New economic team, reg revamp bring in Xi's reform allies
The appointment of new individuals to China's economic team, combined with its biggest regulatory revamp in over a decade, indicates that market reforms are likely to continue, albeit at a relatively gentle pace, economists, fund managers and political analysts told AsianInvestor.
A series of top political and economic appointments announced on Monday indicated that key Xi allies had been handed plum positions.
The relatively surprising appointment was however that of Yi Gang, as the new head of the People’s Bank of China (PBOC), on Monday. Yi, a US-educated economist, is a vice governor of the central bank and a protégé of outgoing chief of Zhou Xiaochuan, indicating a likely continuity in PBOC policies.
Some close observers of Chinese politics had expected Zhou to be succeeded by Liu He, widely seen as Xi’s top economic adviser and a textbook bureaucrat. Instead, he was confirmed on Monday (March 19) as one of the four vice-premiers by China’s parliament and handed a powerful portfolio overseeing economic policies and financial issues.
Economists say the appointment effectively makes Liu China's economic tsar, especially as he is also expected to lead the recently established Financial Stability and Development Committee (FSDC), which will oversee policy co-ordination between the central bank and the banking-insurance and securities regulators.
“That committee is set to become the most important financial regulatory oversight committee in the future," predicted Hao Zhou, senior emerging markets economist at Commerzbank. And Liu looks set to become the most powerful economic and financial official in China.
The appointment of trusted allies in key economic positions reinforces Xi’s consolidation of power and should ensure that the government's reform momentum does not stall, say investors.
On the downside, there is a higher degree of key man risk now that Xi can effectively remain in power as president indefinitely, AsianInvestor has reported.
CONSOLIDATION COMPLETE?
The economic appointments come on the heels of a wide-ranging regulatory revamp, spearheaded by the merging of the banking and insurance regulators into a combined entity.
The reorganisation leaves China with three central financial regulators—the central bank, the combined banking-insurance regulator and the China Securities Regulatory Commission (CSRC).
The PBOC is set to play a more powerful role under the new regulatory framework. It was previously an adviser on monetary policy, but will be in charge of drafting regulations on banking and insurance as well as prudential norms. The new regulator, meanwhile, will oversee daily operations of these institutions.
“The PBOC will be in charge of overall macro management of financial regulation, while the combined banking and insurance regulator will be in charge of execution,” added CommerzBank’s Zhou.
The institutional changes suggest China is gravitating towards a ‘twin peaks’ form of regulatory set-up, according to Kevin Nixon, global and Asia-Pacific lead at the Deloitte Centre for Regulatory Strategy.
A twin peaks approach refers to a set-up where there is a separation of regulatory functions between two regulators. One performs the 'safety and soundness' supervision of the financial system while the other focuses on conduct-of-business regulations.
Australia and the UK are two examples of where this sort of regulatory model exists, Australia-based Nixon told AsianInvestor.
MORE EFFICIENT FRAMEWORK
Fund managers believe the changes should make China's regulatory framework more efficient, and allow the new regulator to shift from being primarily defensive to pre-emptive in its policy goals.
"A more centralised regulatory body will be able to provide a higher degree of system oversight, and will do away with some of the regulatory politics which could at points interfere with practical solutions,” Charles Sunnucks, assistant fund manager, emerging markets at Jupiter Asset Management, told AsianInvestor.
The new regulator may also better manage China's alarming debt levels, which pose a major source of financial risk. And they look set to last; CommerzBank's Zhou predicted that these new institutional changes could remain in place for at least a decade.
The last time China undertook such institutional changes on such a large scale was between 2002 and 2004, he added.
The China Bank Regulatory Commission was created in 2003, while the CSRC, originally created in 1992, acquired major responsibility for all securities regulation in 2004. The State Asset Supervisory and Administration Commission was also established in 2003 to exercise the state’s ownership in state-owned enterprise.
Irrespective of the kind of regulatory bodies established, Jupiter AM’s Sunnucks noted that investors will be most focused on whether the personnel and organisational changes enable regulatory policies to evolve with economic changes.
The revamp keeps the CSRC untouched, and leaves the door open for some regulatory arbitrage to continue, AsianInvestor has reported.
“The CSRC has the very important job of attracting foreign money into the capital markets and also to attract the offshore listed companies to list onshore. That is why they continue to retain prominence in the new structure,” said Commerzbank’s Zhou.
It's an important role at a time of great opportunity. AsianInvestor has reported that China could receive $1 trillion in portfolio flows from global institutional investors over the next 10 years.
TIGHT STATE GRIP
Another key message from recent developments is that the state seems unlikely to loosen its grip over the economy.
In fact, some experts also see the fact that the Xi administration has not created one unified financial regulator points to a desire to keep too much power from congregating in one institution.
“The beauty of this more fragmented model for Xi is that he is still the final overseer through the oversight commission he created in June,” Alicia Garcia Herrero, chief Asia Pacific economist for Natixis, told AsianInvestor, referring to the NSDC. “He is not even willing to transfer regulatory power to a single institution.”
Not everyone agrees with that assessment however: “I don’t know if it makes sense to have a super regulator as there are many aspects of the financial economy to regulate,” Sara Hsu, assistant professor at the State University of New York, told AsianInvestor, adding that the idea of a super regulator has been discussed for years in China with no action.