China merges its banking and insurance regulators

• Merging the banking and insurance regulatory commissions is expected to solve existing problems such as unclear responsibilities, cross regulation and absence of supervision
• Others are skeptical whether changes in China's regulatory environment will address significant issues within the country's financial system
• Guo Shuqing, a highly regarded reformer and chairman of the China Banking Regulatory Commission, was appointed as new head of the China Banking and Insurance Regulatory Commission

On March 13, 2018, the National People's Congress moved to merge the China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC), while delegating more policy making authority to the People's Bank of China (PBOC), as part of a sweeping government re-organisation plan that includes merging or eliminating at least a dozen agencies. The move was a welcome step that will help improve coordination among regulators and delineate clearer divisions of responsibility between them.

From organisation-based to function-based system

The current structure of China's regulatory landscape is sometimes called "one bank and three commissions," which has been in place since 2003. China Securities Regulatory Commission (CSRC) was established in 1992, followed by CIRC in 1998. In 2003, CBRC was carved out of PBOC. All of these were part of a modernisation scheme at a time when banks, insurers and securities companies were clearly distinct from each other.

However, the specialised regulation approach experienced a number of challenges from the rise of new technologies and firms that blurred the lines between banking, insurance, and securities, to a complex regulatory environment where the central bank, although on top of the regulatory chain, does not have authority to coordinate regulatory efforts and handle a constantly changing financial sector.

Furthermore, the country's financial system has become increasingly tough to regulate due to its sheer breadth. It has grown rapidly in terms of size. China, the world’s second-biggest economy has also emerged as one of its largest financial markets with assets of nearly 470% of gross domestic product (GDP), according to the International Monetary Fund.

To respond to these changes, the country’s financial regulatory system has been restructured to "one department, one bank and two commissions" and CBRC and CRIC will now be known as the China Banking and Insurance Regulatory Commission (CBIRC).

Analysts believe the move could bolster momentum for financial overhauls. Instead of having separate regulators for each sector, separate regulators will oversee policy formulation and its day-to-day implementation, which include monitoring compliance. The PBOC will take over the legislative and rulemaking functions of the CBRC and CIRC, a significant increase in power, while CBIRC and CSRC will play the role of policy executor.

“The move is aimed at solving existing problems such as unclear responsibilities, cross-regulation and absence of supervision,” said State Councilor Wang Yong.

But others are skeptical about the effectiveness of these changes to address significant issues in China's financial system. For example, there have been high levels of debt among some firms and industry, particularly the state owned enteprises (SOEs), that are overleveraged. They doubt that the problem is being addressed at the root.

Another question is how this reorganisation will change relations between financial regulatory authorities at the local and national levels. Likewise, it is unclear how the reorganisation will affect financial technology firms that have grown significantly due to the space granted to them by less-coordinated regulators.

A pro-reform head

Part of the reorganisation is the appointment of Guo Shuqing as head of the merged regulatory bodies. Guo was previously chairman of the China Banking Regulatory Commission (CBRC) and secretary of the Communist Party of China (CPC) CBRC Committee.

Widely regarded as a reformer and one of China's most experienced financial services professional, Guo started what was widely known as a “regulatory windstorm” during his first month as chairman of the CBRC, implementing a flurry of new measures to tackle the banking industry’s most complex problems from shadow banking and regulatory arbitrage to hidden bad debt.

Today, aside from being chairman of CBIRC, Guo was also appointed as Communist Party chief and deputy governor of PBOC, allowing him to exert the widest influence at the central bank. Many believe he will continue the crackdown on shadow banking in the insurance sector.

He along with the head of CSRC and PBOC will be governed by the special cabinet level committee set up in 2017 to coordinate regulation called the Financial Supervision and Development Committee.

During a meeting of CBIRC, Guo reaffirmed that he will focus on reducing debt levels at local governments and state-owned enterprises, and curtail the rapid rise in household debt.

“We will continue to focus on shadow banking, interbank wealth management, and off-balance-sheet businesses, and defuse financial risks in overlapping areas this year,” Guo told reporters on the sidelines of the National People Congress on March 9.

However, many are wondering how he will manage his two positions where he takes control of the top-down drafting of new regulators as party chief of the central bank, as well as commands the efforts to ensure that rules are enforced through CBIRC. Nonetheless, he has immense influence in China and could become one of the dominant personalities in the country.