Exclusive Insight: All eyes on China's sweeping financial regulatory reform
China’s Leader, With Rare Bluntness, Blames U.S. Containment for Troubles; China Overhauls Financial Regulatory Regime; China’s Cities Struggle Under Trillions of Dollars of Debt
Welcome to today's issue of The China Brief, where we bring you the latest news and developments from China. In today's issue, we look at China's growing tension with the United States, its struggle with trillions of dollars of debt, and its overhauling of its financial regulatory regime. We also cover Germany's reported ban on Chinese telecoms operators from using certain components in 5G networks, Chinese companies turning to Switzerland to raise capital, and China's decision on whether or not to supply Russia with weapons in its conflict with Ukraine. Additionally, we explore China's lowest growth target in decades and what it signals for the country's future.
And here’s today’s exclusive insight:
Reform of China's Financial Regulatory Framework: What Problems Does It Solve?
In a previous article, I identified seven issues with China's financial system, including:
1 Inadequate inclusiveness, as state-owned banks dominate the financial system and serve primarily state-owned enterprises, making it difficult for small and medium-sized private enterprises to secure loans.
2 Multiple authorities. The central bank, banking and insurance regulatory commission, and Ministry of Finance can regulate and intervene in financial institutions.
3 Lack of supervision. Some businesses, particularly financial innovation businesses, are not subject to regulation.
4 Collusion. Due to the lack of checks and supervision on power, regulators and the regulated can easily collude.
5 Lack of an emergency mechanism. When financial risks arise, there is no specific department or mechanism to handle risks.
6 Lack of a framework for the highest echelon of power to provide unified leadership to financial regulatory departments.
7 Fiscal risks and financial risks are intertwined. Due to historical and institutional reasons, China's local governments have accumulated a significant amount of bank debt.
In the latest plan for the reform of China's State Council institutions, the country has restructured its financial regulatory framework to address the second, third, and fourth problems listed above. In the near future, the departments of the Central Committee of the Communist Party of China will also undertake institutional reforms to tackle the fifth, sixth, and seventh issues. Further information will be available when it is released.
The new regulatory framework is effective in resolving the issue of multiple authorities. Historically, the People's Bank of China had the authority to regulate financial institutions' micro-level operations, which overlapped with the China Banking and Insurance Regulatory Commission's responsibilities. In this round of institutional reform, the newly established State Administration for Market Regulation will take responsibility for financial regulation other than the securities industry. At the same time, the central bank will focus on macro-level aspects such as monetary policy formulation, liquidity, payment systems, macro-prudential supervision, and foreign exchange.
The new regulatory framework also addresses the issue of supervision gaps. The State Administration for Market Regulation will strengthen "penetration supervision" and "continuous supervision," ensuring no regulatory vacuums.
The future responsibilities of the China Securities Regulatory Commission will mainly include securities market and listed company supervision and corporate bond issuance review. Additionally, all future regulatory institutions will use administrative establishments, subjecting their staff to the unified management of national civil servants, disciplinary inspection, and supervision departments, increasing the cost of violations and crimes and potentially solving the issue of collusion.
It's important to note that this article only covers the government-level financial regulatory framework reform. The Communist Party of China Central Committee will also undertake relevant institutional reforms involving the financial regulatory framework. Once this institutional reform plan is released, readers will have a more comprehensive understanding of the new financial regulatory framework. Further analysis and interpretation will be provided at that time.
(The author of this article is Li Weijun, a special analysis expert for The China Brief.)
NYT: China’s Leader, With Rare Bluntness, Blames U.S. Containment for Troubles
China's President Xi Jinping has criticized what he called a U.S.-led campaign of “encirclement and suppression” and warned that it had brought unprecedented severe challenges to China’s development. The Chinese leader's direct approach signals a broader shift in Beijing's rhetoric and reflects how he is bracing for more confrontation and competition between the world's two largest economies. China's foreign minister, Qin Gang, also defended Beijing's right to respond, blaming the United States for escalating conflicts in Ukraine and called for a less confrontational stance towards China.
WSJ: China’s Foreign Minister Says Ties With U.S. Risk Going Off the Rails
China's Foreign Minister, Qin Gang, has warned that the U.S. strategy towards China risks plunging the countries into conflict. Speaking at a press conference on the sidelines of China's annual gathering of its National People's Congress, Qin accused the U.S. of engaging in "new McCarthyism" and praised China's ties with Russia. The comments came a day after Chinese leader Xi Jinping took direct aim at the U.S., rebuking Washington for pursuing “all-round containment, encirclement and suppression” of China.
WSJ: China’s Cities Struggle Under Trillions of Dollars of Debt
Local governments in China are struggling to cope with trillions of dollars of debt built up during the COVID-19 pandemic, which has resulted in a sharp drop in land sales and the cost of the zero-Covid campaign. Two-thirds of local governments are at risk of breaching unofficial debt thresholds, and about a third of major cities are struggling to pay just the interest on debt. Analysts predict that, although a financial crisis may not occur, growth will be impaired for years, resulting in reduced services, salary cuts, and fewer infrastructure investments. Some Chinese analysts believe Beijing is unwilling to make changes, such as implementing a property tax, to raise more funds.
