The Chinese Financial Harakiri.
China Finance System Overview
China’s Economy is a socialist one as opposed to the capitalistic nature of other major economies and so far its, socialistic nature has been a successful endeavor for the nation. The Chinese Finance sector is a part of such reforms and is in the midst of a generational program of major changes as its transition to a more open system supportive of China’s emergence into global economies after decades of communism and state ownership. The program that began in the early 1980s still continues today.
Need for Reforms
As the year 2020 will forever be remembered for the pandemic and impact that the pandemic has had on the economies of all the nations worldwide. The first quarter of 2020 made the economic growth in China come to a halt as the GDP of china contracted by a whopping 6.8%, the first decline in decades, mainly due to the combined supply and demand shock triggered by the measures taken to contain the spread of the virus and the decline of the consumption caused due to the decline in aggregate effective demand. This is what has majorly necessitated reforms in the financial sector of China.
Chinese Financial Regulatory Structure Overview
China’s financial regulatory structure was historically called “one bank and three commissions”, comprising PBOC acting as the central bank, and the China Banking Regulatory Commission(CBRC), the China Insurance Regulatory Commission(CIRC) and the China Securities Regulatory Commission playing the roles of regulators for the banking, insurance and securities industry respectively. Recently major changes have been made in this regulatory architecture of theirs as of November 2017, FSDC (Financial Stability and Development Committee). The role of FSDC is to co-ordinate the overall strategy for the financial sector and formulate policy at higher level, including supervising China’s monetary policy and financial regulation, formulating policies on systematic financial risk management and maintaining China’s financial security, and giving local government guidelines on their financial developments. In addition to this another major move was the merger of CBRC and CIRC, into one regulator, the China Banking Insurance Regulatory Commission, in 2018, Insurance companies were allowed to invest in many new types of assets and issue short term insurance policies.
CBDC in China
CBDC or Central Bank Digital Currency was introduced to majorly in China so as to increase regulations on transactions and reduce privately owned black money.
A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized and is issued and regulated by PBOC in China. The concept of CBDC is somewhat inspired by BTC given its virtual nature but it’s totally different from BTC, which is not issued by a state and lack the legal tender status as given by the government. On 16 July 2021, PBOC passed the white paper on CBDC implementation in China aiming to make use of digital Yuan.
Advantages of CBDC
Given the ongoing digital revolution and widespread technological development, CBDC will have various advantages such as-
· TECHNOLOGICAL EFFICIENCY: such a method would increase efficiency as instead of relying on intermediaries such as banks and clearing houses, money transfers and payments can be made in real time and it being real time it will reduce risk, reduce complexity of transactions and reduce or totally do away with any transaction fees.
· FINANCIAL INCLUSION: safe money accounts at central bank constitute could constitute a strong instrument of financial inclusion allowing any legal resident or citizen to have a free or low cost bank account.
· PREVENTING ILLICIT ACTIVITY
· FACILITATE BANKING COMPETITION
· ACT AS PROOF OF TRANSACTIONS
· PROTECT MONEY AS A PUBLIC UTILITY
· ENSURE SAFETY OF PAYMENTS
Disadvantages of CBDC
Despite having various advantages CBDC suffers from various disadvantages such as-
· WIDESPREAD ADOPTION CHALLENGE-The mode might leave behind a major portion of the society behind due to potential barriers arising due to trust and data privacy as the state would have control on all transactions thereby violating the privacy of
· LARGE CAPITAL OUTLAY-Launching full- fledged CBDC would require central banks to invest heavily in infrastructure; building front end wallets, maintaining technology, monitoring transactions and being responsible for enforcing anti money laundering and counter- terrorism.
Other Financial Sector Reforms
· AMMENDMENT OF COMMERCIAL BANKS LAW: This amendment emphasized on the “core role” of the BOD and independent directors in corporate governance of commercial banks, and emphasized the protection of consumer rights along with remedies available to them, it is applicable to not only commercial banks but to NBFCs as well.
· REGULATION TIGHTENING CONTROL OVER FINANCIAL HOLDING FIRMS-China has issued new roles to check on the companies expanding blindly
into the financial sector without isolation mechanism accumulating risks. The new regulation will seek to put up a firewall between the industrial and financial sector so as to prevent cross institution, cross market and cross sector contagion risks.
IMPACT OF REGULATIONS: CANCELLED ANTS IPO CASE
Ants Group whose CEO is Jack Ma was going to have the largest IPO ever witnessed at $34.5 billion the IPO was announced to be suspended, this move could have possibly been done due to the tightening of regulations on IPO. As per sources like The Global Times, Ant Group has been asked to clarify its
business model, financial innovations and data privacy measures among other issues. It also said that the government agencies asked for its complete restructuring, one possible outcome of this move potentially Chinese companies try to be listed abroad instead on SSE.
It is safe to say that the financial sector of China has seen a complete restructuring due to the onset of the pandemic whether it be the banking sector or the fintech sector, the financial has clearly altered from what it used to be.