The Transformation of China’s Financial Industry in 2023

In recent years, China’s financial industry has experienced a significant transformation. This transformation was initiated through an institutional reform plan issued by the Central Committee of the Communist Party of China and the State Council in mid-March. The objective of this plan is to reshape China’s financial regulatory regime and enhance governance over the next 5-10 years. The reforms entail a redistribution of power and are expected to have far-reaching impacts on the financial system of China.

Prior to these reforms, China’s financial regulatory system comprised four key organizations: the Financial Stability and Development Commission, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission.

The institutional reform plan consolidates these entities into “one committee, one bank, one administration, and one commission”. A newly established Central Financial Commission now assumes the responsibilities previously held by the Financial Stability and Development Commission, making it the primary body for financial decision-making and coordination. Additionally, the Central Financial Working Committee will be established to fulfill party-building functions and collaborate with the Central Financial Commission, reinforcing the ruling party’s leadership over financial regulation.

Another notable change is the replacement of the China Banking and Insurance Regulatory Commission with the National Administration of Financial Regulation (NAFR). The NAFR assumes wider responsibilities, including the oversight of financial holding companies, which were previously under the purview of the People’s Bank of China. Furthermore, the NAFR now possesses regulatory power over financial consumer and investor protection, making it a “super-regulator” comparable to a combination of the UK’s Prudential Regulation Authority and Financial Conduct Authority.

The reform plan also involves restructuring the local financial regulatory framework. This allows the dispatched agencies of the central financial regulatory administration, particularly the NAFR, to play a dominant role. Currently, the NAFR operates 31 provincial-, five municipal-, and 306 city-level regulatory agencies, further empowering its regulatory capabilities.

The role of the People’s Bank of China has been refocused to primarily handle monetary policy and macro-prudential supervision, relinquishing its oversight of financial holding companies. Furthermore, the reform plan introduces major structural changes to streamline the organization of the People’s Bank of China. The central bank eliminates the nine large regional branches, resembling the US Federal Reserve, and replaces them with 31 provincial and five municipal branches. Consequently, the central bank is now divided into three tiers: headquarters, provincial/municipal branches in the specified cities, and city-level branches.

Meanwhile, the China Securities Regulatory Commission’s authority as the capital market regulator has been strengthened. Its responsibilities have expanded to include enterprise bond issuance supervision, previously managed by the National Development and Reform Commission of the State Council. This unification of supervision encompasses both enterprise and corporate bond issuance.

Despite the NAFR assuming investor protection duties, the significance of the China Securities Regulatory Commission in the financial ecosystem remains paramount, especially in enterprise bond markets. The Chinese government has emphasized the importance of developing the direct financing market for enterprises, and enterprise and corporate bonds are key financial instruments targeted for strengthening.

How AI legalese decoder can help?

The introduction of an AI legalese decoder can play a crucial role in the implementation and effectiveness of the institutional reform plan in China’s financial regulatory regime. With the complexity and volume of legal documents involved in the reform process, an AI-powered decoder can analyze and decipher legalese, simplifying the language and making it more accessible to stakeholders. This can enhance understanding and transparency, ensuring that the plan is effectively communicated and implemented by all relevant parties.

A New Governance Model for Sustainable Growth

The transformation of China’s financial regulatory regime is not solely focused on enhancing supervision and efficiency. It also encompasses measures to drive sustainable growth of the Chinese economy. One of the key aspects is attracting and retaining top-tier talent in both regulatory bodies and financial institutions. The transition of the NAFR and China Securities Regulatory Commission from public sector institutions to administrative agencies directly under the State Council may impact compensation levels and, subsequently, talent attraction and retention. Achieving a balance between political and professional interests while retaining financial regulatory talent will be crucial for the plan’s effectiveness.

Further discussions on the institutional reform plan are anticipated at the upcoming sixth National Financial Work Conference in Beijing, scheduled for October. It is essential for domestic and foreign financial institutions operating in China to closely observe and comply with the comprehensive and increasingly stringent regulatory environment. Adapting to the evolving regulatory regime, reshaping corporate governance, and being prepared for the future will be vital for the success and sustainability of financial institutions.

Source: OMFIF