China’s President Xi Jinping announced the initiative to reform the country’s financial system during the National Financial Work Conference which took place on 14th and 15th of July 2017. The reform involves creating new institutions with regulatory and coordination roles, strengthening the power of People’s Bank of China and reducing the debt ratio of state-owned enterprises. The purpose is to prevent risks that, once materialized, can affect the entire financial system and lead to instability, in order to offer a better support for the Chinese economy.
The National Financial Work Conference is organized once in every five years and the last one took place on 14th and 15th of July, when it was attended by China’s Premier, Li Keqiang, and other officials from public administration.
Xi Jinping announced the intention to create a Financial Stability and Development Committee, a new institution with a regulatory and coordination role in the Chinese financial system, which will operate under the State Council, China’s central government. At the same time, the People’s Bank of China will be given more power to reduce the risks in the financial system, while the leadership of China’s Communist Party will also have a stronger role in this system. Moreover, the reduction of debt ratios of state-owned enterprises is also intended. Until now, no further details on the creation of the Financial Stability and Development Committee or the extension of the role played by People’s Bank of China were given.
This reform project focuses on the three main authorities which currently monitor and regulate the financial sector: China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission, which, according to CNBC, do not act always in tandem.
CNBC quoted Xu Hongcai, deputy chief economist of China Center for International Economic Exchanges, who considers that, in some ‘grey’ areas of the financial markets, none of these three regulatory commissions take the responsibility to fully monitor the situation, which generated risks by leaving many financial products to develop without being controlled. According to Xinhua, the fact that the financial system is fragmented can leave unsupervised parts and the creation of the Financial Stability and Development Committee will increase the efficiency of regulations.
At the same time, these reforms are focused on state-owned enterprises, which will have to reduce their debt level, but also on private companies for which the current lack of strict regulation is beneficial. For instance, Reuters reported that authorities are currently worried about the tycoons who manage to avoid regulations and take over other companies. Reuters also explains that each regulatory authority supervises a different part of the financial system and none has a complete picture of capital transfers, thus being harder for authorities to identify market manipulators who divert funds to risky financial products in an attempt to obtain higher gains.
In addition, New York Times states that currently some small and medium enterprises in China can finance themselves thanks to loan guarantees which banks will not be able to offer anymore in case of stricter regulation. At the same time, these SMEs are rarely successful in competing with big, state-owned enterprises for conventional bank loans.
China’s President stated that financial security is part of national security, but some sources consider that the current reform proposals are motivated by his desire to ensure stability before the transition of power that will take place this autumn, during the 19th Congress of the Communist Party.
The announcement of these reforms impacted the Chinese financial markets. According to South China Morning Post, the Conference caused fear about the fact that China’s financial could enter a period of analysis, which led to decreasing stocks and stock market indices on 17th July, which was named “Black Monday”.