What Xi Jinping’s tighter regulatory grip on China means for business

With sweeping changes to financial and tech regulation, Chinese president Xi Jinping is preparing to shore up financial stability at home while trying to keep up in an intense rivalry with the US over technology.

The changes, revealed this week at the annual gathering of the country’s rubber-stamp parliament, are big overhauls of the State Council, China’s cabinet, and government ministries.

Underlying the moves is a desire by Xi and the party’s leadership to exercise tighter control over the levers of the state, according to analysts, as the Chinese president embarks on an unprecedented third five-year term.

What changes are being made to financial sector supervision?

One of the most significant changes is the replacement of China’s banking watchdog, the China Banking and Insurance Regulatory Commission, with a new agency to oversee the financial sector.

The securities market will be handled as before by the markets supervisor, the China Securities Regulatory Commission, but everything else will fall under the remit of a new national financial regulatory administration.

The body will also take over some of the supervisory functions of the People’s Bank of China, the central bank, including oversight of state-owned conglomerates such as Citic Group and fintech companies such as Alibaba’s Ant Group. It will also take on some consumer protection work from the CSRC.

The CSRC’s mandate will be widened to include the review of corporate bond issuance, giving it more say over the market in bonds issued by local governments, an area that has attracted increased scrutiny given their high indebtedness.

The changes were a step towards a more international “twin peaks” model of financial regulation, with one agency covering market conduct and consumer protection and the other focused on financial system stability and policy, analysts said.

Why now and what will be the economic impact of the changes?

While financial regulation was once managed out of a single department in the PBoC, as the economy has grown, so has the regulatory system.

Many of the numerous agencies at the national and local level have failed to keep up with new types of businesses and emerging risks, whether from consumer payment apps or peer-to-peer lending.

“The main aim is to unify the regulatory framework because in the past, a lot of non-banking financial industries had developed very fast,” said Shen Jianguang, chief economist at JD.com.

A beefed-up central regulatory agency is also likely to play a bigger role in supervising local financial activities.

“In the past, there was a lack of supervision,” said Zheng Zhigang, finance professor at the Renmin University of China. He pointed to a scandal that sparked local bank runs last year as an example of the need for tighter regulation. “Establishing the new institution clarifies the responsibility of the financial supervision system.”

This should also free up the central bank to focus on monetary policymaking and macroprudential supervision.

Zhang Ning, an economist at UBS, suggested that “the government is trying to differentiate between so-called macroprudential regulation versus micro-regulations” as part of the changes. “The government’s focus is to improve efficiency and reduce big financial risks.”

Why is China overhauling tech regulation and how will it reshape Chinese research?

Tech companies have been hit hard by Washington’s imposition of export controls barring US companies from selling advanced chipmaking equipment to Chinese groups.

In this context, Beijing has charged a new Communist party science commission, answering to Xi, with the responsibility to catch up with the west in innovation and science. This will work alongside a reinvigorated Ministry of Science and Technology.

“Facing tough science and tech competition globally and external containment efforts, we must straighten out leadership and management of science and technology,” said Xiao Jie, a high-ranking State Council official, when introducing the reforms on Tuesday.

The restructuring would centralise party control over the country’s tech development efforts and create “a new type of whole-country system” for achieving breakthroughs, he said. The Ministry of Science and Technology will aim to build national labs, oversee projects, facilitate technology transfer and foster tech workers, the State Council said.

“China is concerned about its technological future under the tightening chip blockade from the US and its allies,” said Graham Webster, a China expert at the Stanford Cyber Policy Center.

“For years we’ve seen a bureaucratic emphasis on the online world, but that is built on chips,” he said. “There is now a bureaucratic rebalancing to boosting fundamental science and deep industrial capabilities.”

China will also create a national data administration to utilise the country’s vast troves of information, craft a national big data plan and lead the digitalisation of the economy and state.

The bureau will be housed within the country’s state planning agency and take on some functions related to harnessing data from China’s powerful internet regulator, which will remain the watchdog overseeing big tech groups.

Will there be more reforms?

With the parliamentary meeting running until next week, more changes could come.

Analysts will be watching for the announcement of any parallel Communist party bodies to supervise the financial sector and other areas.

These will give Xi even more direct control over government bodies, according to analysts. The institutional reforms are “part of broader efforts to enhance the party’s leadership over the nation’s socialist modernisation”, the party’s leadership said last week.

Also crucial will be the people put in charge of the various agencies, with the National People’s Congress expected to vote on the appointments this weekend.

The top candidates to lead the new financial regulatory body include Yi Huiman, the well-respected current head of the CSRC, people familiar with the matter said.

Additional reporting by Xinning Liu in Beijing