By staff reporters Yu Ning, Zhang Yuzhe and Li Tao

The People’s Bank of China has proposed closer cooperation with three government regulators as part of an adjusted financial oversight system based on years of high-level debate.

The central bank plan released August 14 would revamp institutions, functions and roles through what’s called the “three settlements.”

It would neither be the first such modification, nor would it settle all regulatory problems. For example, the new system would not immediately resolve sensitive issues over economic control by coordinating the central bank and Ministry of Finance (MOF).

But as with past adjustments, the move is linked to current economic conditions. And it was pushed from the top by members of the State Council, China’s cabinet.

The new system would divide responsibilities among the central bank, China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), and China Insurance Regulatory Commission (CIRC). In addition, a cooperative mechanism would link the central bank, MOF and the National Development Regulatory Commission (NDRC).

As part of the announcement, CBRC and CIRC released proposals for operating separate inspection offices to fight fraud and corruption, while CSRC said it would add personnel to its existing inspectorate.

Under the central bank plan, a foreign exchange rate department would be created to boost the government’s research capacity and provide at least a partial response to those who wonder whether China will strengthen foreign exchange rate reform.

The central bank currently lacks full authority over foreign exchange rates and currency policy. Instead, the State Council has the final word based on central bank policy proposals. But against this backdrop, the importance of financial expertise in forex and currency policies is growing.

“Three settlements” calls on the central bank’s forex department to shape the forex regime that now lies at the heart of the Chinese economy. The department will play several supportive roles by, for example, drafting and implementing yuan-forex policy. Macroeconomic controls for the forex market will be studied, drafted and implemented. Additionally, the department will oversee domestic as well as foreign supply and demand.

The proposed overhaul comes on the heels of a forex policy change announced by the State Administration of Foreign Exchange (SAFE) on August 6. SAFE’s roles and functions were revamped for the first time in 11 years, and its policy was amended to allow a managed, floating currency rate that pegs the yuan against a basket of currencies rather than the dollar alone.

The idea to more closely coordinate CSRC, CBRC and CIRC – which assumed separate regulatory responsibilities in 1998 – has been discussed for years, but with few results.
 
A decade ago, the central bank imitated the U.S. Federal Reserve model by replacing 31 provincial subsidiaries with nine to oversee implementation of monetary policy. A year later, however, credit functions returned to the bank’s provincial offices. And banking regulation was transferred from the central bank to CBRC in 2003.

The regulatory agencies once signed a memorandum for cooperation that proposed a quarterly conference attended by central bank and MOF representatives. But such conferences have been rare, and cooperation talks stalled.

The State Council finally got involved in July by ordering a firm mechanism for regulatory cooperation, leading to the “three settlements.” Its involvement would continue through creation of a ministerial level conference that brings regulators and central bank together with the State Council’s leaders.

But the central bank would lead the new mechanism, a source at the State Commission Office for the Public Sector told Caijing. The ministerial conferences would be meaty and regular. Also, Caijing has learned, central bank officials would be seated at the joint conference between representatives from the three regulatory bodies.

Besides the “three settlements,” the central bank is considering revamping its system to improve internal operations and administrative efficiency. This proposal will be reviewed by the State Council, with possible implementation in late 2008 or ’09.

Still to be answered, however, are questions over how to cultivate an effective and cooperative working relationship between the central bank and MOF, and central bank involvement in the forex regime.

Also, for years the central bank has been rescuing state-owned financial institutions by offering credit. Some insiders argue MOF should control a discount window that uses taxpayer money to help troubled banks. 

Provincial financial issues are also on the discussion board. The central bank’s policy report for the second quarter stressed that “more support should be given to regional economic development.”