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Pushing forward the super central bank model

The establishment in November 2017 of the Financial Stability and Development Committee under the State Council, or the cabinet, signaled the country’s intent to tighten the supervision of the financial sector.

In March, during the Two Sessions, China's national legislature approved an institutional restructuring plan of the State Council, which included the merger of the banking and insurance regulatory commissions.

Guo Shuqing, the former chairman of the China Banking Regulatory Commission, was named Party chief of the newly merged China Banking and Insurance Regulatory Commission.

Yi Gang, the former deputy governor of the PBOC, was named the governor of the central bank. Guo was named the Party chief of the central bank.

In the fourteenth issue of 2018, the China Newsweek magazine ran a cover story on new central bank’s governor and Party chief, the central bank’s future role in the financial sector and the challenges facing them.

Below is an excerpt of the article.

On April 8, when the name plate of the China Banking and Insurance Regulatory Commission was installed on the No 15 building of Beijing’s Financial Street, the country’s financial supervision system finally formed a network of “a committee, a central bank and two commissions” in the latest institutional reform.

According to the restructuring plan of the State Council, the merger of the banking and insurance regulatory commissions will not just combine but transform the functions of the two agencies. 

The function of policy-drafting and the basic system of prudential supervision will be transferred to the People’s Bank of China.

The reform will see the central bank take charge of the macro prudential and monetary policies, the banking and insurance commission will take charge of the micro-prudential measures, and the China Securities Regulatory Commission will supervise the capital market.

How to ensure a coordinated supervision of the central bank and two commissions had become a focus of the industry, and the answer soon came after the personnel assignment for the central bank.

The central bank announced on March 26 that the former vice governor Yi Gang was appointed as the PBOC governor and the deputy Party chief. Guo Shuqing, chairman of the banking and insurance regulatory commission, became the PBOC’s Party chief, and vice governor.

The appointments have changed a tradition of many years under which the central bank’s Party chief and governor were the same person, and now two officials with distinct personal style need to cooperate.

What kind of impact will it bring to China's financial reform? The duo, Yi and Guo, will have an important task to continuously prevent systemic financial risk, but it may not be a smooth passage.

Super central bank model

The resumes of Yi and Guo have shown that the two have many similarities, and they are scholar officials and firm reformers. They have worked together for four years between March 2001 and March 2005.

Before joining in the central bank’s system, Yi taught at a university for 11 years, and in 1997, he was a Peking University professor who joined the monetary policy committee of the central bank.

After joining the central bank, Yi continued research on econometrics, money and banking, and international finance. He has finished two papers on the process of monetization in China and China’s financial reform.

Guo, a graduate from the Chinese Academy of Social Sciences, studied in Britain, and returned to join the country’s reform commission, and in 1985, he and other economists such as Zhou Xiaochuan worked on the macroeconomic system reform.

In November 2010, his theory of overall reform won Guo the China Economic Theory Innovation Award.

“Such personnel arrangement will provide a coordinated supervision mechanism for the central bank and the banking and insurance regulatory commission,” said Cao Xiao, assistant dean of the school of finance under the Shanghai University of Finance and Economics.

“Especially, the coordination efficiency of macroeconomic regulation and macro prudential supervision will be improved. It is particularly important in the current economic and financial environment, because systemic risk is closely related to the liquidity of the financial system,” Cao said.

According to the country’s law on the PBOC, the governor will assume overall responsibility, and Guo will mainly focus on personnel management, said Yang Tao, assistant director of the International Finance Bureau of the Chinese Academy of Social Sciences.

Yang said that Guo will work on two major tasks - one is PBOC’s regional reform, coordination, integration and strengthening of grassroots supervision, and the other is coordination of supervision in cross-industrial products and services.

“Yi will possibly focus more on the monetary policy,” Yang said. The governor will take charge of the central bank’s work at business level, such as policy and communications with other country’s central banks.

On March 25, at the China Development Forum, Yi said his key tasks were to maintain a prudent and neutral monetary policy; promote the reform and opening up of the financial sector; and stabilize the whole financial sector.

In January, Yi wrote in an article that this year’s monetary policy will face some challenges, such as the high level of debt and leverage and weak financial supervision, but the economy is still expected to maintain a steady growth.

“It is hoped that the duo will push forward China’s super central bank model,” said Yi Xianrong, a Qingdao University professor.

He said that the report to the 19th CPC National Congress has pointed to the change from stressing financial innovation and excessive financial expansion to preventing financial risk, and forestalling systemic risks.

This change will strengthen financial supervision, stipulate macro prudent policy, rectify the problems in the banking and insurance industries, and change the policy orientation, Yi said.

“This change will not be fulfilled by the coordination of the central bank and the banking and insurance regulatory commission, and it could only be done by standing high at a super central bank,” said Yi.

Future challenges

The focus of the duo in the next phase will be pushing forward the reform and opening up in the financial sector, guarding against major financial risks and maintaining overall stability of the financial sector, according to Yi’s goal.

In the past year, China has relaxed the restrictions on foreign financial service companies to offer rating service, clarifying the policy of allowing foreign companies to enter the bank card liquidation business and further relaxing the limits on foreign companies holding shares in banking and insurance sectors.

In October 2016, the renminbi has been included in the Special Drawing Rights' (SDR) basket of currencies.

The infrastructure facilities have been improved for the cross-border use of the renminbi, and the first phase of the Cross-border Interbank Payment System (CIPS) is in operation. The free floating of the renminbi will be speeded up.

In the bond market, China has pushed ahead the Bond Connect platform in Hong Kong to allow overseas investors to gain direct access to the Chinese mainland’s market.

In the share market, China has launched the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.

In the future, China will fully implement the negative list system of market access and continue to promote two-way opening of financial market.

Yang said that China will have to solve problems at three levels in the financial reform: financial services entities, controllable financial risks and challenges of financial internationalization.

A statement following an April 2 meeting of the Central Committee for Financial and Economic Affairs showed that "supply-side structural reform" was stressed in the major tasks of deleveraging, shadow banking, institutional risk and financial order rectification.

On March 28, the central committee for deepening overall reform approved new regulations and programs for regulating the asset management businesses of financial institutions.

Cao said that the current economic growth depends on the technological innovation, and the premise of technological innovation is financial innovation which will improve the efficiency of resource allocation.

He said the difficulty in the reform lies in the balance of the financial innovation efficiency and macro risk control, and rationally designing the institutional framework of financial supervision will be key to achieving balance.

Huang Yiping, a member of the PBOC's monetary policy committee, said there are many financial innovations now, and these innovations might better allocate resources to gain returns, but there are risks the PBOC needs to prevent.

One of the ways to control the risks is to conduct a pilot in some fields, such as issuing licenses in the Internet financial sector, and when the pilot is successful, the model could be expanded, Huang said.

Experts said they are waiting to see how the duo will lead the central bank to maintain prudent monetary policy, control the money supply, prevent the financial systemic risks, and push ahead the stable financial reform.

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