Author: William Pottenger
The stock market crash that happened this past summer is still fresh in the memories of many Chinese consumers, bankers and politicians. In order to tighten the country’s financial loose regulatory environment, policy makers are contemplating a five year plan for 2016-2020.
According to a report from The Economist, the overarching goal is to create a “super-regulator” similar to those created by Western developed countries (e.g. The United States Federal Reserve or The European Central Bank). By consolidating three separate regulators and the central bank, the new regulator would oversee all financial institutions (I.e. banks, asset managers, insurers etc.).
A few months ago, leading up to China’s stock market downturn, corporate entities were exploiting regulatory loopholes by purchasing equities with debt. In part, financial firms were able to escape the clutches of those watching over them because the regulators’ efforts were simply uncoordinated. For example, the regulatory arms overseeing the insurance industry had little communication with those watching over the banking industry. In light of China’s financial markets deficiencies and projected problems, which may arise in the not-so-distant future, the proposed consolidation efforts seem to be a timely reform.
Shadow banking has been emerging in a China as a popular business activity. For those who do not already know, shadow banking is an industry providing a service similar to traditional commercial banks, however, the services they offer are morphed in one way or another to operate outside of traditional banking environments. Although it is still not as popular in China as it is in other developed countries, shadow banking has been on regulators’ radar since 2013. According to a report from Seeking Alpha, a content provider for investors, China’s share of total global shadow banking assets grew from two percent in 2010 to eight percent in 2014.
Given this rapid increase in murky financial activity, it is good that regulators have been monitoring these activities for a few years now. However, simply keeping the pulse of the market may not be as proactive an approach as would be appropriate in this case. That is why, in my opinion, consolidating regulatory efforts and resources would lead to establishing a more comprehensive strategy to deal with complicated financial products and the institutions that offer these intricate investment vehicles. As The United States Federal Reserve and Ben Bernanke know all too well, even sharp Wall Street minds can get in over their heads when it comes to the services they offer.
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