China Announces Plans For Banking Regulation

by Mary Swire, for LawAndTax-News.com, Hong Kong

25 March 2003

China's legislators have proposed a plan in which the central bank's banking supervisory functions are replaced with the creation of a new, separate Banking Regulatory Commission.

The reform is claimed as a major advance towards achieving tighter supervision over domestic banks weighed down by non-performing loans and the development of a more efficient monetary policy to stabilize China's currency and to support overall economic growth.

The paramount benefit of the reform, said economists, 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. What is pivotal, though, according to comments by economists and banks, is how the new framework is fleshed out in the midst of an ongoing reshuffle and how related reforms proceed.

"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 Centre (DRC) under the State Council, the Chinese cabinet.

Some Western economists, along with the Japanese Government, have been encouraging 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.

A People's Bank of China (PBOC) spokesman said it is unlikely that this can happen 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.

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