Running head: REGULATORY FRAMEWORK OF CHINA 1

Regulatory Framework of China

Name

Institutional Affiliation
REGULATORY FRAMEWORK OF CHINA 2

Regulatory Framework of China

1.0 Introduction

Economists consider the role of the financial system as substantial and fundamental in the

economic system. The financial system has the function of effectively facilitating the

implementation and allocating economic resources. But in some cases, the financial system may

not be able to be well adjusted to the rapidly changing financial environment (Allen, Goldstein &

Jagtiani, 2018). As a result, there have been reforms and in the wake of the global financial

crisis, which usually arises from shocks in the financial market. When it comes to the regulation

of the financial sector, regulators have raised increasing concerns of the banking system given

the situation where global banking activities change rapidly. The regulation of the financial

sector is also aimed to improve the stability and efficiency of the financial system in line with the

Basel Committee regulation with regard to banking supervisions (Fernandez, Gonzalez &

Suarez, 2016). However, there have been accusations as regulatory systems cannot effectively

deal with the rising housing prices and credit expansion. As a matter of fact, Liang (2017) finds

out that regulations sometimes provide little check of the decisions and actions taken by the

financial sectors which merely aim to maximize profits. This generates negative impacts on

economic operations, so effective regulations for financial sectors are necessarily needed.

This paper first presents a critical assessment and evaluation of the need for regulating

the financial sectors by first identifying the role of the financial sector and secondly assessing the

necessity and importance of regulating financial sectors. Then it comes to the discussion of bank

regulation mechanism in China.

2.0 The need for regulations of the financial sector

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2.1 The role of the financial sector

The financial system has been evolving though it emerged only a few years ago. It has

significantly changed the manner in which transactions take place. However, regardless of the

changes, the basic principles and the underlying objectives remain the same. For example, from

an economic perspective, the functions of the first modern banks of Renaissance Italy are the

same as those in place today, which includes the following four points: value exchange,

intermediation, risk transfer, as well as liquidity (Pascali, 2016). The financial sector is important

to the development of the modern economy and in order for a financial sector to perform its

functions, the financial sector needs to have certain supporting capabilities such as monitoring

borrowers.

The financial sector has an important role as it facilitates the provisions of the core

provision mentioned above. These functions also overlap and interact in certain ways. To begin

with, the value exchange of the financial sector ensures a safe and efficient payment system,

which fundamentally supports day-to-day businesses across the world (Schäfer, Schnabel &

Weder di Mauro, 2015). In the second place, the financial sector takes an important role of

monitoring and adjusting the economy by means of intermediation. This means that the financial

sector builds a relationship between savers and borrowers, for example. And the financial sector

can realize the intermediation in many forms in addition to offering traditional banking services

(Sawyer & Veronese Passarella, 2017). The intermediation of the financial sector requires it to

be able to perform accurate accounting, risk assessment, as well as process information. And the

fluent operation of the financial system enables funds to be allocated most suitably according to

the productive use. In the third place, the financial sector also has the important function of

pricing and allocating certain risks, which mainly concerns credit risks, market risks, longevity
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risk, and so on (Reserve Bank of Australia, 2014). It also plays the role of transfer a range of

risks and come up with proper ways to manage them rather completely removing risks. Last but

not the least, the financial sector also has liquidity and the provision of liquidity is essential for

businesses to perform their obligations.

2.2 The importance and need for regulating financial sectors

Given the role and functions of financial sectors, the regulation of financial systems is of

great importance as well because it can not only reduce uncertainties but also increase sanity.

Ever since the emergence of financial sectors, the regulations have also been rapidly developed,

in particular the regulation of the global financial system. However, people raise concerns of

financial systems after the credit crunch, which causes deep thinking of the regulation of

financial institutions and revaluation of risk management approaches (Thelassinos, Pintea &

Ratiu, 2015).

The Latin American debt crisis occurred in the mid-1980s triggered the Basel Committee

to develop and implement a regulatory system to measure the capital in line with the Basel

Capital Accord, which is the Capital Adequacy Ratio (CAR) and it is utilized as an indicator

presenting credit risk. Apart from this, CAR also applies to make assessment of the health of the

banking sector (Baker & Wurgler, 2015). During the late 1980s, CAR was applicable to a wide

range of countries not only including the G20 countries but also some developing countries

across the globe (Gan, Karim & Azhar, 2017). In the late 1900s, the Asian financial crisis made a

number of financial institutions bankrupt, which showed a correlation between macroeconomic

factors (such as GDP) and the requirement of capitals in financial sectors (Gan et al., 2017). This

triggered the generation of the new Capital Accord ‘Basel II’, which provided another method to

calculate CAR. The new calculation approach effectively regulated the financial sector by
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making CAR more sensitive to risks as it introduced three complementary pillars. The need for

regulations of the financial sector has been increasing in the 21st century. Due to the dramatic

downturn the financial market, a wide range of countries across the world experienced the

financial crises and this significantly stroke the global economies as it resulted in the recessions

in many economic sectors (Cerrato, Alessandri & Depperu, 2016). As a consequence, regulations

of financial sectors are increasingly necessary as they are designed to keep the regular and

normal economic operations China banking News.

