By Xie Yu, Selena Li and Carolina Mandl
HONG KONG/NEW YORK (Reuters) – A new Chinese financial watchdog will help bridge regulatory gaps but analysts and investors say the agency will consolidate power at the top and could introduce more state and party intervention.
In a major shake-up, China will set up the new regulatory body, the National Financial Regulatory Administration (NFRA), according to a proposal that the State Council, or cabinet, presented to parliament on Tuesday.
The watchdog, which will oversee all aspects of China’s $57 trillion financial sector apart from the securities market, should help reduce regulatory overlap especially at the level of local government, analysts say.
The creation of the NFRA “carries an intent to have better oversight of financial institutions and consumer protection, by … bringing all financial activities under supervision,” said Daniel Tu, founder of venture capital Active Creation Capital.
“However, one can interpret it as restructuring the party-state to align with Xi’s objectives.”
President Xi Jinping, who clinched a precedent-breaking third leadership term in October, last week renewed his call for ambitious reforms of Communist Party and state institutions, which analysts see as part of his effort to exert tighter control.
The reform also comes after unprecedented regulatory scrutiny of a string of private enterprises in the last couple of years by multiple watchdogs after years of laissez-faire regulatory approach.
Overall, the proposal is meant to “improve financial regulation coordination to enhance financial stability”, a key policy focus in the next few years, Goldman Sachs (NYSE:GS) said in a research note on Wednesday.
The new regulator will replace the banking and insurance sector watchdog and bring supervision of the industry into a body directly under the State Council, or cabinet.
There are also plans, sources have said, for the revival of another high-level financial watchdog which is expected to be directly under central party leadership.
It is not clear how that watchdog, being revived after two decades, will align with the NFRA.
That party-affiliated watchdog is expected to be revealed as part of the party’s institutional reform plan, which is due out shortly after the conclusion of the parliamentary session on Monday.
The reform plan and appointments of new leaders to key government institutions, including the NFRA, should offer more clues as to regulatory policies, Goldman Sachs said in its research note.
(Graphic: Jefferies China regulatory diagram, https://www.reuters.com/graphics/CHINA-PARLIAMENT/REGULATION/zgvobndmgpd/JefferiesDiagram.jpg)
In its reform proposals presented in parliament, the State Council said the changes were meant to “deepen reforming local financial regulatory systems” by “enhancing centralised management of financial affairs”.
Under the changes, the central bank will focus on conducting monetary policy and macro-prudential supervision, while the NFRA will focus on micro-level activities, analysts at CITIC Securities said in a research note.
Kevin Philip, partner at Bel Air Investment Advisors in Los Angeles, managing $9.5 billion in assets, said the overhaul was a step towards “centralisation” of regulations, and considered it reasonable from a debt control perspective.
Some investors, however, are concerned that the regulatory power reshuffle means tighter government control, which may bring more interference or crackdowns on financial activity, particularly in the private sector.
“My sense is that this could still be an issue of concern for investors, especially foreign investors,” said Tara Hariharan, head of global macro research at NWI Management, a New York-based hedge fund focused on emerging markets.
Comprehensive financial oversight could well benefit policy coordination and aid the world’s second-largest economy in supporting growth and credit creation while keeping asset bubbles at bay, she said.
“However, investors may fear such regulatory consolidation as risking further crackdowns on ‘disorderly expansion of capital’ of the sort that the property sector and the tech platforms have already faced,” she added.
($1 = 6.9730 Chinese yuan renminbi)