articles Ratings /ratings/en/research/articles/230330-china-financial-reform-execution-matters-12683329 content esgSubNav
In This List

China Financial Reform: Execution Matters


Credit FAQ: What Declining Commercial Real Estate Values Could Mean For U.S. Banks


Credit FAQ: Can GCC Banks Weather Funding Risks?


Bank of New Zealand Perpetual Preference Shares Rated 'BBB'


India Banks' Strong Performance Set To Continue

China Financial Reform: Execution Matters

China Is Overhauling Its Regulatory Framework. Why Now?

Trust and stability.   In our view, the overhaul is ultimately aimed at strengthening trust and stability in the country's financial system. The stability of banking systems is paramount for any economy. So is trust--as underlined by U.S. authorities acting quickly to stem fallout from the failure of three U.S. banks, or the Swiss authorities brokering an emergency rescue deal between UBS and Credit Suisse.

Curbing deficiencies and loopholes.   The overhaul, announced at last month's "Two Sessions" annual governing event, also addresses regulatory gaps. An increasing number of risk events highlight some deficiencies in the financial supervision. The notable risks include:

  • Struggles to keep pace with new types of businesses and emerging risks. Such as include multilayered wealth management products (i.e., umbrella trusts) or cross-region online deposit-taking business (e.g., Henan Rural Bank event in 2022).
  • Supervisory inconsistency among multiple authorities, especially at the regional level. For example, the oversight around high leverage ratios across micro-lenders in some regions.
  • Insufficient supervision for non-licensed financial business. One notable example is the rapid growth of peer-to-peer (P2P) platforms under the oversight of provincial governments, which lacked the expertise to set standards. Tighter rules were implemented in 2019 – which led to an abrupt shut-down of the P2P market. However, the resulting chaos remains unsettled with lenders still seeking compensation.

A must have.   In our view, China's wide geographic spread and economy require a unified and efficient regulatory system. Aligning different regulators under one roof should help bridge the regulatory loopholes and supervision priorities. Furthermore, a centralized approach facilitates consistency in supervision, especially at the local level.

Centralization of powers.   The Two Sessions in 2023 points to firmer and more centralized controls. Besides regulatory consolidation, major changes are planned for several government bodies, and new ministries will be established. Given the emphasis on longer-term economic and financial stability, we think China is unlikely to return to a growth model driven by credit and public investment over the next year or two (see "What The "Two Sessions" Say About Chinese Government Finances," published on RatingsDirect on March 20, 2023)

Most significant reform since 2018.   As a "super regulator," the National Financial Regulatory Administration (NFRA) will oversee all of China's financial services sector, except securities. The latest reform trails after its last revamp in 2018 when the banking and insurance regulators were combined to form China Banking and Insurance Regulatory Commission (CBIRC). With this, China's super-regulator formation will become the largest (in terms of the size of financial assets under its aegis) globally (see table 1).

Table 1

Many 'Super-Regulators' Are Based In Asia
Country Regulator Year of formation Regulatory scope Reporting To
Singapore Monetary Authority of Singapore 1971 Bank, NBFIs, Insurance, Monetary policy Government of Singapore
Australia Australian Prudential Regulation Authority 1998 Bank, Insurance Australian Parliament
Korea financial Supervisory Service 1999 Bank, NBFIs, Insurance Financial Services Commission
Japan Financial Services Agency 2000 Bank, NBFIs, Insurance Minister of State for Financial Services
Taiwan Financial Supervisory Commission 2004 Bank, NBFIs, Insurance Executive Yuan
NBFI-Nonbank financial institions. Source: S&P Global Ratings.

What's Changed In This Overhaul?

Formation of NFRA.   The new super regulator will be placed directly under the State Council. It replaces CBIRC, and will assume oversight of financial holding companies, and financial consumer and investor protection--duties previously undertaken by People's Bank of China (PBOC) and China Securities and Regulatory Commission (CSRC) (see table 2).

