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China merges insurance and bank regulators to plug gaps in rules, curb abuse

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China merges insurance and bank regulators to plug gaps in rules, curb abuse

China will merge its banking and insurance regulators and give the central bank a bigger role in prudential supervision, in a shake-up that, analysts said, aims to plug gaps in the system that have fueled financial risk.

As China's financial industry grows in size and complexity, the traditional division of labor between the China Banking Regulatory Commission, or CBRC, and the China Insurance Regulatory Commission, or CIRC, is seen as inadequate to curb risky lending practices and oversee hybrid products. The creation of a single, financial super-regulator directly under the government's main administrative arm will discourage "regulatory arbitrage" where companies exploit gaps in the rules of different supervisors, the analysts said.

The move is also part of China’s broader overhaul of ministries, ostensibly to improve efficiency. The proposed changes come after the National People's Congress, on March 11, altered the country’s constitution to allow President Xi Jinping to rule for life.

It also follows a crackdown by the Chinese state on irregularities in the financial industry. In February, the government took control of Anbang Insurance Group Co. Ltd. for up to two years, citing solvency issues.

"Financial regulations will become more stringent ... because it is hard for people to [engage in] regulatory arbitrage under a unified regulator," said Albert Xu, vice president of research at securities company Zhongtai Financial International.

'Lack of consistency, coordination'

Ken Shih, research director at DBS Vickers Securities, said: "It is a [long-standing] complaint that there is a lack of consistency and coordination of regulation among China's financial regulators."

"[The merger] means the Chinese government steps up further to prevent financial risks," Shih said. "And more comprehensive policies to regulate the financial industry are expected."

Risk has been building up in recent years, as more banks parked their off-balance-sheet assets in wealth management products sold by each other, while some insurers turned themselves into alternative fundraising platforms by selling short-term wealth management-type products that offer few safeguards. In addition, so-called multilayer nesting investments have become a growing source of hidden financial risk, potentially destabilizing the world's second-largest economy.

The proposed merger strengthens the regulators' ability to oversee the shadow banking system and channel businesses, which effectively allow off-balance-sheet lending among financial institutions and which skirt regulation, the analysts said.

"Multilayer nesting investments were hard to [monitor] under different regulators," Xu said. "But now such investments can be controlled."

In addition, the CBRC's and the CIRC's responsibilities to draft rules and design the prudential regulatory framework for the banking and insurance industries will be transferred to the People's Bank of China, according to a document seen by S&P Global Market Intelligence. The integrated body's primary responsibilities will include unifying regulations on the banking and insurance industries while preventing and mitigating financial risks, according to the document.

"The transfer to the central bank of rule-making authority in the two industries would enhance coordination between monetary and regulatory policies in the interests of safeguarding financial stability," Moody's Investors Service said.

Xu said he expected the central bank to continue to take the lead in financial reform and coordinate with other financial regulators.

The China Securities Regulatory Commission will remain a separate entity. Shih speculated this was because the insurance and banking regulators have overlapping areas, and the regulator can control financial institutions' activities in the financial markets through investment rules.

More, strict regulation in 2018

The merged banking and insurance regulator, along with the securities regulator and the central bank, will all report to the Financial Stability and Development Committee, which was established under the State Council and which set up its office at the PBOC in November 2017, the South China Morning Post reported Feb. 28, citing an anonymous source. The State Council is the main administrative arm of the Chinese government.

China's banks and insurers have said they expect 2018 to be another year of strict regulation after the government warned that addressing systemic financial risks is a high priority.

Since early 2018, the CBRC and the CIRC have both published rules to regulate shareholder activities. The banking regulator ordered shareholders who hold more than 5% of any commercial lender to reduce their stakes within a year. The insurance regulator, meanwhile, lowered the limit for a single shareholder's stake in an insurer to one-third from 51%, among other measures, to prevent irregular benefit transfers to shareholders outside of the insurance industry.

In January, the CBRC also vowed to tackle irregular lending practices and shadow banking business in the banking sector.

The CIRC also revised rules on the use of insurance funds and asset liability management, focusing on the quality of insurers' funding sources and the authenticity of companies' solvency data.

The chair of the CIRC has been vacant since April 2017, after Xiang Junbo was removed from the position amid allegations of "serious disciplinary violations." Xiang was later expelled from the ruling Communist Party and anti-graft investigators handed his case over to prosecutors.