Will China's impending overhaul of its financial regulatory system make a difference?

Martin Chorzempa Martin Chorzempa () and Nicolas Veron
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Martin Chorzempa Martin Chorzempa: Peterson Institute for International Economics

No PB23-1, Policy Briefs from Peterson Institute for International Economics

Abstract: China's reshuffle of its financial supervisory architecture announced in March, like previous changes, appears incremental rather than radical. It will not, however, resolve the main challenge hobbling China's financial system, which is not linked to specific choices of supervisory architecture but rather to the unfinished transition from a state-directed to a market-based financial system and the way the Chinese Communist Party's pervasive role creates obstacles to good corporate governance of individual financial firms and to the independence of supervisory authorities. Too often, political authorities and sometimes the supervisors themselves intervene directly in financial firms' decisions to allocate capital and credit, occasionally resulting in failures of risk control and risk management. The authors argue that Chinese reformers should aim at a clearer and more rigorous division of responsibilities, in which financial firms manage financial opportunities and risks, and supervisors are exclusively focused on their respective public policy mandates.

Date: 2023-03
New Economics Papers: this item is included in nep-cna, nep-reg and nep-rmg
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