Tighter central bank regulation helps stave off systemic monetary risks

The People’s Bank of China, China’s central bank, recently issued a draft guideline on financial holding companies to solicit public opinion. Financial analysts said the move marks a milestone for financial conglomerate supervision.

The number of financial groups and firms could reach almost 3,000 as the majority are from private sectors. During its initial stage, new business entities grew out of larger financial institutions to explore China’s emerging markets.

Banks have launched new affiliations to do business in the trust, securities, and insurance sectors. Significant market demands have enticed newcomers, internet company investors, central and provincial state-owned enterprises, and business magnates. However, rapid development hid potential manipulation and business malfunctions, thus increasing financial risks. With the backdrop of deleveraging, potential dangers in peer-to-peer wealth management projects, and non-performance financial institutions like Baoshang Bank and Bank of Jinzhou, along with other financial holding companies like Anbang Insurance were eliminated.

Financial conglomerates need regulation as licensed institutions. The new guideline could also be seen as a measure to curb market risks.

Before the draft regulation was released, five companies, including China Merchant Group, Ant Financial Services, and Suning Group, were placed under supervision on a trial basis. The new regulation would require business behavior compliance in capital management, cooperation governance, risk isolation, and related party transactions.

As estimated by professionals, more than 90 percent of all unqualified firms will retreat from this syndicated service sector, with the majority being private companies. Qualified companies could open businesses under financial groups or holdings. During China’s economic slowdown, the nation’s GDP growth rate hit 6.2 percent in the second quarter of the year, the lowest in two decades. During the first half of the year, bond defaults and amounts jumped three times year-on-year, indicating market clearance is far from over.

Financial deleveraging policies downgraded systemic financial risks only slightly while adjusting credit models for micro-activities. Economic vitality was also hit. The government wants to adjust to milder policies for financial supply-side reform to foster market rhythm and intensity.

As a result of today’s global uncertainty, the Chinese economy may endure more challenges in the economic and financial stabilization process.

The author is a senior economist at the Financial Group of SGCC and a senior visiting fellow of National Institute for Finance and Development in CASS. bizopinion@globaltimes.com.cn