Bloomberg: China Overhauls Financial Regulatory Regime to Control Risks; New agency to take oversight of all sectors except securities
China is setting up an enlarged national regulator to strengthen oversight of its $60tn financial system, according to a plan announced at the National People’s Congress on Tuesday. The new regulatory body will absorb the banking and insurance watchdog and oversee all financial sectors except securities, and will take over oversight of financial holding companies, such as Ant Group, from the central bank. The moves are part of a broader government overhaul by President Xi Jinping, and will give the Communist Party a firmer grip on the sector and centralise key policy decision-making. The China Banking and Insurance Regulatory Commission will cease to exist after the overhaul, while the China Securities Regulatory Commission will become a government agency directly under the State Council.
Bloomberg: China to Cut Number of Central Government Employees by 5%; Jobs to be redistributed to strategically important areas
China plans to cut the number of positions in central government departments by 5%, redistributing jobs in strategically important areas, according to a government reform plan announced at the National People’s Congress. The move is part of President Xi Jinping’s efforts to streamline the bureaucracy and make the government more efficient. China also announced plans to restructure its Ministry of Science and Technology to better allocate resources for self-reliance in science and technology and to strengthen oversight of its financial system by setting up an enlarged national regulator. The shake-up is the biggest since 1998.
Nikkei: Canadian official to examine Chinese election interference Trudeau will appoint special investigator to make public inquiry decision
Canadian Prime Minister Justin Trudeau has said he will appoint a special investigator to decide whether a public inquiry is needed into reports of Chinese interference in Canada's elections. Trudeau has also asked a Parliament national security committee to examine classified information on the matter. Last month, The Globe and Mail reported, citing unidentified intelligence sources, that China preferred Trudeau's Liberals to be reelected in the 2021 election and worked to defeat Conservative politicians considered unfriendly to Beijing. Trudeau said that the independent special rapporteur would recommend whether an inquiry, an investigation or a judicial review is appropriate.
Caixin: Hong Kong-Shanghai-Shenzhen connect lists add 1,000 stocks
The stock exchanges of Shanghai, Shenzhen, and Hong Kong have expanded their cross-border trading programs by over 1,000 stocks, with almost 40% added. This will bring the total of A-shares available to international investors to 3,623. Securities regulators in the Chinese mainland and in Hong Kong agreed in December to expand the scope of eligible shares in the stock connect programs. The southbound trading expansion will include stocks of foreign companies with primary listings in Hong Kong, such as L'Occitane, Samsonite, Yancoal Australia, and Cambodia's NagaCorp, that are constituents of the Hang Seng composite indexes or have a market cap of at least HK$5 billion ($637 million).
Reuters: China exports slump again as global demand falters; Imports also drop for Jan.-Feb. as purchases of parts and materials slow
China's exports and imports fell in January and February, reflecting weak foreign demand and backing the government's concern that a global slowdown will hamper the country's recovery from pandemic damage. Exports fell by 6.8% YoY in the period, while imports were down by 10.2%, greatly missing the poll estimate for a 5.5% drop. A plunge in China's imports of semiconductors showed a shrunken market for the consumer electronics exports. The data came as a result of worsening global demand for goods, given the export decline happened not only in China but also among other major Asian exporters such as South Korea and Vietnam.
Reuters: Germany set to ban China's Huawei, ZTE from parts of 5G networks
Germany is reportedly set to ban telecoms operators from using certain components made by Chinese companies Huawei and ZTE in 5G networks, in a move to address security concerns. The ban could include components already built into the networks, requiring operators to remove and replace them. The German government has not yet commented on the report. Only Britain and Sweden have so far banned Huawei and ZTE from supplying critical 5G network equipment. Critics of Huawei and ZTE say that their close links to Beijing's security services mean that embedding them in mobile networks could give Chinese spies access to essential infrastructure.
FT: Chinese companies choose Switzerland over US and UK to raise money overseas
Chinese companies are turning to Switzerland to raise capital after being discouraged from listing in the US and the UK due to geopolitical tensions and tougher audit standards. Nine Chinese companies raised $3.2bn by floating in Zurich last year, while just five raised $470m in New York, according to SIX. Swiss authorities have less demanding requirements for company audits, and dozens more Chinese companies are said to be considering the Stock Connect scheme that links the Shanghai and Shenzhen stock markets with the main market in Zurich. Companies can issue global depositary receipts under the scheme.
FT Op-ed: China has a fateful choice to make on Ukraine
China is faced with a difficult decision over whether or not to supply Russia with weapons, as the latter runs short of munitions in its conflict with Ukraine. If China decides to provide support to Russia, it would be seen as a sign that it sees increased rivalry with the US as unavoidable and perhaps even desirable. However, if it decides not to provide support to Russia, it would indicate that China still believes tensions with the US are manageable and globalization can be saved. Experts in Beijing understand the risks of providing Russia with munitions, but there are reasons why some officials might consider doing so, such as China's close relationship with Russia and the potential for a weakened Russia to isolate China further.
FT: China’s lowest growth target in decades signals era of caution
China's leaders have set a growth target of just 5% for 2023, the lowest in decades and trailing last year’s Covid-era figure of 5.5%, which it failed to reach. Despite recent high-frequency data showing a quick recovery in activity, other indicators point to deeper systemic challenges. Policymakers are less concerned about a high target than with the threat of another disappointing reading, given the rolling property crisis, falling exports as global interest rates rise, and the hangover from zero-Covid restrictions.
That’s it for today. Stay informed about the latest news, analysis, and policy briefs from across the globe related to China with The China Brief. Our team aggregates synthesizes and summarizes the most important information from various sources, including media outlets, think tanks, government agencies, and industry experts.
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