Reform enhances security of financial system

Financial risks, in different forms, are frequently emerging in many countries and regions, posing a threat to the global financial system. The instability of the global financial markets poses a risk to global development and is obstructing economic recovery. The 2008 global financial crisis revealed the inadequacies in the financial regulatory system, which led to economic recession.

As economic globalization faces headwinds, frequent financial risks occur, destabilizing the global financial system. Issues such as the United Kingdom’s pension crisis intensifying to cause turbulence in the bond and pound sterling market, ongoing crises in the banking sectors of the European Union and the United States, and recurring concerns over Washington’s debt default are eroding the US’ credit and increasing financial market uncertainties.

In its “Global Financial Stability Report” in April, the International Monetary Fund warned that as the resilience of the global financial system is being tested by higher inflation and fragmentation risks, financial stability risks are rapidly increasing. The global financial system is an interdependent system, with the financial stability of each country interconnected. Therefore, the stability of China’s financial system is important for the stability of the global financial system.

The stability of China’s financial market is crucial for the smooth operation of global trade. China is the world’s second-largest economy, a vital engine for global economic recovery, the largest trading nation, and a key link in global supply chains. So the stability of China’s financial system is intertwined with the smooth operation of global trade and supply chains. If issues arise in China’s financial markets, it will have an impact on global commodity prices, international payments and the stability of global supply chains.

The stability of China’s financial environment is a prerequisite for enhancing the quality of foreign investments. While China is promoting the opening-up and internationalization of its financial market, attracting significant foreign investment and capital, it is also advancing the Belt and Road Initiative, and promoting international trade and investment, which have far-reaching effects on global financial markets.

The stability of China’s financial environment is critical to deepening global cooperation and coordination. China plays a significant role in international financial cooperation, taking active part in international financial organizations and multilateral financial cooperation mechanisms.

The reform of China’s regulatory system is facilitating the high-quality development of China’s financial system. The reform, guided by the directives of the 20th National Congress of the Communist Party of China, involves optimizing and adjusting the institutional responsibilities in the financial regulatory field.

It encompasses a series of measures taken to help establish and enhance a modern financial regulatory and financial stability assurance system. This reform not only underscores the importance of strengthening the centralized and unified leadership of the Party in financial work but also reflects the inherent need for improving the modern financial regulatory system. It is needed to safeguard financial security and contribute to the new pattern of high-quality economic development.

First, the reform is about building a regulatory firewall, strengthening supervision, and protecting financial consumers. Following the recent adjustments, a regulatory framework has been established which uses macro-prudential regulation to maintain financial stability and prevent systemic risks, while market supervision is used to regulate the actions of financial institutions and better protect financial consumers.

For instance, the inaugural meeting of the China Banking and Insurance Regulatory Commission focused on the insurance industry’s solvency. This involved enhancing the functional oversight and in-depth supervision of insurance companies and promoting the high-quality development of the insurance industry.

Second, the reform has designated the newly established China Banking and Insurance Regulatory Commission to oversee the protection of financial consumer rights and assume the regulatory responsibilities for financial holding companies and other financial groups. As part of the overall financial reform, the local financial regulatory system reform will be deepened, allowing financial regulatory agencies established by local governments to play their supervisory roles, ensuring that responsibilities are well-defined and financial regulation is functioning well.

Third, the reform involves building a modern central banking system and improving the modern financial regulatory framework, in order to reduce policy conflicts between multiple objectives. After the reform, the central bank will focus on monetary policy and macro-prudential functions, while the CBIRC will oversee micro-prudential regulation and supervision. In addition, the China Securities Regulatory Commission will shoulder more responsibilities as far as regulating the capital market is concerned. By differentiating between macroeconomic control and financial regulation, each entity can perform its respective functions, thus minimizing policy conflicts between multiple objectives.

And fourth, the reform is aimed at streamlining the relationship between central and local authorities in financial regulation, while facilitating the establishment of a local financial regulatory system primarily led by the local branches of the central financial regulatory department, optimizing resource allocation to prevent excessive local government intervention in local financial institutions. As such, it will strengthen the central government’s ability to prevent and resolve risks, better combat financial crimes, and reconfigure and bolster regulatory resources to address issues such as the lack of local regulatory tools and a shortage of skilled professionals.

China’s financial regulatory reform has drawn global attention, but it has also been the subject of Western political posturing. For instance, a US legislator has proposed the China Financial Threat Mitigation Act of 2023, which calls for assessing the impact of China’s financial sector reform on the US’ and the global financial systems.

Under the pretext of “de-risking”, this bill essentially seeks to “de-Sinicize” the global financial system, ignoring the objective economic realities. This approach not only goes against the pressing need of global coordination and cooperation in today’s increasingly complex and interconnected world of financial and economic affairs, including the involvement of China, but also overlooks the fact that a robust Chinese financial regulatory system can serve as a stabilizing force for the global economy.

Minimizing conflicts between multiple policy objectives is an effective way of preventing systemic financial risks and aligning with the goals of real economic development. This provides valuable insights for policy arrangements for all countries. During the COVID-19 pandemic, the US Federal Reserve’s “helicopter money” approach was a major contributor to high inflation. Later, ignoring the reality of the situation, the Fed continued to raise interest rates, causing a liquidity crisis in EU and US banks and exacerbating financial instability. This shows that policy arrangements which lack a systemic perspective can lead to political dysfunction.

Furthermore, it is essential to strengthen investor protection systems and improve the capital market’s financing functions to create healthier “safe havens” for investors. The CBIRC, which now oversees financial consumer rights protection, including investor protection, will raise the standards of behavior of market players, reducing market manipulation and misconduct and preventing the emergence of “congressional stock gods”. And by widening the scope of direct financing supporting high-quality development, China’s capital market will become more robust and stable, contributing to increased efficiency and stability of global financial markets.

The improvement of a modern financial regulatory system paves the way for further progress in global cooperation and coordination. The new regulatory framework is better suited to dealing with the evolving financial landscape, and China will establish multi-level and wide-ranging cooperation mechanisms with financial regulatory bodies in other countries to jointly address cross-border financial crimes and prevent financial risks. China has been carrying out continuous reform and improving its financial regulatory model according to its own needs, offering valuable insights to many developing countries striving to improve their own financial regulatory systems.

The author is the secretary of the Party Committee of School of Finance of Central University of Finance and Economics.

The views don’t necessarily represent those of China Daily.