The emergence of financial crisis demonstrates that financial sectors in a variety of

countries are connected with each other, which highly calls for the integrity of financial systems

and an overall regulation so that financial sectors can be controlled in a global scope (Mazzucato

& Penna, 2016). Therefore, new financial regulations have been introduced to achieve this

objective and the need for regulations also contributes to a set of rules and principles alongside

Basel 2.5. The regulations of the financial sector are also designed to enhance the financial

institution’s abilities to deal with financial shocks in the market. Due to the need for regulations

of financial sectors in the rapidly changing environment, the Basel Accord has evolved to

include a range of reforms and emphasized the supervision and risk management of financial

sectors (Barr, 2012). Such regulations can enhance the governance of financial sectors by

increasing the transparency and improving the capital adequacy requirement (Gan et al., 2017).

In addition to minimizing the possibilities of financial crisis, regulations are also set to

ensure that financial sectors have taken their roles and performed the responsibilities effectively.

Generally speaking, customers need regulation to protect their benefits and regulations are

important to guarantee that financial sectors comply with laws in different countries. There are

many kinds of regulations implemented to take control of the activities and performances of the
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financial sector, including both rules and principles (Barr, 2012). The purpose of such

regulations is to oversee whether the financial sector has correctly and effectively deployed the

principles incorporated within the regulatory framework proposed in global regulations such as

the Basel Accord. The appearance of macroeconomic policies is a good case that proves the

importance and need for regulations, which ensures the stability of financial sectors. For

example, monetary policies take the role of controlling the money supply of the country (Barr,

2012). And this is necessary because they are used to check the economic growth through setting

limitations to expenditures with the aim of reducing the possibilities of economic recessions.

3.0 The mechanism for bank regulation in China

The mechanism for bank regulations in China has gone through a variety of changes in

order to effectively deal with the proliferating risks which are more and more common to see in

the financial sector. The reforms and changes in the mechanism are also taken to control the

pressure of trading with the United States and the decreasing growth of economies. The banking

regulation mechanism initiates from the establishment of the Financial Stability and

Development Committee. There have been a number of actions taken in relation to inter alia,

which focuses on the elimination of non-performing loans, the financial supports to other non-

bank institutions and so on.

3.1 Key Banking Regulations in China

The financial regulatory structure in china has been known as “one bank and three

commissions” for centuries. This consists of four regulatory systems: “the people’s bank of

china, the china banking regulatory commission, the china security’s regulatory commission, as

well as the china insurance regulatory commission. These four components in the regulatory
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structure take respective roles in order to effectively monitor bank activities. PBOS is the central

bank in china and the CBRC, CRC, CSRC take the role of regulatory of regulating a range of

banks, inspecting the insurance, as well as monitoring the whole banking industry

3.2 The development of the Bank Regulation Mechanism

In the past years, the mechanism of the bank regulation in china has reformed in terms of

its regulatory structure. However, the banking mechanisms of china of largely influenced by

western nations since they are more developed. Over the last ten years, China has undergone

significant changes in its financial system leading to the development of a self-sustaining system

that is generally stable for the economy and consumers.

An important mechanism in the development of china’s financial system is hinged on its

policy transmission process China’s policy transmission system has improved significantly

especially after its economic activities developed significantly and helpful government agencies

developed. Nevertheless, the Chinese regulatory system developed significantly to resemble the

western financial model in place. However, these development mechanisms have been

development in light of the Chinese mechanisms in that it carries the values of the culture in

future.

Another important mechanism in the development of an effective state regulation

mechanism emanates from its capacity to decentralize powers. The decentralization of the

government’s power of the last few years has resulted from the regulatory, as well as supervisory

power of varied institutions in the government. Delegation of power is an important mechanism

throughout the state used to check other people’s power and ensure they conform to the rules and

regulations of the state. In line with this factor, China has developed an intricate system whereby

different factors and levels of governance are given more priority as opposed to others. However,
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Chinese organizations are conservative in that they try to maintain the operations of the

organization within its institutional context as opposed to the global model in place. In this case,

the Chinese regulator is described in the context of the national regulations that control the

operations of china over time.

While discussing the how China manages to control its financial institutions, an

important institution that needs to be given adequate consideration is the China Banking

Regulatory Commission (CBRC). This regulatory agency was developed in 2003, however it has

offered significance benefits and stability to the national system in general. This commission was

only developed after the rise of banking scandals within the system that ended up raising ethical

issues in the field. The CBRC has undergone significant reforms over the years to allow it handle

issues that are arising in the field. Over the years, this regulatory commission has overseen the

development of a system that is considerate of the needs of the people (consumers), as well as

the economy in general. Despite all the challenges that are encountered within the financial

system, important factor for consideration emanate from the fact that there is need to ensure that

the system is stable and does not threaten the sustainability of the system over time.

