with party loyalists, but most said the regulatory changes could in theory solve multiple existing problems.
The reorganization could close “regulatory loopholes under multiple regulators,” Citigroup analysts wrote in a research note. “Financial regulators are upgraded in this sense,” they said.
Morgan Stanley said in a note Wednesday that the reform should “reduce regulatory arbitrage.”
The move also “signals a shift in the government’s priority towards financial stability and de-risking the financial exposure of local governments and financial institutions,” wrote analysts at Australia and New Zealand Banking Group.
A big thrust of the changes seeks to extend regulators’ reach to China’s vast and often poorly managed local levels — which have been drivers of the country’s growing debt and rising risk.
The new central regulator will have local offices with jurisdiction over authorities at the city, town and county levels.
“This all seems part of a more general conflict between Beijing and local governments over control of the economy and the financial system,” economist Michael Pettis said from Beijing.
Regulation of finance in China has been one of overseeing a slow-growing and tightly controlled sector to one experiencing extraordinarily rapid growth with sometimes jarring steps toward open-market processes.
In the 1980s and into the 1990s, the People’s Bank of China — the country’s central bank — oversaw all subsectors of the finance industry, including banking, insurance and securities. Those three areas broke out into their own regulatory bodies as they matured.
But in 2018, the trend had reversed — with the banking and insurance regulators moved back under one roof. The steps announced this week appear to continue that consolidation.
But finance is not the only area getting a major overhaul — and one bringing more direct control to central authorities.
The regulator of China’s fast-growing tech sector — the Ministry of Science and Technology, or MoST — is streamlining multiple departments, putting more emphasis on areas considered strategic to security, and putting a commission led by Xi in its driver’s seat.
The overhaul comes amid simmering tensions with the United States, which Beijing says is attempting to stifle China’s growth as fears of a tech arms race mount.
“As China is under severe international technological competition and external suppression, we must further rationalize our sci-tech leadership and management system,” the State Council said this week in a message addressed to members of the legislature.
In other words, “Beijing is counting on MoST to provide answers to U.S. export controls,” said analysts at Trivium, a China-focused policy research group.
A third area that is being given heightened regulatory status involves management of China’s enormous stores of data. A new agency will be established to set and enforce rules for data gathering and sharing.
Tanner Brown covers China for MarketWatch and Barron’s.
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