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China’s Unfinished Reform in Financial Regulation

China’s Unfinished Reform in Financial Regulation. Jun Wang Workshop on Aligning Financial Regulatory Architecture with Country Needs New Delhi, India June 5-6, 2004. Current Regulatory Framework. Specialized regulatory authorities for Banking Securities Insurance Pension

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China’s Unfinished Reform in Financial Regulation

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  1. China’s Unfinished Reform in Financial Regulation Jun Wang Workshop on Aligning Financial Regulatory Architecture with Country Needs New Delhi, India June 5-6, 2004

  2. Current Regulatory Framework • Specialized regulatory authorities for • Banking • Securities • Insurance • Pension • Central bank responsible for overall financial stability

  3. Tradition of Central Planning • Mono-banking system • Non-existence of securities and insurance • Financial risks were minimum • Absent need for financial regulation and supervision • Banking network is present where government is • Umbrella regulatory arrangement

  4. Bank-based Financial System Distribution of China’s Financial Assets, March 2004 Data Source: the Websites of CIRC, CBRC and CSRC

  5. Distribution of Deposits and Loans of Banks, 2003 Deposits Loans

  6. A Path of Repeated Reorganization • 1984 • PBC became central bank with its commercial banking functions spun off • 1989 • PBC reorganization • Insurance regulation spun off to CIRC • 2003 • Banking regulation spun off to CBRC

  7. PBC Reorganization in 1998 • 9 Regional Offices plus 2 Municipal Offices • 21 Supervisory Offices • 30 Provincial-level Sub-branches • X number of Prefecture-level Sub-branches • Y number of County-level Sub-branches

  8. PBC Reorganization in 1998 • Reorganization plan was conceived behind closed doors • Attention to organizational issues rather than functional effectiveness • No strategy for implementation

  9. Widely Viewed as a Failure • Confusion and disarray within PBC, especially at the provincial level • Civil service compensation scheme added to talent drain • Embarked on a vicious circle of conspicuous, campaign-style supervision • Failure resolution aggravated conflict of interest between monetary policy and banking supervision

  10. What Also Triggered the Changes in 2003 • Internal pressures • Emerging financial services integration and innovation • Professionalizing regulation and supervision • Restructuring state-owned banks to get the house in order • Political dynamics and expected change of government

  11. What also Triggered the Changes in 2003 • External pressure • Rising competition anticipated after WTO accession • Increasing scrutiny by international community • Growing need to contribute to regional and international rule-setting in regulation

  12. What Were the Alternatives • keep banking supervision in the PBC • Realigning regulatory and supervisory functions in various departments • Or create a SAFE-type of organization • unify regulation and supervision under one roof • Merging all regulatory functions into one • create a separate bank regulator

  13. Why Separate Bank Regulator • Banking was by far the dominant sector • Securities and insurance regulation had just got on their feet • Perceived cultural differences • The issue had been whether to keep banking supervision in or outside the central bank

  14. How It Was Implemented • Supervisory departments and staff were carved out of the central bank and handed over to the CBRC • Many new positions and promotions but little substantive changes introduced • Separation from the central bank at the local level was a bumpy ride • Legislation followed to validate the change

  15. What Does CBRC Supervise • Commercial banks • State-owned • Second-tier and third-tier • Foreign banks • Policy banks • Rural credit cooperatives • Urban credit cooperatives • Asset management companies • Postal savings • Some NBFIs (TICs, FCs, LCs)

  16. Changes Necessitated at the Central Bank • Creation of Financial Stability Bureau • Realignment of regional network • Change in mindset to begin to focus on macroeconomic and monetary policy issues

  17. Financial Stability Framework Yet To Be Built • MOU among the C*RCs • Formal coordination mechanism still absent between the central bank and the C*RCs • Overlaps and gaps co-exist, especially in financial conglomerates

  18. What Are the Lessons • Organizational changes alone cannot achieve effective banking supervision • Philosophical changes • Objectives • Independence, in relative terms • Incentives • Staffing and skills • Do not embark on reorganization unless ready to accompany it with substance

  19. What Are the Lessons • Process of change is full of risks and needs careful management • Time required at least 1-2 years (FSA, APRA, Korea) • Goals and milestones needed to guide it • Resources should be mobilized to fund the change

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