China will establish a new financial regulatory body that analysts say will centralize oversight of the nation's financial system and reduce risk at regional levels.
The plan, presented Mar. 7 at the National People's Congress meeting, calls for the establishment of a central agency for financial regulation, which will replace the China Banking and Insurance Regulatory Commission, or CBIRC, and bring supervision of the entire financial industry, except securities, directly under the State Council, according to state media reports.
"The biggest change is the building of a centralized financial supervision system which will weaken the role of local authorities," ANZ economists said in a March 8 note. The new central agency will set up its own local agencies that will trim the influence of local governments on local financial institutions, the note added.
The People's Bank of China, or PBOC, the CBIRC and the China Securities Regulatory Commission, or CSRC, currently have oversight of the nation's financial sector, with the State Council's Financial and Development Committee having overall responsibility.
Under the new plan, the CBIRC's responsibilities would move to the new central agency, along with certain functions of the PBOC and the CSRC.
"The revamp signals a shift in the government's priority towards financial stability and de-risking the financial exposure," the ANZ economists said. Chinese authorities will have to strike a balance between economic growth and financial stability, they added.
Local government debt
Local governments' explicit debts have increased 16% year over year over the past five years, and their implicit debts may have reached 60 trillion yuan, or half of the country's gross domestic product, according to ANZ estimates.
The International Monetary Fund defines explicit liabilities as specific obligations that governments must settle, while implicit liabilities, although not legally binding, represent burdens that are likely to be borne by governments because of public expectations or political pressures.
The establishment of the new central agency "will be helpful for risk prevention and earlier detection of risks in the financial system," Iris Pang, chief economist of Greater China at ING said in a report, adding that the tightening of regulations will not happen immediately.
Also under the new plan, the PBOC's nine regional agencies will be split into 36 provincial branches, according to the media reports.
This suggests that future monetary policy will be more locally targeted and region-specific, ANZ said its note, adding that recent rapid increases in structural policy tools have prompted the PBOC to work closely with local governments.
The ANZ economists said China seems to be adopting a "Twin Peaks" supervisory model, similar but not identical to the Australian one, where the PBOC will be responsible for macro prudential regulations, while micro policymaking will be divided between the new central agency and the CSRC.
As of March 7, US$1 was equivalent to 6.95 Chinese yuan.