China’s financial industry has undergone a transformation in 2023. The Central Committee of the Communist Party of China and the State Council issued an institutional reform plan in mid-March, reshaping China’s financial regulatory regime to enhance governance over the next 5-10 years. This reform plan redistributes power and includes a major overhaul of China’s financial regulatory regime, with presumed far-reaching impact on China’s financial system.
Previously, China’s financial regulatory system consisted of four key bodies: the Financial Stability and Development Commission, the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission (Figure 1).
Figure 1. China’s financial regulatory regime prior to the reform plan
Source: Deloitte
The institutional reform plan consolidates these organisations into ‘one committee, one bank, one administration and one commission’ (Figure 2).
Figure 2. China’s new financial regulatory regime
Source: Deloitte
The newly established Central Financial Commission absorbs the responsibilities of the former Financial Stability and Development Commission, becoming the primary body for financial decision-making and coordination. The Central Financial Working Committee will also be established for party-building functions and will work with the CFC. The ruling party’s leadership over financial regulation is reinforced.
The National Administration of Financial Regulation replaces the CBIRC and takes on broader responsibilities, including oversight of financial holding companies, previously under the PBoC’s purview. The NAFR also gains regulatory power over financial consumer and investor protection, creating a ‘super-regulator’ akin to a combination of the UK’s Prudential Regulation Authority and Financial Conduct Authority.
Meanwhile, the reform plan restructures the local financial regulatory framework, allowing the central financial regulatory administration’s dispatched agencies – namely the NAFR – to play a dominant role. As of July 2023, the NAFR operates 31 provincial-, five municipal- and 306 city-level regulatory agencies.
The PBoC’s role in monetary policy and macro-prudential supervision has been refocused, relinquishing oversight of financial holding companies. The reform plan has also made major structural changes to streamline the organisation of the PBoC. The central bank will eliminate the nine large regional branches, modelled after the US Federal Reserve, and replace them with 31 provincial and five municipal branches. The new structure of the central bank is now divided into three tiers: headquarters, provincial/municipal branches in the cities specified in the plan and city-level branches.
The China Securities Regulatory Commission’s role as the capital market regulator has been strengthened, with the addition of enterprise bond issuance supervision to its responsibilities (formerly the responsibility of the National Development and Reform Commission of the State Council), thereby unifying supervision of both enterprise and corporate bond issuance.
In recent years, the Chinese government has emphasised the importance of growing the direct financing market for enterprises, and enterprise and corporate bonds are the financial instruments which the government wants to strengthen. Despite losing investor protection duties to the NAFR, the significance of CSRC in the financial ecosystem is paramount, especially in enterprise bond markets.
New governance model for sustainable growth
The reform of China’s financial regulatory regime aims to empower financial regulators (especially those at the central government level) to strengthen their respective supervision roles and increase efficiency. The institutional reform plan also covers more far-reaching measures to drive sustainable growth of the Chinese economy.
Attracting and retaining top-tier talent is a priority for both regulators and financial institutions in China. The NAFR and CSRC, previously public sector institutions, will become administrative agencies directly under the State Council, which might lead to lower compensation levels, potentially affecting talent attraction and retention.
The effectiveness of the plan hinges on the government’s ability to balance political and professional interests and retain financial regulatory talent. It is expected that the institutional reform plan will be further discussed at the sixth National Financial Work Conference in Beijing, set for October.
Going forward, all domestic and foreign financial institutions in China will face a comprehensive and increasingly stringent regulatory environment. It is essential for financial institutions to follow the lead of the regulatory regime reform, reshape and strengthen their corporate governance and be ready for the future.
Bo Chen is Deputy Managing Partner, Deloitte China Corporate Governance Centre.