First glance

China’s new regulator hints at a major clean-up of the world’s largest financial sector

Among several institutional changes, the most significant might be the creation of a new nationwide regulator to oversee China’s financial industry.

Publishing date
13 March 2023
 Chinese President Xi Jinping

China’s 2023 National People’s Congress, which concluded on 13 March, was mainly significant for its confirmation of Xi Jinping’s unprecedented third term as president, which comes on top of two other roles he was confirmed in at the Twentieth Party Congress in November 2022: Party Secretary and head of the People’s Liberation Army. Not even Chairman Mao managed to keep these three leading positions for three terms. 

In this context, it might have been easy to miss other announcements of centralisation of power in the economic and financial spheres. Among several institutional changes, the most significant might be the creation of a new nationwide regulator to oversee all parts of China’s financial industry. This new regulator will take over responsibility for financial consumer protection and day-to-day supervision of financial holding companies from the People’s Bank of China, and investor protection from the China Securities Regulatory Commission.

The announcement of this centralised agency deserves attention for a number of reasons. First, China’s financial sector is now the largest in the world, with $60 trillion in assets, equating to 340% of GDP. Chinese banks also top the list of the largest globally systemic financial institutions, which increasing interrelationships with the rest of the global financial system. Chinese banks, especially development banks, were lending abroad massively until recently, when they stopped lending, with major consequences for the Global South. In that context, any action that affects China’s financial sector is important for China and for the rest of the world.

Second, the concentration of regulatory and supervisory power in fewer hands comes with little clarity, so far, on reporting lines and the role of Xi Jinping in overseeing this regulator. The rumours are that the salaries of civil servants in existing regulatory agencies will be reduced. Meanwhile, a major restructuring of central government personnel is taking place, with an overall 5% cut. A plausible reason for cutting the salaries and number of civil servants is to create the necessary fiscal space to populate the new financial institution.

Creating a new institution at a time when the Chinese economy is struggling to recover from the scarring left by COVID-19 and zero-COVID-19 policies might seem like too much of a luxury. But this might not actually be the case in a particular circumstance of a potential financial crisis in China, which would need to be tackled swiftly and effectively. The international evidence shows that centralised regulatory and supervisory agencies tend to be created when systemic risk is high and a potential restructuring of the financial system is warranted. The question, therefore, is whether China finds itself in this situation today.

Three factors suggest it might. First, systemic risk stemming from a much more complex financial sector with very large off-balance-sheet positions remains pervasive, notwithstanding President Xi’s announcement in 2017 of a “crusade” against the shadow banking. In fact, since then, China’s overall debt has increased.

Second, the collapse of a number of real-estate developers, which started in the second half of 2021 and continued until very recently, has harmed financial institutions. The weakening of the sector is not fully over.

Finally, local governments have had to shoulder most of the expenses related to zero-COVID-19 policies, while seeing revenues plummet from their major income generator – land sales. By the third quarter of 2022, all provinces in China were running fiscal deficits and had to be supported by the central government.

Concentrating regulatory and supervisory powers in a small but agile and high-level agency with direct access to the State Council, and possibly also to Xi Jinping directly, should make coordination much easier and, most importantly, faster at times of potential financial distress. Another advantage of this agency could be that it is easier to link any potential decision to restructure a particular financial institution with the sources of funding to finance these actions. A good example of this was China’s restructuring of its largest banks in the early 2000s, for which foreign reserves were use as funding pool to recapitalise these banks.

The creation of this centralised regulatory and supervisory agency may be almost as important a piece of news as Xi Jinping’s third term, if it implies the Chinese government is getting ready for a major clean-up of its financial sector, which has ballooned in terms of size and influence on the rest of the world.


About the authors

  • Alicia García-Herrero

    Alicia García Herrero is a Senior fellow at Bruegel.

    She is the Chief Economist for Asia Pacific at French investment bank Natixis, based in Hong Kong and is an independent Board Member of AGEAS insurance group. Alicia also serves as a non-resident Senior fellow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology (HKUST). Finally, Alicia is a Member of the Council of the Focused Ultrasound Foundation (FUF), a Member of the Board of the Center for Asia-Pacific Resilience and Innovation (CAPRI), a member of the Council of Advisors on Economic Affairs to the Spanish Government, a member of the Advisory Board of the Berlin-based Mercator Institute for China Studies (MERICS) and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR).

    In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. As regards her academic career, Alicia has served as visiting Professor at John Hopkins University (SAIS program), China Europe International Business School (CEIBS) and Carlos III University. 

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate, Google Scholar, SSRN or REPEC). Alicia is very active in international media (such as BBC, Bloomberg, CNBC  and CNN) as well as social media (LinkedIn and Twitter). As a recognition of her thought leadership, Alicia was included in the TOP Voices in Economy and Finance by LinkedIn in 2017 and #6 Top Social Media leader by Refinitiv in 2020.

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Alessia Amighini, Alicia García-Herrero, Michal Krystyanczuk, Robin Schindowski and Jianwei Xu