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Chinese financial regulation bids farewell to soft constraints

WITH a strong supervisory storm sweeping the country's financial sector, Chinese regulators have shown their resolve to abandon soft constraints, characterized by a meticulous and tolerant regulatory pattern.

Along with rapid growth in recent years, China's financial sector has been exposed to various risks -- illegal lending, insider trading in the securities market and fraud by insurance companies -- that imperil financial market stability and could hinder economic transformation and structural upgrading.

These chaotic or illegal activities can be partly attributed to the problems of the real economy, but are also associated with the moral hazard in the country's financial market, sparking regulatory concerns and stricter scrutiny.

Regulators, however, sometimes cannot perform their tasks effectively for fear that too much regulation may lead to fierce market volatility, in addition to other factors such as inadequate regulatory forces and an incomplete legal system, all of which have led to regulatory soft constraints.

While interbank transactions and asset management have developed into systemic power to sustain the financial market's steady operations, irregularities and regulatory arbitrage increased due to regulatory soft constraints.

It should be acknowledged that soft constraints contributed to accelerating financial development at times, but that is by no means a reason to allow regulators to deviate from their top duty of maintaining a favorable market with orderly competition and normal operation.

The country's financial regulators surely know that inadequate punishment of market violators harms the interests of law-abiding citizens and institutions.

In an effort to control chaos and prevent risks, regulators have not only slapped harsher punishments on market violators, but are going full steam to remedy shortcomings and promote efficiency in financial supervision.

Adding to a chain of tough measures in the sweeping campaign targeting both long-standing and emerging problems, the country's banking regulator has recently issued stricter regulations toward interbank transactions and off-balance-sheet financing.

Meanwhile, regulators are working on a joint regulation to set basic standards that every institution -- including commercial banks, trusts, fund management firms, brokerages and insurers -- can follow.

Financial regulators have said they will set higher priorities for risk prevention and control while addressing vulnerabilities in the regulatory system, market access, on-site surveillance, information disclosure, accountability and punishment. They have pledged to take preemptive, tough and targeted measures to protect against systemic financial crisis, a key task outlined by the country's leadership.

They are doing what they said they will do. There has been no shortage of high-profile punishments in the country's financial markets in recent months. The latest case is that of Xiang Junbo, chairman of the China Insurance Regulatory Commission, who is being investigated for suspected serious violations of the code of conduct of the Communist Party of China.

All these are a sign of Chinese regulators' rejection of soft constraints and the demonstration of China's determination to balance stable growth and financial risk control.


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