Proposed 'twin-peak model' seen modernizing rules, deepening reform

China seeks to set up a new national financial regulatory administration that will shoulder the responsibility of supervision over the financial sector minus the securities sector, said a reform plan submitted to the National People's Congress on Tuesday for deliberation.

Experts said the new administration, if established, would mark a significant step in modernizing China's financial regulatory system, help lift supervision efficiency and defuse financial risks.

The proposed administration would function directly under the State Council, China's Cabinet. It will likely be established along the lines of the China Banking and Insurance Regulatory Commission, which will not be retained, according to the institutional reform plan submitted by the State Council.

Part of the duty of the People's Bank of China, the country's central bank — financial holding company supervision and financial consumer protection — is proposed to be transferred to the new administration.

The duty of the China Securities Regulatory Commission regarding investor protections should also be transferred to the new body, the plan said.

"The establishment of the administration would be conducive to improving modernized financial regulation, ensuring that all kinds of financial activities will be covered by financial regulation pursuant to the law," said Lou Feipeng, a researcher at Postal Savings Bank of China.

"The proposed administration will help fill the regulatory vacuum caused by blurred oversight responsibilities or different regulatory standards and avoid overlap or duplication of regulation. Such efforts will ensure financial stability and guard against systemic financial risks," Lou said.

The Government Work Report, delivered to the NPC on Sunday, has underlined the need to deepen reform of the financial system, improve financial regulation, and see that all those involved assume their full responsibilities to guard against regional and systemic financial risks.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, said a key source of the country's financial risk has been that its sector-specific regulatory system sometimes does not accommodate the integrated business trends of the financial industry.

Against such a backdrop, deepening the reform of the financial regulatory system and building a modern financial regulatory framework have become necessary, Dong said.

As the new round of financial regulatory system reform sets in, a "twin-peak model" of financial system regulation with Chinese characteristics will be better brought out, Dong said, whereby the PBOC will be responsible for monetary policy and macro-prudential regulation while the new administration and the CSRC will be in charge of financial activity supervision.

The plan has also proposed that the CSRC, which is now a public institution directly under the State Council, will be recast into an agency directly under the State Council.

The National Development and Reform Commission's function related to corporate bond issuance and review will be transferred to the CSRC, as a step to strengthen the securities regulator's duty of capital market regulation, according to the plan.

Experts said the transfer or reorganization of functions can go a long way toward unifying the country's corporate bond market, which would help improve market liquidity, reduce transaction costs and improve pricing efficiency.

The plan also seeks to advance reforms of branches of the PBOC, proposing abolishing regional branches of the central bank and setting up provincial branches.