China’s Financial Regulation Reform: Reinforcing Global Financial Stability

Chinese President Xi Jinping has stressed that financial vitality leads to economic vitality, and financial stability is of vital importance to economic stability. Currently, financial risks are increasingly gathering momentum and manifesting in diverse ways across many countries and regions. This has emerged as a substantial menace to the stability of the global financial system. The report to the 20th National Congress of the Communist Party of China (CPC) clearly indicates that China will reinforce the systems that safeguard financial stability, place all types of financial activities under regulation according to the law, and ensure no systemic risks arise. Against this backdrop, China has taken bold steps and implemented comprehensive measures to reform its financial regulatory system. It has deftly addressed the emergence of new trends, innovative business models, and evolving demands within the context of drastically changing domestic and international situations. By establishing a framework for financial security that harmonizes with the trajectory of the new development paradigm, China has not only ensured the bedrock of its own financial stability but also administered a tonic to fortify global financial stability.

China’s Financial Security: Integral to Global Financial Stability

The volatile global financial markets pose significant risks to world economic growth, acting as obstacles hindering recovery. The 2008 global financial crisis exposed shortcomings within financial regulatory frameworks, culminating in a widespread global financial tumult and an enduring economic downturn. In the current landscape in which economic globalization faces headwinds and financial risks are surging, global financial instability is again resurfacing: The U.K. pension fund crisis has triggered turbulence in the gilt-edged market and fluctuations in the sterling market; the escalating banking crisis across Europe and the U.S. has resulted in deep-seated contradictions emerging one after another, and potential U.S. treasury defaults are cast a shadow over American creditworthiness. All of these factors have amplified uncertainty within global financial markets.

In April, the International Monetary Fund (IMF) issued the Global Financial Stability Report wherein was a cautionary note stating that in the face of mounting inflation and a landscape riddled with fragmented risks, the resilience of the global financial system was being rigorously tested, leading to a swift escalation in financial stability risks.

 The global financial ecosystem operates as an interwoven tapestry in which the stability of each nation’s financial sector is intimately linked. In particular, China’s financial stability assumes a position of paramount significance in upholding the stability of the worldwide financial architecture.

Firstly, China’s financial stability stands as a fundamental assurance protecting the unhindered flow of global trade. As the world’s second-largest economy, China is assuming a pivotal role as a driving engine for global economic recovery, a major participant in international trade, and a critical link in the global supply chain. The stability of China’s financial landscape shares an inseparable bond with the orchestration of global trade dynamics and the web of supply chains. In the event of any disruptions within China’s financial market, the reverberations would spread throughout the global arena, impacting not only commodity prices and international payments but also the overall stability of the global supply chain.

Secondly, the stability of China’s financial landscape serves as the primary precondition for enhancing the quality of its investments abroad. On one hand, China is proactively advancing the openness and internationalization of its financial market, a strategy that magnetizes an influx of foreign investment and capital. Simultaneously, the nation is steadfastly propelling the Belt and Road Initiative, acting as a driving force for international trade and outward investment. The unfettered movement of funds and global investments originating from China is sending far-reaching ripples through the tapestry of global financial markets.

Thirdly, the stability of China’s financial ecosystem has emerged as a critical factor in advancing global cooperation and coordination. China has assumed a vital role within the realm of international financial collaboration by actively participating in international financial organizations and multilateral platforms for financial cooperation. During the G20 Summit in 2022, President Xi advocated curbing global inflation and diffusing systemic economic and financial risks. “In particular, developed economies should mitigate the negative spillovers from their monetary policy adjustment and keep their debts at sustainable levels,” he said.

Reforming the Regulatory System: Safeguarding China’s High-Quality Economic and Financial Development

President Xi has emphasized that the Party’s leadership over the financial sector must be strengthened. This reform adheres to the guiding principles set forth by the 20th CPC National Congress and is expected to cause sweeping optimization and adjustments of institutional responsibilities within the realm of financial regulation. The reform encompasses a series of arrangements aimed at forging a robust and modern financial regulatory framework while ensuring financial stability. Notably, this endeavor not only underscores the pivotal role of consolidating Party leadership over financial affairs but also responds to the inherent imperative of refining a modern financial regulatory system. Furthermore, it stands as a proactive response to the imperatives of the new financial security paradigm and synergizes with the pursuit of a new paradigm for high-quality economic development.

The first dimension involves establishing robust regulatory firewalls, strengthening oversight of financial institutions’ behaviors, and safeguarding interests of financial consumers. After these adjustments, a regulatory framework that harnesses macro-prudential supervision to uphold financial stability and prevent systemic risks will take shape. Concurrently, market conduct supervision is being employed to standardize the behaviors of financial institutions, thereby enhancing the protection of financial consumers. To illustrate, following the establishment of the National Administration of Financial Regulation (NAFR), the organization’s inaugural meeting was dedicated to assessing the solvency of the insurance industry, with an aim to intensify the oversight of insurance company functions and implement penetrative monitoring to build a robust solvency constraint that contributes to the high-quality development of the insurance sector.

