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April 24, 2014

China State Council Launched New Financial Coordination Mechanism

On August 20, 2013, the China State Council approved the application from the People’s Bank of China (Central Bank) to launch a new financial coordination mechanism led by the Central Bank to reinforce regulation in the financial sector, but without altering the existing functions of industry regulators.

The new system will be led by the central bank and will involve the chairmen of the CBRC (China Banking Regulatory Commission), CSRC (China Securities Regulatory Commission), CIRC (China Insurance Regulatory Commission) and SAFE (State Administration of Foreign Exchange). If necessary, the NDRC (National Development and Reform Commission), the country's top economic planner, and the MOFCOM (Ministry of Finance and Commerce) will also be invited to take part in the meetings.

The State Council said it approved the commencement of the joint conference mechanism to coordinate monetary and financial supervisory policies, promote financial stability and prevent systemic financial risks, according to a statement published on the central government website on August 20.

This is not the first time that the State Council has launched such mechanism to reinforce financial regulations. In 2000 and 2008, the State Council made active attempt to coordinate financial supervision, due to some complicated topics which can’t be solved by a single regulator, such as the financing of a security company, insurance funds entering the securities market, and trust and investment companies engaged in the securities business.

The separate supervision mechanism China launches in its financial regulatory system divides the financial sector artificially, which may sometimes lead to undesirable consequences. The cross-sector business of financial institutions, are too complicated and professional to be supervised by one regulator. The increasing interconnection between the financial sector and the real economy also increases the need to create a supervisory coordination group to prevent financial and economic risks. The separate supervision mechanism lacks of flexibility, causes regulatory overlap and vacuum, and fails to timely react to financial emergencies.

The financial coordination group set up in 2000 and 2008 intended to settle the problems of the cross-sector business, but both of the attempts ended up with insignificant effects, because neither of the groups took leadership or worked on a specific priority. The interdepartmental joint conference held under such mechanism deadlocked.

This time the State Council reopened the mechanism to boost coordination between financial regulators, but made some significant changes. First, the State Council chose the Central Bank to be the leader and convener. Second, the new body is designed to coordinate monetary and financial supervisory policies as well as supervise legal policies related to financial sector. It will focus on prompting overall financial stability and preventing regional and systemic risks. Third, the new body is more of a coordinating scheme rather than a decision-making agent, the group will meet on a regular basis but won’t supplant the current system of financial regulation, and won’t replace or weaken the current division of responsibilities of the relevant agencies.

Some analysts believe the impact of the new financial regulatory system remains to be seen. Although the interdepartmental joint meeting mechanism is launched between the regulators, there are still no legislative procedures or implementing rules, which means that the purely institutional arrangements may play a limited role.

"There have been debates within China about whether to set up a super-ministry or a single regulatory body for financial regulation to reduce bureaucratic hurdles. As the market is not yet mature enough in China, the current joint conference mechanism is more realistic," Song Guoliang, a finance professor at the Beijing-based University of International Business and Economics.

It is difficult to draw conclusions on the effect of the new mechanism at the moment, but it is undeniable that the mechanism is a transitional arrangement toward a more efficient financial system, and it is flexible and will help accelerate financial reforms in the country.

Xiao Xu contributed to this article.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

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