What Xi Jinping’s tighter regulatory grip on China means for business

With sweeping changes to financial and technology regulation, Chinese President Xi Jinping is preparing to bolster domestic financial stability while trying to keep up in an intense rivalry with the US over technology.

The changes, announced at this week’s annual gathering of the country’s Stamp Parliament, are major overhauls by the State Council, China’s cabinet and government ministries.

Underlying the moves is a desire by Xi and the party leadership to exercise tighter control over state levers as the Chinese president begins an unprecedented third five-year term, analysts said.

What changes are there in financial sector supervision?

One of the most important changes is the replacement of China’s banking regulator, the China Banking and Insurance Regulatory Commission, with a new agency to oversee the financial sector.

The securities market will continue to be managed by the market watchdog, the China Securities Regulatory Commission, but everything else will fall under the purview of a new national financial regulator.

The body will also handle some of the oversight functions of the People’s Bank of China, the central bank, including oversight of state-owned conglomerates like Citic Group and fintech companies like Alibaba’s Ant Group. She will also take over some consumer protection tasks from the CSRC.

The CSRC’s mandate will be expanded to include corporate bond issuance review, giving it more say in the local government bond market, an area that has come under increasing scrutiny due to its high levels of indebtedness.

The changes are a step toward a more international “twin peaks” model of financial regulation, with one agency responsible for market conduct and consumer protection and the other focusing on financial system stability and policies, analysts said.

Why now and what are the economic implications of the changes?

While financial regulation was once managed by a single department of the PBoC, as the economy has grown, so has the regulatory system.

Many of the numerous agencies at the national and local level have failed to keep up with new types of businesses and emerging risks, whether through consumer payment apps or peer-to-peer lending.

“The main goal is unification of the regulatory framework, because in the past many non-bank financial industries had developed very quickly,” said Shen Jianguang, chief economist at JD.com.

A strengthened central regulator is also likely to play a larger role in overseeing local financial activities.

“In the past, there was a lack of oversight,” said Zheng Zhigang, finance professor at Renmin University of China. He cited a scandal that sparked local bank runs last year as an example of the need for tighter regulation. “The establishment of the new institution clarifies the responsibility of the financial oversight system.”

This should also allow the central bank to focus on monetary policy and macroprudential oversight.

Zhang Ning, an economist at UBS, suggested that “among the changes, the government is trying to distinguish between so-called macro-prudential regulation and micro-regulation.” “The government’s focus is on improving efficiency and reducing major financial risks.”

Why is China overtaking tech regulation and how will it transform Chinese research?

Tech companies have been hit hard by Washington’s imposition of export controls that prevent US companies from selling advanced chip-making equipment to Chinese corporations.

In this regard, Beijing has tasked a new Communist Party Science Commission, reporting to Xi, with responsibility for catching up with the West in innovation and science. This will work alongside a revived Ministry of Science and Technology.

“In the face of fierce global competition in science and technology and external containment efforts, we must improve the leadership and management of science and technology,” said Xiao Jie, a senior official with the State Council, introducing the reforms on Tuesday.

The reorganization would centralize party control over the country’s tech development efforts and create “a new kind of nationwide system” to make breakthroughs, he said. The Ministry of Science and Technology will aim to set up national laboratories, oversee projects, facilitate technology transfer and nurture technicians, the State Council said.

“China is concerned about its technological future amid the intensified chip blockade by the US and its allies,” said Graham Webster, China expert at the Stanford Cyber ​​Policy Center.

“For years we’ve seen a bureaucratic emphasis in the online world, but that’s based on chips,” he said. “There is now a bureaucratic realignment to encourage basic research and deep industrial capabilities.”

China will also set up a national data administration to harness the country’s vast information resources, create a national big data plan, and advance the digitization of the economy and the state.

The office will be based in the country’s state planning agency and will handle some functions related to the use of data from China’s powerful internet regulator, which will remain the watchdog overseeing big tech companies.

Will there be further reforms?

With the parliamentary session running until next week, more changes could be added.

Analysts will follow the announcement of parallel Communist Party bodies to monitor the financial sector and other areas.

According to analysts, these will give Xi even more direct control over government agencies. The institutional reforms are “part of broader efforts to strengthen the party’s leadership in the country’s socialist modernization,” the party leadership said last week.

The heads of the various agencies will also be crucial, with the National People’s Congress expected to vote on the appointments this weekend.

Among the top candidates to head the new financial regulator is Yi Huiman, the respected current head of the CSRC, people familiar with the matter said.

Additional reporting by Xinning Liu in Beijing