A Proposal for China’s Financial Regulatory Reform


A Proposal for China’s Financial Regulatory Reform

We propose to maintain the current “One Central Bank, Three Regulators” framework, strengthen the existing inter-ministerial financial regulatory cooridniation committee and enforce the decision-making mechanism for major regulatory issues. We propose to assign the central bank the regulatory responsibility for 19 SIFIs and major exchanges and the role of the last financial regulator. 

By Hao Zhou and Haibin Zhu 

Caixin, April 12, 2016

Abstract: Reform of financial regulatory institutions is a focus in the ongoing discussion on financial regulatory reform. Among the various proposals being explored, we think it is inappropriate to make big institutional changes to the existing regulatory framework as financial risks are gradually exposed and feasibility of implementation is important. We propose to maintain the current “One Central Bank, Three Regulators” framework, strengthen the inter-ministerial financial regulatory coordination committee and enforce the decision-making mechanism for major regulatory issues. Meantime, under the macro-prudential principle, the central bank should be assigned the regulatory responsibility for 19 SIFIs and major exchanges and the role of the last financial regulator. This proposal can achieve the regulatory objectives without a major change in institutional setup.


The current “One Central Bank, Three Regulators” framework was officially formed with the separation of CBRC from the PBOC in 2003. This framework fit the specialized (sector-specific) business model in the financial sector and achieved the separation between monetary policy and financial regulation. Nonetheless, with the rapid development in China’s financial market, financial institutions have gradually shifted toward the universal banking model, and the caveat of existing sector-specific regulatory framework has become more obvious. On the one hand, regulatory standards are not uniform, creating regulatory loopholes that have encouraged risky activity such as channel lending, P2P, OTC margin financing etc. On the other hand, multiple supervisions exist in some areas, such as bond, rating and asset management business, which has caused different degrees of regulatory competition. These problems are in part due to inefficiency in regulatory implementation, and in part due to the design of the regulatory institutional framework.

In the ongoing debate on the reform of financial regulatory institutions, the following models have been proposed: (1) “One committee + One central bank and three regulators”, i.e. maintaining the existing structure unchanged, and establishing a Financial Regulatory Coordination Committee in the State Council which is responsible for regular coordination of regulatory issues as well as decision-making and execution of major policy issues; (2) “One super central bank” model under which all regulatory functions will be centralized to the central bank; (3) “One central bank, One commission” model which consolidates the three existing regulatory commissions to form a super financial regulator; (4) “Central bank + Prudential regulation agency” model under which the central bank is responsible for macro-prudential policies and supervision of systemically important financial institutions (SIFIs), while a newly created Prudential Regulation Agency (merged from three regulatory commissions) will serve as the micro prudential regulator of non-SIFIs. In our view, it is inappropriate to have a major surgery program at this stage and Proposal (1) is the most realistic choice in the near term.     

The details of our proposal include: (1) strengthen the existing inter-ministerial financial regulatory coordination committee (the Committee hereafter), with the central bank governor taking a leading role and participated by three regulatory commissions, Ministry of Finance and NDRC, as well independent experts or scholars. The Committee will be the highest-level institution in charge of financial regulation and supervision, and it will be responsible for the clarification of regulatory function of each agency, the unification of regulatory standards, the design and execution of policies to address systemic risks in the financial sector; (2) New permanent agencies can be established under the Committee, e.g. secretariat groups and systemic risk assessment agencies, to strengthen financial data collection and analysis and support the decision-making procedure; (3) Maintain the existing “One central bank, Three regulators” framework, but the regulatory standards need to be unified and regulatory functions clarified, so as to avoid regulatory gaps or multiple regulation. Function-based regulation could be introduced based on the function of each financial product; (4) A priority is to introduce the macro-prudential regulatory framework. The central bank will be in charge of the formulation, supervision and enforcement of macro-prudential policies and report to the Committee; (5) Under the new framework, the central bank will be assigned the regulatory responsibility for systemically important financial institutions (including banks, security firms, insurance and exchanges). The formulation of major laws and rules in the financial sector needs to be co-signed off by the central bank and approved by the Committee.

The “Systemic Risk Report on China’s Financial Institutions” published by the National Institute of Financial Research of Tsinghua University showed that the systemic risk in China’s financial sector has continued to rise. The 19 financial institutions in the Appendix table can be considered as the SIFI candidates in China, including 14 banks, three insurance companies and two security firms. The regulation of SIFIs, especially large and mid-sized banks and Shanghai and Shenzhen Stock Exchanges, can be shifted under the central bank.

Our proposal is based on the following considerations.   

First, a major surgery program is inappropriate given the rising financial risk needs to be seriously addressed. A major surgery program is appropriate after a crisis with least resistance, or when the financial system is sound and stable. Currently, China’s financial risk has been exposed. With major institutional changes in financial regulation, it will consumer substantial time and resources, cause sense of insecurity for employees in the regulatory agencies, delay reforms in other areas of financial regulation, and increase even trigger systemic risks in the financial sector.

Second, the focus of financial regulatory reform is to improve regulatory function, unify regulatory standards and enhance the strength, scope and depth of financial regulation. There is no such thing as best practice of regulatory structure around the globe. After the 2008 global financial crisis, the U.S., Europe and U.K. all introduced major changes in regulatory set-up, in which the central banks’ role in financial regulations (in particular in terms of macro prudential regulations) was generally strengthened. For instance, U.K. put most financial regulatory functions back to the central bank and established a Financial Stability Committee in parallel with its Monetary Policy Committee within the central bank. However, in general, the financial regulatory framework is country-specific. It is yet to be proven that whether the new regulatory arms in the U.S. and Europe are effective to prevent future crisis. Historically, the business model (universal banking vs. specialized banking) and regulatory structure often change back and forth after a major financial crisis, but often reversed after another major crisis. It is interesting to note that Australia and Canada, the two countries that weathered through the GFC smoothly, have not made any changes to their regulatory structure after the GFC.  

Third, the sector-specific regulatory model will cause problems in coordination, but a unified regulatory model may also cause problems such as excess regulatory centralization. The checks and balances and cross-departmental monitoring will no longer exist under a centralized regulatory framework. If the Super Central Bank model is adopted, it will bring about potential conflict between monetary policy and financial stability operations. For instance, the current downward pressure on the real economy will call for counter-cyclical response of monetary policy, which implies that credit growth will pick up and debt risk further accumulated. Moreover, coordination problems also exist within the institution. To summarize, we think our proposal is the realistic choice that can partially address the existing problems.    



Hao Zhou, Vice Chair of National Institute of Financial Research and Associate Dean of PBC School of finance at Tsinghua University

Haibin Zhu, Chief China Economist at J.P. Morgan and Associated Research Fellow of National Institute of Financial Research at Tsinghua University 

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>Tsinghua National Institute of Financial Research