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November 18, 2015

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China considering super-regulatory agency

CHINA is considering bringing together its banking, insurance and securities regulators into a single super-commission, sources said, following the summer’s stock market crash that was blamed in part on poor inter-agency coordination.

China’s stock markets dropped by more than 40 percent between mid-June and August, forcing authorities to take unprecedented measures to prevent a wider panic and delaying planned improvements to nascent derivatives and futures markets.

The uncoordinated policy response prompted the senior leadership to begin internal discussions about merging the three main financial regulators, part of a broader goal to reform China’s markets, said a senior official at one of the regulators involved in the process.

A financial services executive who is in frequent contact with regulators, and a source close to the senior leadership confirmed discussions were taking place.

Industry insiders have expected a shake-up in the regulatory apparatus in the months following the crash, and sources said the central government had already begun exploring a replacement for China Securities Regulatory Commission head Xiao Gang.

The three agencies that may be merged are the CSRC, the China Banking Regulatory Commission and the China Insurance Regulatory Commission.

China is looking at Britain’s regulatory set-up as a model, among other options, the senior regulator source said. Britain reformed its regulation after the global financial crisis, handing the Bank of England more control over the financial system, partly in the hope of avoiding future bank failures.

It’s not clear whether the People’s Bank of China, the central bank, would be part of any new super-regulatory body, the sources said.

Currently, the country’s three regulators operate independently, each reporting to the State Council, China’s Cabinet.

Overlap situation

“It’s quite difficult to differentiate between a securities company versus an insurance company versus an asset-management company, yet they are under different regulatory umbrellas and belong to different regulators. This leads to a lot of overlap,” said Zhou Hao, economist at Commerzbank in Singapore.

“This is something that follows the more sophisticated and more straightforward regulatory framework, which I think has done quite well in the British system,” he added.

Discussions around a unified financial supervisory commission have been ongoing for more than a decade.

Those plans haven’t moved forward, but in August 2013 the State Council created a system to coordinate meetings on monetary and financial supervision, headed by the central bank and including the regulatory agencies.

More recently, authority figures have discussed publicly the need for major reform of China’s financial and markets regulators.

Yang Weimin, vice director of a central financial policy-making committee, told a State Council news briefing last week that China will reform its regulatory structure, as stated in its latest five-year plan, because of market volatility and cross-asset developments.

And local media said late last week that Yin Zhongqing, vice director of the finance committee of the National People’s Congress, suggested the PBOC, CBRC, CSRC and CIRC be merged into a single regulatory body when conditions are ready.

In August, a report from the Financial Stability Board, the international regulatory body comprised of central banks, urged China’s regulators to work more closely and clearly define their roles to improve risk management in the financial system.

Any move to centralize regulatory supervision would shift power away from the three current agencies and create a more direct link between market oversight and China’s leadership. A new institution would be overseen by the State Council, the senior regulatory source said.


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