CBIRC consumer finance grading system guarantees market stability

Matteo Giovannini


**Editor's note: **Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author's views, and not necessarily those of CGTN.

An increased awareness of the potentially devastating effects of an unregulated tech sector is the reason at the basis of the sudden escalation in initiatives from governments and industry regulators all over the world aimed at creating a regulatory framework that prevent internet platforms from assuming a dominant position in the market.

This week the China Banking and Insurance Regulatory Commission (CBIRC) has communicated on its website a notice regarding the establishment of a pilot test for grading consumer finance companies according to a scale from 1 to 5 considering factors such as corporate governance, internal controls, capital and risk management, professionalism and technology.

The decision, that was reached at the end of December but that has only been made public this week, follows the news that came out early this week according which the Chinese government is planning to force tech giants to share the large amount of consumer loan data in their possession to nationwide credit agencies.

The agencies are expected to play a central role sharing the data received by tech companies to banks and other financial institutions present on the domestic market thus helping to prevent an excess level of borrowing and to reduce the chances of defaults and frauds thanks to a more symmetric distribution of information.

The first aspect to emphasize in the new consumer finance scoring system is the sense of urgency shown by the regulator with the communication that the new rules will take effect immediately. This aspect underlines that the Chinese government has definitely put domestic risk control at the top of its agenda in order to solve a generalized problem before it is out of control.

File photo of the China Banking and Insurance Regulatory Commission in Beijing. /CFP

In this regard, the introduction of a grading system will help to guarantee an acceptable level of order and discipline within China's borders at a time of fast recovery from the pandemic and, considering the turbulent economic conditions in overseas markets, to persevere in the development of the dual circulation model.

The introduction of a consumer finance rating system is going to help the regulator to monitor and assess the level of companies' trustworthiness in particular in terms of compliance to rules and laws, in an attempt to get to a fair, transparent and in some way predictable business environment.

It is interesting to observe that the regulator pays a very high-level of attention on infractions concerning accounting manipulations and spread of false communications to the market that have been the cause of major scandals in countries such as the United States.

In this sense, the stress on aspects such as corporate governance, internal controls, professionalism and risk management demonstrates that the focus of the CBIRC's evaluation is on the heart of corporations where decisions are made and where the consequences of external actions take shape.

The measures that the CBIRC has decided to introduce to punish irresponsible firms, including limiting shareholders' rights, distribution of dividends and reshuffling the senior management, serve as a deterrent for key stakeholders in taking unethical actions that are against the common interest.

The introduction of a corporate rating system in consumer finance will also certainly have repercussions on the level of market competitiveness passing from the current oligopolistic environment dominated by few major tech firms, widely considered risky for the entire system, to a more open market with the opportunity for small fintech firms to gain more space due to lower barrier of entrance.

As a direct consequence, a more competitive market is going to serve the interest of the final consumers through a better service to the client, due to an increased level of choice, and through a better protection of personal financial data, a major reason of complaint towards tech giants.

All in all, the move from the CBIRC to implement a consumer finance grading system represents a timely decision due to a combination of factors that serve the interests of the nation through more market stability and less systemic risk as well as the interests of SMEs and consumers through an increased level of market participation.

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