China's legislators outlined a sweeping government reorganization
plan last week, in which the central bank's banking supervisory
functions are carved out to create a separate banking regulatory
commission.
The move ended months of speculation surrounding the possible
establishment of a China Banking Regulatory Commission (CBRC).
Authorities have pinned high hopes on the separation, hoping the
new body will provide tighter supervision over domestic banks
weighed down by non-performing loans (NPLs), speed up reform and
reduce financial risks, offer a more efficient monetary policy to
stabilize China's currency and support overall economic growth.
The reform is being heralded as a significant step towards
achieving those goals. What is more pivotal, according to comments
by economists and banks, is how such a framework is fleshed out in
the midst of an ongoing reshuffle and how related reforms
proceed.
Separation
The paramount benefit of the reform is that it draws a line between
monetary policy and bank supervision. Long-standing confusion
surrounding the functions of the two has already eroded the
efficiency of both, economists said.
"On the one hand, monetary policy should rely more on
market-orientated tools like open market operations instead of
loosening or tightening bank supervision," said Wei Jianing, a
senior researcher with the Development Research Center (DRC) under
the State Council, the Chinese cabinet.
The excessive money supply and lending that took place in 1992 and
during the first half of 1993, a result of the then slack financial
supervision, caused widespread fever to grip the economy, leading
to financial chaos. When the government took measures in late 1993
to straighten out the disorder, one tactic was to readjust money
supply by tightening bank supervision.
"On the other hand, when things go wrong in banking supervision, we
shouldn't plug the holes by stuffing money into them," said Wei,
noted as one of the earliest advocates for divorcing bank
supervision from monetary policy.
A
considerable slab of the NPLs at China's commercial banks and rural
credit cooperatives over the years was simply written off with
increases in the central bank's relending, he said.
Acknowledging that the separation could improve the efficiency in
bank supervision and monetary policy making, Wang Songqi, a senior
researcher with the Chinese Academy of Social Sciences (CASS),
still expressed concern about possible costs.
"The costs are too expensive," he said. Merely establishing
branches for the ministerial-level CBRC in some 320 cities where
the central bank has a prefectural office, Wang estimates, could
easily cost tens of billions of yuan in expenditure for things like
housing, personnel and equipment.
It
also makes coordination between the central bank and the CBRC, now
an inter-ministerial effort, far more difficult in situations such
as a bank's insolvency, he said.
Economists say there is no clear global trend as to whether bank
supervision should be independent from monetary policy. Currently,
three quarters of member economies of the Organization for Economic
Cooperation and Development have their monetary policy and bank
regulatory functions handled by the same entity.
Bank Supervision
"We expect that the CBRC will fulfill its role of preventing and
dissolving banking risks by reinforcing bank supervision, brushing
up on levels of regulatory expertise and fostering a greater pool
of first-class regulatory personnel," said DRC's Wei.
The new commission is expected to be based on the central People's
Bank of China's (PBOC) bank supervision department, but it is still
unclear how its supervisory methodology will differ from the
existing set up.
Government officials and analysts have said the central bank's
efforts to supervise its banks have been effective. The ratio of
non-performing assets at China's financial institutions dropped to
19.8 percent last year from a high of 26 percent five years ago,
according to Qiu Xiaohua, deputy director of the National Bureau of
Statistics.
"That means overall bank supervision has been effective," he said.
"It not only supported a fairly fast economic growth, but also
effectively prevented and dissolved financial risks."
But there are also weaknesses, economists say. "There's a high
personal behavior factor (in supervisory activities), and their
methods and approaches lag behind (supervisory needs)," said a
senior official with the Agricultural Bank of China.
"The CBRC should increase staff scrutiny, and focus more attention
on discerning risks and expelling irregularities," he said.
Underlying reasons for regulatory difficulties, the banker said,
include a lack in clear orientation for the four State-owned
commercial banks. "Should they be profit seekers, engines for
economic growth, or the government's tools?" he asked.
Andy Xie, executive director of Morgan Stanley, Asia, said
inadequate disclosure of information on Chinese banks'
irregularities makes it difficult to evaluate regulatory
efficiency.
What is left unanswered in the reform, analysts say, is who will be
supervising China's emerging financial holding companies that
operate different subsidiaries to circumvent legal barriers
separating banking, insurance and securities. The CBRC is designed
to oversee banks, asset management companies, trust companies and
other depository financial institutions.
"A
regulatory vacuum was created," said Wang.
Monetary Policy
It
is unclear how the slimmer PBOC will approach its monetary policy
objectives in the future, but economists said the separation was
already taking effect.
Fears of inflation had prevented the central bank from scaling up
money supply to support growth. It raised its yearly money supply
growth targets twice last year partly as a result of rapid
increases in loans. This year, the PBOC has set a 16 percent growth
target, similar to last year's real growth.
"The central bank is already showing signs of an attitude change in
daring to loosen up (money supply)," said Yuan Gangming, a senior
CASS economist.
"Risk prevention should not be a goal of monetary policy," he said.
"The result of monetary policy shouldering that responsibility was
inadequate money supply. And the problem remains unsolved."
China's consumer price index remained on a downward spiral for
virtually all of last year, stirring worries about deflation.
Still, most economists acknowledged the monetary policy's
effectiveness over past years.
"We were faced with fairly complicated circumstances over the past
few years, but the financial picture kept improving year by year,"
said a senior PBOC adviser. "The monetary policy, I should say, was
effective."
The creation of the CBRC theoretically wiped the central bank from
partaking in bank supervision objectives, but analysts are calling
for the reform to be used as an opportunity to grant the central
bank a higher level of independence, in an effort to insulate it
from political considerations. The PBOC falls under the
administration of the State Council.
It
has become a global trend to reinforce the independence of the
central bank in recent years, said Wei. Relatively conservative
countries like Britain, Japan and South Korea all took such
measures after financial crises or other monetary turmoil
erupted.
Strengthening central bank independence can help China resist
external pressure to appreciate its renminbi, Wei said, citing the
example of Japan, which was forced by other countries in the 1980s
to raise the yen's exchange rate sharply only to pummel its exports
and produce economic bubbles.
Some Western economists, along with the Japanese Government, have
been pressuring China to raise the renminbi's exchange rate, which
they claim is undervalued and harms other economies.
"If our central bank becomes directly responsible to the National
People's Congress, if the monetary policy committee can be elevated
from an advisory board to a decision-making body and make decisions
by voting, it will help alleviate external political pressure on
the renminbi's exchange rate," Wei said.
But the PBOC adviser said it is unlikely that the central bank's
monetary policy committee can become a decision maker soon, as the
central bank law needs to be revised first to exclude bank
supervision from its responsibilities.
Currently, the PBOC formulates monetary policy initiatives on the
basis of the monetary policy committee's suggestions with the final
decision resting with the State Council, analysts explained.
(China Daily March 17, 2003)