Table 2


PBOC focuses on monetary policy.  With this transformation, financial holding companies such as Ant Group (China's fintech giant) will be regulated by NFRA. Previously, PBOC was the supervisor. Going forward, PBOC will focus on monetary policy setting (like that of the Fed).

CSRC gets upgraded.  The CSRC will be raised to become a government agency directly under the State Council from its earlier public institution role. It will continue to supervise the securities market. In addition, CSRC expands its oversight to include approval of enterprise bonds (on top of corporate bonds); a role it has taken over from the National Development and Reform Commission NDRC.

PBOC reforms branches.  Under the plan, PBOC will discontinue its large regional branches, and instead, will create provincial branches in all 31 provinces, and city-level branches (in Shenzhen, Dalian, Ningbo, Qingdao, and Xiamen). In addition, special branches will be established in Beijing and Shanghai. Concurrently, the county-level branches will be abolished, and their functions will be transferred to the city-level branches. In place, we anticipate NFRA to establish local presence to facilitate supervisory oversight.

However, more details needed.  Some missing parts remain in the regulatory overhaul plan. One example is lack of explicit mention about the supervisory responsibilities of the "7+4" type local financial institutions (i.e., micro lending companies, financing guarantee companies, pawnshops, local asset management companies and etc.), which are regulated by local governments, mostly. Likewise, the department responsible for issuance of financial holding company licenses is unclear.

What Are The Implications From This Change?

Easier said, more time needed.   While we believe the intentions of this overhaul are good (streamline cooperation across different financial regulators, stem out illicit practices in finance, and streamline operations), the execution will be time consumptive. In particular, the clearing up of PBOC's branch networks be a multi-year project.

Some delays abound.   NFRA will need time to get the ground rules ready. This means regulatory approvals may slow and face delays. For the insurers, this will derail strategic and financial plans to boost capital as part of C-ROSS Phase II. Concurrently, the centralized supervision of banks, and insurance companies (moving away from local supervision) could demand more experienced personnel. Meanwhile, employees at CSRC will be paid on par with the nation's public servants, insinuating a pay-cut for some, risking turnover.

Need for policy clarification.   Meanwhile, the sudden centralization of risk management oversight will need to clarify existing policies--posing uncertainties and inconsistency (though temporary) over prospective policy directions. Some of the local and regional governments (LRGs) could seek to distance themselves from supporting the local state-owned enterprises (SOEs) amid policy clarification. For some of the overleveraged local SOEs, this temporal disconnect could see funding support fall through the cracks, risking defaults (see "China's SOEs Are Stuck In A Debt Trap," Sept. 20, 2022). Furthermore, distressed SOEs could implicate economic growth and local stability.

Behavioral change.   Prior to this change in regulatory framework, local governments could function as both regulatory supervisor and shareholders to financial institutions--giving rise to conflicting priorities (profits or risk management). However, under the new rule, local governments will no longer perform the roles of regulatory supervision. This means some LRG-linked financial institutions will abide to regulatory supervisors' focus on risk management and could delay or refrain responding to LRGs' mandates of supporting distressed SOEs.

Looking Ahead

Execution is key.   The aim to centralize is clear in government's agenda and blueprint for China. The alignment of the financial services sector, like a jigsaw, will be instrumental to facilitate consistent rollout of future policy packages and responses. However, execution is key (i.e., having the right people and the determination to follow through).

China's geographical scale, differing conditions across the regions, will entail upending existing rules. We believe this process will be long where hidden risks could be uncovered, unfortunately. We expect some hard decisions will be required to balance intent and practical execution.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Eunice Tan, Hong Kong + 852 2533 3553;
Phyllis Liu, CFA, FRM, Hong Kong +852 2532 8036;
Robert Xu, Hong Kong + 852 2532 8093;
Susan Chu, Hong Kong (852) 2912-3055;
WenWen Chen, Hong Kong + 852 2533 3559;
Secondary Contacts:Ryan Tsang, CFA, Hong Kong + 852 2533 3532;
HongTaik Chung, CFA, Hong Kong + 852 2533 3597;
Research Assistant:Martin Liu, Hong Kong

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back