China to Strengthen Financial Oversight

By Ouyang Xiaohong, Tian Yun
Published: 2010-05-14

Market, page 17, Issue 466, May 4
Translated by Tang Xiangyang
Original article:

China is planning to establish a Financial Supervision Coordination Commission (FSCC) to monitor large financial players who are involved in the securities, insurance and banking sectors.

This new oversight mechanism will be directly under the State Council and the China Banking Regulatory Commission (CBRC). The China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC) will contribute to the new mechanism.

The FSCC will be an actual oversight mechanism, separate from the former "Joint Conference on Financial Supervision" whose coordination of the three oversight bodies has proven ineffective.

Methods of Reasoning

A source told an EO reporter that the current project to establish the FSCC was only transitional since the entire financial system would be reshaped after its implementation.

According to a source close to the policy-makers, a mature version of this plan will not come about quickly because it involves the alteration of numerous organizations, which will inevitably bring changes to China's society; therefore the plan is being developed gradually. For example, the re-positioning of the People's Bank of China and how to partition and shift the responsibilities of the CSRC, CBRC and CIRC have yet to be settled. He said the project may not be implemented until the end of the year. The CSRC, CBRC and CIRC have set up special groups to research how to coordinate a supervision mechanism with each other.

Another source close to the decision-makers said it has been decided that an official at State Council level would lead the FSCC, though it was not clear whether there would be three vice-chairman or just one. If there are three, each of them will be selected from the CSRC, CBRC and CIRC respectively; if there is one, he or she could be directly appointed by the three bodies or by the State Council.

"One is better than three in making the FSCC a more practical mechanism," the source said.

Cheng Siwei, vice chairman of the Standing Committee of the NPC once said in 2006, "a financial oversight mechanism would not be effective unless it was under the leadership of the vice premier."

Need for a New System

Many financial giants, such as China Ping An Group and China Ever-bright Group, have expanded their business to various fields including insurance, securities and banking, and need to be jointly-supervised. Currently, financial giants with multiple businesses are monitored by the oversight body in charge of their parent companies.

Lu Hongjun, president of the Shanghai Institute of International Finance, said the breakout of the financial crisis had exposed the deficiency of having separate mechanisms overseeing the financial sector.

In the past, it was the State Council that coordinated the three oversight mechanisms of China's financial system. For example, when the stock index futures began trading, the CSRC who is in charge of the futures market and the CBRC who is the regulatory body of banks, had different ideas about how banks would participate in the stock index futures market and sought coordination from the State Council.

Although there has been an increasing demand for a national oversight mechanism of financial companies, one has yet to emerge.

In 2008, the People's Bank of China tried to monitor the comprehensive management and business innovation of financial institutions, but failed.

In 2003, the mechanism of "Joint Conference on Financial Supervision" was founded but it has been ineffective because no one takes its authority seriously.

National Financial Working Conference

The National Financial Working Conference will be held in the second half of 2010. In the past, this meeting was held once every five years, but the most recent meeting was held only three years ago, an indication of the increasing development speed of China's financial industry.

Topics such as creating a comprehensive system of supervision, how to regulate the state-owned banking giants, increasing financial security, international supervision and systemic risk oversight will be discussed in the meeting, with comprehensive supervision being the dominant topic.

The coordination of financial sector supervision has become more and more common. High-level executives of state-owned insurance companies are not assigned by the CIRC; the CIRC only holds the right to approve the qualification of the nominee. Additionally, the China Export and Credit Insurance Corporation is under the coordination of the Ministry of Commerce, the Ministry of Finance and the CIRC.

Due to the increasing mixture of business types in the financial industry, the number of conflicts brought about by oversight mechanism separation has been growing. The Fourth National Financial Working Conference will be dominated by discussions about establishing a mechanism to coordinate financial supervision: the Financial Supervision Coordination Commission.

This article was edited by Rose Scobie