July 23, 2017

New Chinese Agency to Increase Financial Coordination

HONG KONG — The Chinese authorities said Tuesday that they would set up a group to coordinate financial regulation, in an apparent attempt to reduce risk and wean the economy off of easy credit and steer it toward slower, more sustainable expansion.

The new agency will, among other things, coordinate monetary policy and financial regulatory policies, help regulate financial products where jurisdiction overlaps, and coordinate information-sharing and statistics, an announcement on the Chinese government’s Web site said.

The entity will be led by the central bank and will include representatives from banking, stock market and insurance regulators, as well as the State Administration of Foreign Exchange.

Described in a Xinhua report as an “interdepartmental joint conference system for financial regulation,” the body appears to lack real enforcement or policy-making powers, which will remain with a host of other agencies in the financial sector. The group will “not alter the current system of financial regulation, and will not replace or weaken the current division of responsibilities of the relevant agencies,” the government announcement said.

The new arrangement appears to be “more of a coordinating scheme rather than a decision-making agent,” Zhu Haibin, chief China economist at JPMorgan in Hong Kong, said in an e-mail. “However, given the member composition, it will have a very important advisory role on financial regulation.”

The plans for better coordination also highlight Beijing’s acute awareness of the need to contain the risks that have built up within the country’s financial system amid a lending splurge that followed the global financial crisis in 2008.

At the time, the authorities in Beijing announced a stimulus package worth 4 trillion renminbi, or $654 billion at current exchange rates, and instructed banks to lend freely. Those efforts helped the Chinese economy bounce back quickly from the global downturn.

But the availability of cheap cash also led to a sharp increase in debt and in credit-funded projects undertaken with little regard to their ability to pay off the loans.

More recently, a sharp increase in so-called shadow banking — activities outside the formal banking sector that often entail riskier, less regulated lending — has further fanned concerns about credit quality.

The government leadership that took the helm in Beijing in March has been fairly outspoken about potential financial risks and has sought to rein in shadow banking activities. A cash crunch engineered by the central bank in June, for example, was widely seen as an effort to prompt banks to adopt a more prudent approach to lending.

But that episode also caused a period of market nervousness and concerns about the effect that more restrictive lending would have on economic activity. A report from a major government research body warning of risks to the financial system from poor coordination appeared to show that Beijing was eager to minimize disruption and exert more control over the shadow banking system.

“During the course of withdrawing stimulus policies, the major tightening of monetary policy and regulatory policies has lacked effective coordination,” said the report from the State Council Development Research Center, which advises the central government. It was published in the China Economic Times on Tuesday.

“This has had a massive impact on the entire financial system, especially the banking system,” the report said.

The center’s researchers said the financial tightening policies had successfully prevented excessively fast growth and a rebound in inflation but had also created risks of their own by encouraging the growth of financing activities outside the regulated system and by encouraging banks to rapidly expand new products off of their usual balance sheets.

“Lack of unity in regulatory policies and the lagging of development of the related legal framework has increased the difficulty of defusing risks from the shadow banking sector,” it said.

Those failings have allowed banks to get around regulators by, for example, using investment funds and other entities, the report said.

“The even deeper reason why regulatory policies have been so disparate and lacked unity is that reform of our country’s current financial legal system lacks so badly behind,” it added. “This is also at present the biggest difficulty we face in establishing effective mechanisms to isolate risks and defuse the risks in shadow banking.”

Article source: http://www.nytimes.com/2013/08/21/business/global/chinese-agency-to-increase-financial-coordination.html?partner=rss&emc=rss