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2009-04-02 | All chapters

China needs a single regulator
EuroMoney, 1st April 2009

If China’s capital markets are to mobilize funds a simpler, more coordinated regulatory system is imperative. Chinese bank executives, government officials and regulators observing the meltdown of the western financial system might be forgiven for regarding with bemusement delegates from that system who advise them on how China’s financial markets should be run. Although executives such as Zhu Min from Bank of China speak with sincerity of the lessons they have learnt from western financial institutions and of the sound advice they have received from their foreign stakeholders, there is now a feeling when talking to bankers in Beijing that they are in a stronger position than their international peers.

Foreign banks and lobbyists offering advice on the reform of Chinese markets might also be expected to have their own interests at heart. However, despite this and the reduced status of western financial markets, China might benefit from some of the advice that is being offered as its developing capital markets gear up to the challenge of supporting Chinese companies in a slowdown.

Chief among the banking recommendations of the European Business in China Position Paper (click here to download the Position Paper 2008/2009), issued by the European Chamber, is that China should establish a single body that can coordinate the activities of the country’s numerous regulatory authorities. The SEC in the US and the Financial Services Authority in the UK would be the closest equivalents of the proposed new regulatory overseer, and neither institution has emerged blameless from the crisis. Yet the proliferation of regulators in China and the lack of coordination between them can lead to inefficiencies in the markets, especially in cross-industry matters, and might help to foster the kinds of problems that are bringing western markets so low.

At present, each industry in China has its own regulator: CIRC for insurance, CSRC for securities, SAFE for foreign exchange and so on. The People’s Bank of China, which sets interest rates, is also involved. The existence of these separate agencies is not the problem, say bankers in China (both foreign and Chinese): each has its role, as the securities agencies ensure transparency, the bank regulators protect the interests of depositors and so on. The issue is that a lack of coordination between them and the lack of a central agency that can issue reporting requests leads to duplication of work, slow approval times and a lack of oversight of the whole rather than the individual parts.

The issue is pressing because China’s capital markets have a vital role to fill: the country’s high rate of deposits is an untapped resource that will be needed as the economic slowdown puts pressure on companies to raise capital. Since the banks are under pressure to lend huge amounts to state infrastructure projects, private companies will not be able to rely as much as they have on the loan market that has traditionally accounted for something like 90% of their funding.

Much progress has been made in developing a corporate bond market but as that market becomes more sophisticated and interconnected with other markets so the need for a single regulator with oversight of the whole increases. There might be officials within the government and the central bank who possess that overview but the establishment of a formal body that can issue directives and receive and distribute reports might prove useful as more sophisticated tools are added to the system. The present crisis has proved decisively that a problem in one market (defined as an asset class and/or a geographical area) can have grave repercussions in others. The need to make oversight of the whole system as well as its parts as easy, transparent and effective as possible has never been more apparent.

Source:http://www.euromoney.com/Article/2172479/CurrentIssue/71519/China-needs-a-single-regulator.html