The second aspect centers on establishing clear regulatory roles and responsibilities, thereby fostering a synergized regulatory force. This reform initiative notably designates newly-formed NAFR as the leading institution in safeguarding the rights and interests of financial consumers. Additionally, the NAFR is assuming day-to-day supervisory duties over financial conglomerates, including financial holding companies. It is also advancing the reform of local financial regulatory systems, wherein specialized financial regulatory bodies established by local governments are entrusted with specific supervisory responsibilities. This well-defined distribution of authority and responsibilities serves to significantly enhance the efficacy of financial regulation.

The third dimension entails establishing a modernized central bank system and refining a modern financial regulatory framework to alleviate potential conflicts among multiple policy objectives. After this reform, the central bank will focus on monetary policy and prudential regulation on a macro level, while the NAFR will play a comprehensive role in prudential supervision on a micro level and behavior regulation. The China Securities Regulatory Commission (CSRC) will undertake heavier responsibilities in capital market oversight. The separation of macroeconomic control and financial regulation, with distinct functions allotted to different regulatory authorities, is ensuring a more streamlined and focused execution of their respective duties. Ultimately, this approach has minimized any potential clashes arising from diverse policy objectives as much as possible.

The fourth facet involves rationalizing the jurisdictional relationship between central and local financial regulatory bodies to achieve a comprehensive enhancement of regulatory capabilities. This reform initiative requires establishing a local financial regulatory framework primarily centered around regional branches of central financial management agencies, coupled with an optimization of resource allocation. The core objective is to curtail undue interference by local governments in the operations of local financial institutions, while intensifying central-level efforts on risk prevention and mitigation, and combating financial crimes. Additionally, this reform seeks to facilitate reallocation and reinforcement of regulatory resources to effectively address problems such as insufficient local regulatory tools and a dearth of professional personnel.

Fortified Chinese Financial Regulatory System: A New Pillar of Global Economic and Financial Stability

China’s financial regulation reform has attracted global attention, and some Western politicians have sought to exploit the issue. For instance, a member of the U.S. congress introduced the China Financial Threat Mitigation Act of 2023, demanding an assessment of any “risky impacts” on the U.S. and global financial systems from China’s financial reform.

President Xi has indicated that “drawing ideological lines or promoting group politics and bloc confrontation will only divide the world and hinder global development and human progress.” Cloaked in the guise of risk reduction, this “de-sinicization” approach ignores objective economic laws. It not only contradicts the present-day intricately interwoven global economic and financial landscape that demands coordinated collaboration among nations, China included, but also fails to recognize the historical testament that a fortified Chinese financial regulatory framework is acting as a bedrock to stabilize global economy and finance.

First and foremost, by mitigating conflicts among multifaceted policy goals, China is effectively addressing the contradictions between the imperative of averting systemic financial risks and the pursuit of tangible economic development objectives. This serves as a vital guiding principle for shaping policy agendas on a global scale. The “helicopter money” approach adopted by the Federal Reserve of the U.S. during the COVID-19 pandemic emerged as a pivotal driver of heightened inflation. Disregarding domestic contextual factors in the later phases of the pandemic, it raised interest rates consecutively which in turn exacerbated liquidity challenges for banks in Europe and the U.S., intensifying financial instability. This dynamic underscored the fact that policy arrangements lacking a holistic perspective tend to yield political inefficacies. China’s financial regulatory structure reform stands as an instructive model, bearing noteworthy insights for countries around the world as they formulate their own economic and financial policies.

Moreover, China’s investor protection framework will be refined, coupled with a continuous improvement of its capital market’s financing functions, creating a more resilient haven for investors. The NAFR will take the lead on safeguarding financial consumer rights, including enacting measures to protect investors. This approach will effectively enhance the adherence to behavioral standards and increase the integrity among market participants to mitigate market manipulation and inappropriate conduct and avoid the emergence of phenomena like the “stock gods” on Capitol Hill. Concurrently, the reinforcement of capabilities for direct financing to serve high-quality economic development will cultivate a more robust and stable capital market in China. This, in turn, is contributing to augmenting the efficiency and stability of global financial markets.

Lastly, China will continuously improve its modern financial regulatory framework and push international financial cooperation and coordination into a new stage. The revamped regulatory system is well-aligned with the evolving landscape of financial development. China is poised to take on a more proactive role in engaging with international financial regulatory mechanisms and establishing multi-tiered and comprehensive collaborative frameworks with financial regulatory bodies in other countries to jointly tackle cross-border financial risks. At the same time, China remains committed to an ongoing process of reform and optimization of its own financial regulatory model according to its own national conditions. This path is also providing experience and inspiration for a multitude of developing countries as they strive to continually enhance and refine their own financial regulatory systems.

The author is a contract research fellow at the Beijing Research Center of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and the secretary of the CPC Committee of the School of Finance at the Central University of Finance and Economics, where he is a professor and Ph.D. supervisor.