Banking & Finance

Watchdog watch

China to bring in a super financial regulator?

Xiao addresses the Asian Financial Forum in Hong Kong

Xiao: burdened with a difficult job

Grameen Bank founder Muhammad Yunus always gives the same answer when interviewers ask him why the pioneering micro-credit institution has such low default rates: “Women”. The bank specialises in micro-loans to women and the Noble Peace Prize winner believes the female of the species is far more responsible with money than the male.

So who better to take charge of China’s messy regulatory financial regime than its own Big Mama, or Yang Ma, as the People’s Bank of China (PBoC) is otherwise known? The summer’s stock market rout appears to have added extra impetus to calls to overhaul the existing watchdog system of one central bank plus three commissions – the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC).

Under the Xi Jinping administration it has become fashionable for state giants to grow even bigger by merging with their rivals (it has happened in the railway, nuclear power and shipping sectors). Now there are louder calls for a merger among these powerful regulators too.

On November 9, the State Council issued a briefing which concluded that the current overlapping and divided regulatory regime needs to be reformed because no one agency has the full picture of an increasingly complex financial system. Shortly afterwards, newspaper CBN published a long feature, lining up one expert after another calling for the creation of a “super regulator” to regroup different regulatory functions under one roof.

Many want the Big Mama to take on a more central role. Typical is the comment from Guo Tianyong at the Central University of Finance and Economics. “I want the central bank to take the lead,” he proclaims.

A decade ago, the government set up a system which was supposed to facilitate joint meetings between the different agencies so they could make unified decisions. But the People’s Daily reports that they have never met.

Time Weekly says this lack of co-ordination was one of the chief reasons for the bourse’s summer turmoil. Lu Zhengwei, an economist at Huafu Securities tells the newspaper: “The scale of margin financing wasn’t particularly huge. The issue was the added leverage from trust companies and internet platforms, which don’t come under the four regulatory bodies. The regulators didn’t have enough information and this caused errors of judgement.”

Some international analysts might beg to differ – having regularly hoisted red flags about the growing scale of margin financing and the market’s rapid rise in the months leading up to the crash. And as the Wall Street Journal points out, the CSRC’s head, Xiao Gang, had the almost impossible task of keeping stocks rising to bail out over-indebted state firms while making sure no one lost money. The role ranks as one of the toughest and most politically sensitive jobs in China.

The Financial Times says Xiao is “unique among Chinese officials” because he has a sense of humility, “not to mention grey hair among a sea of black”. Both newspapers say he arrived at the CSRC in 2013 only to find that many of his staff were not as qualified as he had hoped. Talented officials were constantly being lured back to higher paid jobs at the banks. The Chinese press now wonder how wounded Xiao has been by the crash and whether he will be displaced in any new super regulator by top PBoC officials.

The repercussions of the crash are also being felt through the government’s ongoing anti-graft crackdown on the financial sector. It is claiming an increasing number of CSRC scalps, with the most high profile yet announced at the end of last week – Xiao’s deputy Yao Gang, who is also known as the “IPO king” after 13 years of having the final say on whether a company could proceed with its flotation or not. And according to Caixin Weekly, Xi Longsheng, the CSRC’s head of internal inspection, was himself “taken away” for questioning this week, though it isn’t immediately clear if Xi was only assisting with an investigation into other CSRC officials.

Before he joined the CSRC, Xiao Gang was once tipped as a future governor of the PBoC. The recent rumours suggest that his predecessor at the CSRC and current Shandong governor, Guo Shuqing, may be in line for the top job. n

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