By Shu Zhang and Se Young Lee
BEIJING, March 13 (Reuters) – China is merging its banking and insurance regulators and creating a slew of ministries including a new agricultural and rural affairs ministry as part of the biggest government shake-up in years.
The long-awaited move to streamline and tighten oversight of the $42 trillion banking and insurance sectors comes as authorities seek more clout to crack down on riskier lending practices and reduce high corporate debt levels.
Details were released in a parliament document on Tuesday.
Liu He, Xi’s top economic adviser and confidante, has emerged as a prominent voice in the party on trade and economic matters. Writing in a commentary in the official People’s Daily on Tuesday, Liu said reforms would be profound.
“Deepening the reform of the party and state institutions is an inevitable requirement for strengthening the long-term governance of the party,” Liu said.
The economy and the party have become ever more intertwined since the once-in-five-years party congress in October when Xi cemented his grip on power.
On Sunday, presidential term limits were removed from its constitution, giving Xi the right to remain in office indefinitely, and confirming his status as the country’s most powerful leader since Mao Zedong died more than 40 years ago.
The heads of the new merged regulator, ministries and departments will be announced before the close of the annual session of parliament on March 20.
Many Xi allies are expected to get top appointments including the chair of the National People’s Congress, or parliament, and National Supervisory Commission.
SHARPENING FINANCIAL OVERSIGHT
China is among the global economies seen as most vulnerable to a banking crisis, the Bank for International Settlements (BIS) said at the weekend, though Beijing has maintained that debt risks are under control.
Speculation that China was considering the creation of a super financial regulator has been rife since the Chinese stock market crash of 2015, which has been blamed in part on poor inter-agency coordination.
The merger of the China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC) is aimed at resolving existing problems such as unclear responsibilities and cross-regulation, according to the parliament document.
The new merged entity will directly report to the State Council, or cabinet.
The function of making important laws and regulations of CBRC and CIRC will be transferred to the People’s Bank of China as the central bank takes on a bigger role.
“Coordinated financial regulation will address the issue of regulatory arbitrage, especially in the shadow banking sector,” said Nicholas Zhu, a Beijing-based senior analyst at Moody’s Investors Service.
“We’ve seen coordinated policy efforts in the past by CBRC and CIRC, but now the institutional consolidation of the two agencies will further enhance efficiency of implementation of the rules.”
China’s securities regulator – the China Securities Regulatory Commission (CSRC) – will remain a separate entity, however.
CBRC was carved out of the central bank in 2003 under a State Council directive, while CIRC was created in 1998. The Ministry of Agriculture has not undergone any major change in its role and oversight since 2013.”
HARDER TO POLICE
China’s financial system has become increasingly tough to regulate as it grows rapidly in size and complexity, emerging as one of the world’s largest with financial assets at nearly 470 percent of gross domestic product, according to the International Monetary Fund.
Companies registered as banks or insurers have also started dabbling in other areas of finance with many offering complex hybrid products and making non-traditional investments.
Many brokerages also structure wealth management products as a channel for hidden bank lending, in addition to the more traditional business of facilitating share trades and investment banking services.
“One area of systemic risk is insurance, and one of the problems is that some insurance products have fallen in the cracks between insurance and banking and nobody was looking after them,” said James Stent, a former independent director at two Chinese banks and author of “China’s Banking Transformation.”
Regulatory arbitrage and risky cross-asset investments have worried policymakers.
According to a parliament document released on Tuesday, the government will create seven new ministries: natural resources; ecological environment; emergency management; agriculture and rural affairs; culture and tourism; veterans affairs; and the National Health Commission.
Within the ministries and departments being restructured, some officials are concerned about the loss of some functions while others welcomed the opportunity to gain new powers, according to people familiar with the situation.
“Everyone seems to regard these departments as their own interests – giving up a piece of yourself is very heart-wrenching but it’s a pleasure to take a piece of someone else,” said an official at a ministry, declining to be named due to the sensitivity of the matter.
“Reforms are difficult.”
China has also proposed forming a national markets supervision management bureau, which will take on the pricing supervision and antimonopoly law enforcement role from the National Development and Reform Commission (NDRC), Ministry of Commerce and State Council.
The National Council for Social Security Fund led by former finance minister Lou Jiwei will be managed by the finance ministry, instead of the State Council.
The securities and state assets regulators were not mentioned among the proposed changes.
The proposed changes outlined in the document will be discussed in parliament on Tuesday, and are expected to be formally approved by the largely rubber-stamp parliament on Saturday.
When the plan is passed, the cabinet will consist of 26 ministries and commissions in addition to the General Office of the State Council.