NPC-mandated changes to impact China's financial regulators and assets

With the onset of China''s National People''s Congress last week, policy-making is once again entering that peculiar period of intense behind-the-scenes activity combined with public ''no comments'' on important policies.

One of the most important decisions to be taken at China's ongoing National People's Congress (NPC) will be the restructuring of state assets through the creation of a state asset management committee, which would take over the ownership rights of the assets. What has caused some delays is how to deal with the state’s financial assets as a sub group of the national assets.

Financial assets, represented by stakes in banks and securities and insurance companies, were until recently under the control of two bodies. The Ministry of Finance owns the assets and oversees disbursements and profits. The Central Financial Working Committee (CFWC) used to oversee and appoint personnel – but the CFWC has already been disbanded in the run up to the congress.

If the functions of these two organizations are taken over by the a new state asset management committee, some observers say it could give rise to a conflict of interest to include both the lenders and the borrowers under the ownership of the same umbrella organization. That could give rise to a situation whereby the state asset management committee forces banks to lend to the SOEs, for example.

These assets are sizeable. One respected local magazine, Caijing, estimates total state assets to be worth RMB11 trillion, ($1.3 trillion). The government, the magazine said, is the controlling shareholder of RMB7.3 trillion of these assets, of which financial assets such as stakes in securities houses, banks and insurance companies make up RMB830 billion.

The creation of a financial state asset management committee, away from government control by the MoF and the CFWC, could unify their functions and help maximize the value of government-held institutions.

So far, it seems that the idea of separating non-financial asset ownership from financial assets has taken root.

An attendant issue has been the creation of the China Bank Regulatory Commission. That has become a priority following the numerous banking scandals over the past years. Many observers have been calling for an independent or semi-independent bank supervisory body. Independent refers to the body answering to the State Council, while semi-independent refers to it answering to the central bank, the People’s Bank of China.

One widely-circulated suggestion was to create it out of the merger of disbanded Central Financial Working Committee with the bank supervisory department of the PBOC.

However, some industry observers have expressed unease about the right to appoint personnel of the CFWC. Should that authority be continued in the CBRC? The Bank of China’s recent governor, Liu Mingkang was appointed by the CFWC, for example.

“A supervisory organ should have an arms length relationship to the relevant bodies, and the power to appoint staff would compromise the supervisor’s neutrality,” says one CSRC-connected civil servant. “Since any financial state asset management company would include securities houses, banks and insurance companies, it is all the more important that the committee not compromise itself by appointing staff to all these varied areas,” he adds.

A source at the Ministry of Finance also pointed out that if the right to make appointments is not waived by the CBRC, then it should logically be extended to the China Securities Regulatory Commission and the China Insurance Regulatory Commission, which rank equally in the hierarchy of the government, both answering directly to the state council.

A regulatory body is clearly important in the wake of China’s entry to the World Trade Organization and the opening up of the finance industry. Foreign banks will also soon be on the landscape, and keen to see an impartial regulator.

“A specialized, independent CBRC would also allow the PBOC to get on with its major task of interest rate regulation and currency supervision,” comments one finance insider.  

Stripping out the bank supervisory function would help the central bank set interest rates and exchange rates in a more independent manner. Interest rates are currently tightly regulated to protect domestic banks and SOEs, for example, leading to conflicts of interest within the central bank.

However, one Beijing-based academic pointed out that so far no legislation is in place to give teeth to any future CBRC, making it difficult to judge the impact of such an institution.

The Securities Law, for example, merely validates the CSRC as a legal organization without giving it the right to enforce the legislation, he says, explaining the many restrictions the CSRC has suffered in the implementation of its duties.Accordingly, he says, the government needs to attack the problem of legislation as soon as possible.
However, sensitive, though necessary, legislation has often been the Achilles heel of China’s reforms. Laws are often slow in being drawn up, and have an even more patchy record of application. The bankruptcy law, for example, though badly needed to help foreclose on SOEs and clear up non-performing loans, has already been many years in the making. It will be noteworthy if this session of the NPC breaks new ground. 

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