China plans to revamp financial and technological oversight

BEIJING – China plans to overhaul its financial regulatory system by merging aspects of the central bank and securities regulator into a new entity, while getting rid of the existing banking regulator.

This was according to a draft released late Tuesday as part of China’s ongoing annual parliamentary meeting, known as the “Two Sessions”. Delegates are due to approve the final version on Friday.

The changes follow similar adjustments to China’s government structure that have occurred roughly every five years over the past few decades. The moves also come as Beijing has increased regulation over parts of the economy that have developed rapidly, with little oversight.

The latest plan calls for the creation of a national financial regulatory department to replace the China Banking and Insurance Regulatory Commission and expand its role.

The new regulator was appointed to oversee most of the financial industry – with the exception of the securities industry. The draft said responsibilities include protecting financial consumers, strengthening risk management and dealing with violations of the law.

The China Securities Regulatory Commission’s investor protection responsibilities are set to shift to the new financial regulator.

The People’s Bank of China’s responsibilities for protecting financial consumers and regulating financial holding companies and other groups are also set to shift to the new official.

“China’s regulatory reforms will enhance regulators’ ability to create and enforce a unified regulatory framework, as well as reduce the space for regulatory arbitrage,” David Yen, vice president, chief credit officer at Moody’s Investors Service, said in a note.

“In addition, the reform goals are aimed at strengthening the central government’s control over financial regulations at the local government level, which will improve regulatory enforcement and reduce the influence of local governments on financial institutions,” Yin said.

Separately, the project proposed that the People’s Bank of China (PBoC) consolidate its domestic subsidiaries with greater central control, and change the designation of the securities regulator within the State Council from one Similar to the Development Research Center in the Council of the Customs Authority.

The Standardized Financial Regulatory Authority of China [a] Winston Ma, associate professor of law at New York University, said:

The proposed changes also create a new national data office to coordinate the creation of a data system for the country and promote the development of the so-called digital economy, which includes Internet-based services.

The proposal didn’t go into many details, but it did indicate that the new office would take over some of the responsibilities of the cybersecurity regulator.

Ma said he expects the new regulators to develop new approval processes for data-intensive internet companies that want to go public overseas.

The National Data Office is set to operate under the National Development and Reform Commission, which is the Economic Planning Department of the State Council – the highest executive body of the Chinese government.

The proposed changes to the State Council come at a time when the ruling Communist Party of China is expected to dramatically increase its direct control over the government.

Party leaders already hold top government positions. For example, Xi Jinping is the party’s general secretary and president of the People’s Republic of China.

Xi is set to formally gain an unprecedented third term as president on Friday.

Over the ten years of his first and second terms, Xi has pushed for the country’s unification under the Chinese Communist Party and “Xi Jinping Thought”.

More changes to increase the party’s control over the Chinese government are expected to be unveiled this month. The draft changes to the State Council’s structure cited a document — literally translated from the Chinese text as “State Plan for Party Institutional Reform” — approved last week at a regular meeting of the CPC Central Committee.

State Councilor and General Secretary of the State Council Xiao Ji said in a supplementary document explaining the proposed structural changes. This is according to CNBC’s translation of the Chinese text.

Xiao said the changes “establish the Central Committee for Science and Technology,” whose responsibilities are borne by the restructured Ministry of Science and Technology.

A draft restructuring of the State Council released on Tuesday has led to plans to reform the Ministry of Science and Technology, to strengthen its work in areas such as research and building national laboratories.

Xiao said China should work faster to achieve self-reliance in technology “in the face of fierce international scientific and technological competition and external containment and oppression.”

The Biden administration has increased restrictions on the ability of Chinese companies to obtain critical technology for the use and development of cutting-edge semiconductors.

In the supplementary document, Xiao said the responsibilities of the new Ministry of Science and Technology include the allocation and supervision of resources, while the supervision of agricultural science and biotechnology is set to be transferred to other ministries.

The document said high-tech development and industrialization plans fall under the supervision of the Ministry of Industry and Information Technology.

Citi analysts pointed out that the proposed changes in the structure of the State Council also called for the separation of ownership and operation of state-owned enterprises overseen by the central government’s financial department.

They said they see the move as increasing the level playing field between state-owned and non-state-owned companies.