In Sweeping $43 Trillion Overhaul, China Merges Banking And Insurance Regulators

While the total number of ministerial level and deputy ministerial level government institutions was reduced, this change is not of the same scale as the government restructuring in the late 1990s which massively reduced the number of government ministries, officials and functions.

Goldman notes that the merger of the banking and insurance regulators (CBRC and CIRC) was confirmed and has long been expected. So the real news is more about what did not happen: the CSRC did not merge with the CBRC and CIRC to form a “super regulator” as speculated by some media. Instead, the rationale is likely because the CSRC is regulating the market and the merged banking and insurance regulator will regulate institutions. Mergers of ministries are always difficult as it will imply fewer senior positions. Nevertheless this new regulatory body is more powerful than any of the regulators before, in our view. Besides the merger of banking and insurance regulators, drafting banking and insurance regulation is now part of PBOC's responsibilities, according to the plan.

The impact of this restructuring on the PBOC is mixed. On the one hand the central bank has been given more macro prudential responsibilities. But on the other hand, the increased influence is relative as the creation of a large regulator adds to a counterweight in the government.

The reduction of regulatory arbitrage opportunities is a new policy direction. Whether this is a positive for the long term development depends on how the government uses this power. If this is coupled with pro market reforms it will be a positive in our view. If it is coupled with conservative policies and less financial liberalization, it may lead to greater financial repression in our view.

The restructuring plan also streamlines responsibilities in other areas such as market supervision, environmental protection.

What is next? Here are some thoughts from Deutsche Bank:

  1. The key personnel of the new regulatory framework is likely to be determined soon. Reuters reported Liu He is likely to be Head of FSDC and Governor of PBOC in the same time.

  2. Local financial regulators will be empowered further.

  3. Regulators are likely to further hike market rates, issue/implement new regulations and crack down shadow banking, internet finance and financial holding companies.

Implications for the financial sector would be positive, with more coordinated actions, rising transparency and lower leverage. The change would benefit deposit-funded banks (big four, PSBC and CRCB), while wholesale-funded, shadow-banking-centric bans would suffer, resulting in a further slowdown in shadow banking credit creation.

Ultimately, this is what China's regulatory framework is expected to look like.

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