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March 9, 2017

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A super watchdog with more bite? Maybe

SHADOW banking, rising bad debts, bond defaults and dodgy Internet finance in China highlight the shortcomings of a patchwork regulatory framework, prompting calls for the integration of the nation’s three principal financial watchdogs.

“We could see a super-regulator of sorts created to tackle the thorny problems,” Hu Yifan, chief economist at UBS Wealth Management, said in a telephone conference call on Tuesday. “Though the process could take years, movement is afoot.”

In a series of media briefings in Beijing held before the ongoing sessions of the National People’s Congress, the heads of the China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission vowed to work more closely together to tackle the gray area of off-balance-sheet asset management products sold to retail investors.

“Banks, trust companies, fund-management companies, brokerages and insurers all have asset-management businesses, but they answer to different regulators and different regulations,” Guo Shuqing, the newly appointed chairman of the banking regulator, told a press conference in late February. “There has been some chaos caused by that.”

Asset-management products in China totaled about 60 trillion yuan (US$8.6 trillion) at the end of last June, according to a recent estimate from China’s securities regulator. Many of those products don’t appear on the balance sheets overseen by regulators.

At the end of last year, off-balance-sheet products issued by banks alone amounted to 26 trillion yuan, according to the People’s Bank of China.

To give the watchdogs more bite, Guo said the three regulators are drafting a set of joint regulations for asset-management products.

The lockstep approach is in line with Premier Li Keqiang’s keynote speech to the NPC on Sunday, in which he urged the building of a “firewall against financial risks.” That goal is a priority in the government’s work schedule this year.

“We must be fully alert to the buildup of risks, including risks related to non-performing assets, bond defaults, shadow banking, and Internet finance,” according to the annual Report of Government Work read out by Li. “We will take steady steps to advance the reform of the financial regulatory system and defuse major potential risk.”

Market insiders agree that greater agency coordination is needed if these problems are to be tackled quickly and effectively. Widening gaps in oversight activities need to be addressed, and innovative methods of dealing with new trends in capital markets need to be explored.

Trusts, for example, operate in a tangle of businesses, including securitized loans, private equity investments and futures trading. Each element falls under the purview of a different regulator.

Traditional oversight has been largely by-passed in the booming realm of online peer-to-peer lending, leading to increasing cases of fraud, malfeasance and participant losses.

The outstanding balance of online lending totaled 816.2 billion yuan at the end of 2016, double a year earlier, according to Shanghai-based researcher Yingcan Group.

At least 165 billion yuan of those loans involved some element of fraud, according to a previous calculation done by Quartz.

Chen Shujin, chief financial analyst with Huatai Financial Holdings, called it a critical weak spot in China’s financial regulatory system. So-called innovative financial products, he added, are being sold in a gray area of loose or no regulation.

Wang Jian, an analyst at Guotai Jun’an Securities Co, pointed out that regulatory overlaps are an equally serious problem. In some cross-sector businesses, such as funds custody and bond underwriting, operators have to meet standards set by both the banking and securities regulators, which can be confusing and time-consuming.

China has been mulling the idea of a super financial regulator over banking, insurance and securities for at least a decade. The idea gathered momentum in mid-2015 when the stock market crashed, exposing weaknesses in other financial sectors.

China has sought advice from the UK, which established a centralized Financial Services Authority, a super watchdog, after the global financial crisis in 2008, Reuters reported.

Guo has denied market rumors that he would lead a unified super-regulator, but that didn’t stop speculation that a watchdog supremo would eventually be created.

In a rare interview released by the People’s Bank of China last month, Ruan Jianhong, the central bank’s new head of statistics and analysis, said the major task ahead is to tighten joint supervision and guide financial institutions toward businesses that pose no risk to the economy.

“We should give full play to coordination meetings among financial regulators to forge a unified effort,” Ruan said.

WHAT the watchdogs said

Guo Shuqing

Chairman of the China Banking Regulatory Commission

SOME cross-market financial products invest in one another without anyone really knowing the underlying assets or the final destination of fund flows. There are loopholes in deeming which products are under the current regulatory system, which is like keeping cats inside a cattle pen.

The commission is collaborating with other financial regulators to create a framework to better supervise off-balance-sheet asset-management products.

Liu Shiyu

Chairman of the China Securities Regulatory Commission

In the age of modern analytics, any person or institution that breaches rules, hurts small investors or disrupts market order will be tracked.

Limiting or halting initial share sales in order to stabilize the secondary market has proven ineffective. The commission will continue a faster pace of IPO approvals this year. The entry of new companies in the market will increase liquidity and attract additional capital.

Xiang Junbo

Chairman of the China Insurance Regulatory

The commission will not allow the insurance industry to become a rich man’s club, nor will it let financial crocodiles use insurance to prey on people or hide from regulators.

Any insurer that challenges the regulatory bottom line, tarnishes the industry’s image or harms the public interest will be driven from the market.


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