A lack of agility in China’s economic system during the stock market crash of August proves that the nation’s regulatory framework is in urgent need of an overhaul.
That is the stark assertion of top finance professional Wu Xiaoling – former vice governor of the People’s Bank of China (PBoC), now director of the Financial and Economic Committee in the national legislature.
In a Beijing session of the Committee in late November, Wu called for a more prominent leadership role for the PBoC, which is just one of four, main regulatory bodies – the others being the China Insurance Regulatory Commission, China Banking Regulatory Commission and China Securities Regulatory Commission.
While Wu’s Committee colleague, deputy director Yin Zhongqing, recently argued that the organisations should be merged as a means of enhancing the supervision of mixed business, Wu called for financial institutions themselves to take greater responsibility on disciplinary matters.
“Banks, securities, insurance and trust firms have different functions,” she said. “It is necessary to conduct respective management changes, based on the features of different products.
“It is not a simple thing just to merge the central bank and the three regulatory authorities.”
Wu said that, because of the complexity it would involve, it was “unlikely” that the legislature would “scrap the current system and start all over again”. With that in mind, she pointed out, it was vital for the PBoC to have greater control over the three Commissions – a measure that would support firms’ managerial improvements.
A more dominant central bank, she argued, would be able to compile better financial information that would equip the economy to avoid a repeat of 24 August – dubbed Black Monday – when the Shanghai Stock Exchange plummeted by 8.5%, wiping billions of dollars of capital from numerous companies’ balance sheets.
In particular, Wu stressed, securities laws should be amended to cover newer financial products that are not currently in their remit, while the PBoC should have the power to untangle the mass of confusing and often contradictory rules that have emerged from the Commissions.
Most of those regulations, she said, had arisen to cover a mass of often inconsistent agreements that industry players such as trusts and brokers had reached over wealth-management products.
“Clear, financial logic [and] a well-established idea of supervision” were required, she said. “We need to draw lessons from the past.”
In the days following Wu’s remarks, the International Monetary Fund (IMF) revealed that it had decided to include the renminbi in its ‘basket’ of reserve currencies – an apparent vote of confidence in China’s financial system.
However, in the wake of that announcement, PBoC assistant governor Zhang Xiaohui told Euromoney that the IMF’s decision was “mainly symbolic”, given the currency’s limited use by markets.
While the PBoC would continue to promote the renminbi as a means of avoiding liquidity traps during dollar shortages and cutting FX costs in foreign trades, Xiaohui said, the “internationalisation of the renminbi is driven by the market – not the Chinese government or PBoC”.