Cross-sector financial regulation to reduce risks, spur innovation


China's decision to coordinate financial supervision is expected to reduce systematic risk and drive innovation in an industry fraught with cross-sector financing vehicles.

The State Council, China's cabinet, has approved the new mechanism, headed by the People's Bank of China and involving regulatory bodies from the banking, securities, insurance and foreign exchange sectors, to beef up financial supervision.

Meetings, to coordinate monetary policy, financial regulation, financial stability and innovation, will be attended by representatives of the National Development and Reform Commission, the Ministry of Finance and other government bodies when necessary.

Seen as a natural outcome of new financing models that blur sectoral boundaries between banks, securities and insurances, the new scheme will put cross-market and cross-sector financial services under more coordinated scrutiny, ease possible systematic risks and facilitate financial reforms and innovation.

"The move is in line with the cross-sectoral trend in the finance industry," said Yin Zhentao, an economist with the Chinese Academy of Social Sciences.

In recent years, flourishing of emerging financing services, such as trust and wealth management products, as well as Internet-related financing, have diversified the financial market, but also brought complex challenges, including the controversial shadow banking, to the regulatory authorities.

Statistics from the central bank showed yuan loans accounted for 52.1 percent of the total social financing volume in 2012, retreating 6.1 percentage points from a year earlier, while the ratio of other financing channels, including trust and corporate bonds, saw a significant increase during that period.

"Cross-market and cross-sector financial innovation has become the most active area in the industry, but also poses the most thorny issues for regulatory bodies," said Zong Liang, deputy chief of the Strategic Planning Research Institute under the Bank of China.

Some of China's financial sectors are over regulated or under overlapping supervision, whereas others, such as Internet financing, are in an supervision vacuum.

At a time when China is steadily proceeding with financial reforms, such as the liberation of interest rates and the opening of capital accounts, more unified and coordinated supervision of the sector has become ever more important to contain risks and stimulate innovation.

"The key task facing the new mechanism is to steadily promote market-oriented financial reform while maintain financial stability, and avoiding risks from cross-sector financial products," said Zong.