China

1
Chinas Unfinished Reform in Financial Regulation

• Jun Wang
• Workshop on Aligning Financial Regulatory
  Architecture with Country Needs
• New Delhi, India
• June 5-6, 2004

2
Current Regulatory Framework

• Specialized regulatory authorities for
• Banking
• Securities
• Insurance
• Pension
• Central bank responsible for overall financial
  stability

3
Tradition of Central Planning

• Mono-banking system
• Non-existence of securities and insurance
• Financial risks were minimum
• Absent need for financial regulation and
  supervision
• Banking network is present where government is
• Umbrella regulatory arrangement

4
Bank-based Financial System
Distribution of Chinas Financial Assets, March
2004
Data Source the Websites of CIRC, CBRC and CSRC
5
Distribution of Deposits and Loans of Banks, 2003
Deposits
Loans
6
A Path of Repeated Reorganization

• 1984
• PBC became central bank with its commercial
  banking functions spun off
• 1989
• PBC reorganization
• Insurance regulation spun off to CIRC
• 2003
• Banking regulation spun off to CBRC

7
PBC Reorganization in 1998

• 9 Regional Offices plus 2 Municipal Offices
• 21 Supervisory Offices
• 30 Provincial-level Sub-branches
• X number of Prefecture-level Sub-branches
• Y number of County-level Sub-branches

8
PBC Reorganization in 1998

• Reorganization plan was conceived behind closed
  doors
• Attention to organizational issues rather than
  functional effectiveness
• No strategy for implementation

9
Widely Viewed as a Failure

• Confusion and disarray within PBC, especially at
  the provincial level
• Civil service compensation scheme added to talent
  drain
• Embarked on a vicious circle of conspicuous,
  campaign-style supervision
• Failure resolution aggravated conflict of
  interest between monetary policy and banking
  supervision

10
What Also Triggered the Changes in 2003

• Internal pressures
• Emerging financial services integration and
  innovation
• Professionalizing regulation and supervision
• Restructuring state-owned banks to get the house
  in order
• Political dynamics and expected change of
  government

11
What also Triggered the Changes in 2003

• External pressure
• Rising competition anticipated after WTO
  accession
• Increasing scrutiny by international community
• Growing need to contribute to regional and
  international rule-setting in regulation

12
What Were the Alternatives

• keep banking supervision in the PBC
• Realigning regulatory and supervisory functions
  in various departments
• Or create a SAFE-type of organization
• unify regulation and supervision under one roof
• Merging all regulatory functions into one
• create a separate bank regulator

13
Why Separate Bank Regulator

• Banking was by far the dominant sector
• Securities and insurance regulation had just got
  on their feet
• Perceived cultural differences
• The issue had been whether to keep banking
  supervision in or outside the central bank

14
How It Was Implemented

• Supervisory departments and staff were carved out
  of the central bank and handed over to the CBRC
• Many new positions and promotions but little
  substantive changes introduced
• Separation from the central bank at the local
  level was a bumpy ride
• Legislation followed to validate the change

15
What Does CBRC Supervise

• Commercial banks
• State-owned
• Second-tier and third-tier
• Foreign banks
• Policy banks
• Rural credit cooperatives
• Urban credit cooperatives
• Asset management companies
• Postal savings
• Some NBFIs (TICs, FCs, LCs)

16
Changes Necessitated at the Central Bank

• Creation of Financial Stability Bureau
• Realignment of regional network
• Change in mindset to begin to focus on
  macroeconomic and monetary policy issues

17
Financial Stability Framework Yet To Be Built

• MOU among the CRCs
• Formal coordination mechanism still absent
  between the central bank and the CRCs
• Overlaps and gaps co-exist, especially in
  financial conglomerates

18
What Are the Lessons

• Organizational changes alone cannot achieve
  effective banking supervision
• Philosophical changes
• Objectives
• Independence, in relative terms
• Incentives
• Staffing and skills
• Do not embark on reorganization unless ready to
  accompany it with substance

19
What Are the Lessons

• Process of change is full of risks and needs
  careful management
• Time required at least 1-2 years (FSA, APRA,
  Korea)
• Goals and milestones needed to guide it
• Resources should be mobilized to fund the change