The 2023 State Council makeover plan brings profound change to the financial industry, following waves of scrutiny in the aftermath of the 2015 Shanghai Stock Market crash. The reorganisation continues to centralise while refocusing regulation to favour alternate modes of investment in light of a decimated real estate market.
In a move likely meant to ensure a smoother transition, Yi Gang 易纲, PBoC (Peoples's Bank of China) governor and Liu Kun 刘昆, finance minister, have been kept in their positions. However, changes may come later in the year, as both have reached retirement age and were not named in the Politburo at the 2022 Party Congress.
new improved regulator
The CBIRC (China Banking and Insurance Regulatory Commission), itself recently merged, is now to transform into a National Financial Regulatory Administration (NFRA), with the addition of regulatory arms of the PBoC and CSRC (China Securities Regulatory Commission); the new agency will sit directly under the State Council (the CBIRC was a separate agency at arm’s length from State Council, while still reporting to it).
The new superagency will maintain CBIRC’s role, while acquiring the PBoC function of regulating financial holding groups. Responsibility for protecting investors and consumers, previously held by PBoC and CSRC respectively, falls under the new regulator’s purview as well.
The ‘Twin Peaks’ model of financial supervision used in other countries is at play here; a macro-regulator (PBoC) handles monetary policy and systemic risks, while market conduct and consumer protection fall largely to the new NFRA, with the CSRC attending to the share market. Merging more of the sector under one body, goes the theory, cross-financial sector regulators will be more aligned, filling regulatory gaps and mitigating risk.
CSRC raising its profile
The securities regulator, too, becomes joined at the hip to the State Council (entailing pay and entitlement cuts for staff, now treated as civil servants), and takes over the NDRC’s oversight of enterprise bond issuance. With rollout of a new IPO mechanism and clearer rules for cross-border listings, CSRC is theoretically better placed to regulate firms and coordinate with other agencies.
Talk of immediate financial decoupling has gone off the boil over the last year. Yet, with demographic change curbing the real estate sector’s capacity to soak up investment, Beijing is stubborn about growing its own capital markets. Better regulated, the latter could, in keeping with the tech autarky mantra, absorb more investment without loosening Beijing’s grip on which firms are being promoted.
Giving CSRC oversight of enterprise bonds (SOE bonds) is another step towards unifying domestic bond markets, hitherto split between CSRC, NDRC and the NAFMII (National Association of Financial Market Institutional Investors) under the PBoC. CSRC will now supervise most forms of non-financial corporate bonds, including those of SOEs. NAFMII will keep covering bonds issued by banks and other firms. Putting both corporate and enterprise bonds under a solitary regulator may flag, argues Li Qinghe 李清荷 Huafu Securities chief fixed income analyst, that Beijing seeks to dilute the implicit guarantees associated with SOEs, whose debts may be subject to ever shorter term limits. Should CSRC maintain the status quo, however, impact will be limited.
going local
Beijing is also changing how central regulators work with localities. PBoC’s nine regional branches are being abolished in favour of provincial branches, plus special branches in such cities as Shenzhen and Dalian. Local financial systems should be set up, better coordinating local agencies under central regulators and local financial regulators under local authorities. The aim is to help local governments defuse their debt risks and ensure the consistent rollout of policies across regions.
state-owned financial capital
The last aspect of the reform covers changes to ‘state-owned financial capital’ (SOEs in the financial sector). Market-oriented institutions operated by central financial regulatory agencies will be stripped away from the agency; related assets will be transferred to entrusted management agencies, walling regulators off from market players. This advances Beijing’s gradual switch to managing capital instead of entities.
who's moving policy?
He Lifeng 何立峰 | vice premier
Appointed vice premier at the Two Sessions in March 2023, He Lifeng is expected to assume Liu He’s 刘鹤 economic portfolio. With Liu’s seals of office in the Central Financial and Economic Affairs Commission likely already in his grasp, those for the State Council SOE Reform Leading Group appear sure to follow. He Lifeng's recent writings sound a dominant policy theme: expanding demand. Chairing the Offices of the crucial Comprehensively Deepening Reform Commission and the Belt and Road Construction Leading Group, his credentials in Party (read ‘Xi’) affairs could hardly be better.
He Lifeng studied finance and economics at Xiamen University under the founder of ‘national distribution theory’ Deng Ziji 邓子基 (and in class with current finance minister Liu Kun 刘昆). Going on to advise on setting up Xiamen’s Special Economic Zone, He Lifeng worked closely with Xi Jinping, taking on a series of Fujian Party leaderships (Fuzhou, Quanzhou, Xiamen), and making a mark as head of Tianjin’s Binhai New Area as well. He joined NDRC in 2014, attaining the chair in 2017. He joined the Politburo in October 2022 at the 20th Party Congress.
Yi Gang 易纲 | Governor of the People's Bank of China
Yi was expected to retire in 2023 after being appointed head of the China Society for Finance and Banking and failing to be re-elected to the Politburo in 2022. Yet he retained his position as PBoC governor. This may be more about optics, papering over the transition to a new regulator, with Yi departing in due course. During the COVID outbreak in 2019, he had pledged PBoC would maintain ‘normal monetary policy’, refraining from negative interest rates or quantitative easing. Reserve requirement rate cuts, he told a March 2023 press conference, were now more effective for improving liquidity than interest rates, signalling to markets that, with the economy recovering, the PBoC would likely spare interest rates any further cuts.
A PhD in economics from the University of Illinois, Yi taught at Indiana University 1986–94. Returning to a Peking University post, he moved to PBoC in 1997, replacing Zhou Xiaochuan 周小川 as governor. Deemed a close ally of vice premier Liu He 刘鹤, Yi has been a scapegoat in times of economic criserioussis, despite lacking the independence afforded to central bankers elsewhere.
Zhu Hexin 朱鹤新 | CITIC Bank chair
Zhu was expected to replace Yi Gang as PBoC governor at the 2023 Two Sessions. A veteran of the state financial sector as well as local government positions rather than Yi’s academic and purely central regulator record, Zhu's resume more closely resembles Guo Shuqing’s 郭树清 CBIRC and PBoC Party secretary than Yi’s. At PBoC, Zhu was responsible for financial risk control, monetary policy transmission, and private company access to finance. He may still take over as PBoC governor after the transition to the new regulatory system.
Prior to directing the CITIC Group in 2020, Zhu was a PBoC vice governor for two years, and vice governor of Sichuan province. Before government, he spent over two decades with the Bank of Communications and the Bank of China.