3.3 Financial Regulatory Agencies of China

In as much as nations are vested with the responsibility of guiding and streamlining the

financial system, regulatory agencies within the country have been vested with the responsibility

of developing a foolproof system (Dickinson, Zhang, Cai & Kutan, 2015). In this case, there is a

total of four regulatory agencies that are expected to realize full compliance in the system. These

include the China Banking and Insurance Regulatory Commission, China Banking Regulatory

Commission, China Insurance Regulatory Commission, and China Security Regulatory

Commission.
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3.3.1 China Banking and Insurance Regulatory Commission

This is one of the main regulatory commissions within the country. It is tasked with the

responsibility of ensuring that the Chinese system is stabilized and evades any crises that may

occur over the years. This agency is authorized and mandated by the state Council. Some of its

main roles and activities include supervising the development or setting-up of new banking, as

well as insurance institutions within the country (Yazzar, 2015). Similarly, it is involved in the

process of taking enforcement actions that resolve violations associated with the regulations of

the country. This system works alongside other regulatory agencies within the nations.

3.3.2 China Banking Regulatory Commission

This is also an important regulatory commission that is expected to solve challenges that

face the country and financial stability in the nation. Similarly, this agency was mandated and

developed by the State Council and was expected to regulate the main banking sector within the

country (Borst & Lardy, 2015). This regulatory commission was only developed in 2003 and was

expected to solve challenges that China was facing including the increasing debts, non-

transparency in the sector, as well as underutilization of resources within the disposal of

organizations in the economy (Borst & Lardy, 2015). This agency is especially renowned for its

attempts to promote to financial inclusion in the nation.

3.3.3 China Insurance Regulatory Commission

Same as all the other agencies, this one was also mandated, as well as authorized by the

State Council. The agency was expected to regulate insurance products and the service market

associated with the insurance and other non-banking financial institutions on the industry. This

regulatory commission was only developed after several agencies (the China Insurance

Regulatory commission and China Banking Regulatory Commission) were harmonized to serve
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the same purpose(Chen, 2019). This is in addition to resolving challenges that were cross-cutting

across the entire industry, to serve this purpose effectively, this agency was designed to be state-

owned for the purpose of the stability of the economy in general (Fernandez et al., 2016).

3.3.4 China Security Regulatory Commission

Similarly, this agency is state-owned and is an oversight committee meant to streamline

the activities of organizations involved in trading securities and other derivatives of importance.

This agency was effectively developed in 1999 and was one of the main ones expected to

oversee trade in securities within China (Wang, Wang, Wang & Zhou, 2018). In one of the first,

and main legislations expected to oversee the activities in security exchange, the China Security

Regulatory Commission was expected to centralize, as well as unify state-wide regulations that

streamline the operations of the entire industry (Nölke, 2015). This commission oversees trade in

the security exchange system and supervises the system as well, thus enforcing the rules and

imposing penalties on entities involved in illegal activities whatsoever. For that matter, this

entity is vested with important responsibilities similar to those of the Security Exchange

Commission (SEC) in the United States (Nölke, 2015). These responsibilities include: -

 Formulating policies, as well as laws of importance to the security market

 Oversee the issuing, trading, as well as settlement of financial instruments within the

republic of China.

 Supervising such activities like trading, listing, and settlements of future exchanges,

contracts, as well as security firms (Chen, 2019).

As a result, this commission is responsible for the success and stability of the financial institution

across the world.

3.4 Banking Regulations in China

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The regulatory system within the country is complicated and expected to deliver stability

within the economy in general. One of the main frameworks to ensure that the framework is

successful is the legislature of China (Okazaki, 2017). At the top of China’s legislature lies the

Law of the People’s Republic of China on the People’s Bank of China, on commercial Bank, as

well as on Regulation of and Supervison of the Banking Industry (Chen, 2019). On the second

tier lies the regulations, as well as administrative rules that the state council enacts to protect

people of any and all challenges that the financial system faces. In the third tier lies regulatory

initiatives of importance to the regulations of the China and advancements to solve any

challenges that may arise in the process (Chen, 2019).

4.0 Conclusion

Just like other developed economies, China has managed to evolve to become one of the

most advanced, not only terms of finance, but also in terms of financial complexities. The

country, clearly, is keen to develop financial regulations that will help it gain stability, as well as

reduce uncertainties in the market. However, this would have hardly been impossible had the

country failed to adhere to, as well as address challenges that arise over time. Subsequently,

China’s regulatory framework, is intricate and developed enough to handle any challenges that

arise over time.

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