The main developments from China’s National People’s Congress on Tuesday were the announcement of a major government restructuring plan and a harsh tone from China’s foreign minister on the relationship with the US. I recorded a 5-minute video today that discussed both items (please see link HERE) and summarize the main takeaways below.
SUMMARY:
- An overhaul of the financial regulatory structure unveiled on Tuesday may be just the start, as Beijing may also create a new Party body to guide financial policies; as it stands, the new regulatory structure is likely to be net positive for financial stability, neutral to negative for growth, and potentially negative for banking reforms and market communication.
- The harsh tone towards the US from Xi Jinping and foreign minister Qin Gang this week makes it unlikely that Beijing and Washington will lower tensions from the existing high baseline level anytime soon; more broadly, a main takeaway of the NPC thus far is that Xi feels more urgency to pursue his long-term strategic and political agenda than to send a message of confidence to the domestic private sector and foreign business community.
Financial sector overhaul highlights Beijing’s focus on systemic risks
As expected, the government restructuring included a major overhaul of China’s financial regulatory regime. Key changes were:
- The banking and insurance regulator (CBIRC) is morphing into a super-charged State Administration of Financial Supervision and Management. This new agency consolidates all supervision outside of the securities markets, including by taking over regulatory functions from the central bank (PBOC) in areas such as oversight of financial holding companies.
- The securities regulatory (CSRC) will continue to exist separately, reporting to the cabinet and with some expanded powers as well.
- China will also overhaul local-level financial regulation, with a new structure in which the central regulatory agencies will dispatch personnel to the local level.
How big a deal is this? It may not actually be the main event, given that Beijing may also proceed with plans to create a new Party structure (such as a “Central Financial Work Commission”) to oversee the financial sector (please see: Speculating on Xi’s new financial team, 24 February 2023). That news could come out during or after the NPC and will be a key part of how to evaluate the policy outlook. Another watchpoint is the appointment, on 12 March, of a new financial team; Yi Huiman, who currently heads the securities regulator, will likely be in charge of the new super-regulator.
In the meantime, my initial takeaways on the changes announced so far are as follows:
- The regulatory overhaul underscores Xi’s continued focus on systemic financial risks. This isn’t growth-negative but it certainly isn’t growth-positive: it pushes back on any hopes (which were always misplaced) that Xi and a new financial team would turn on the credit spigots to boost short-term growth.
- The new structure may indeed be more effective in addressing key debt risks, particularly at the local level. There is a logic to consolidating supervision functions to avoid loopholes and regulatory arbitrage, though of course this only works if it is well-designed and well-run. At this point, it seems net positive in terms of avoiding a financial crisis.
- However, the restructuring also puts the PBOC and financial regulators under the regular civil service salary system (meaning lower pay grades) and could mean a reduction in headcount. China’s anti-corruption agency has issued criticism in recent weeks about high pay in the financial sector. Lower salaries and headcount means a risk of reduced professional competence and bureaucratic capacity.
- Institutionally, PBOC is the clear loser with diminished regulatory and likely political power. It remains to be seen if this impacts PBOC’s conduct of monetary policy. PBOC has generally had a reform-minded team and was the most powerful voice in the financial sector, which allowed it to push through gradual but important market-oriented measures. The loss of that influence under a new team and new structure could slow the pace of overall reform in the financial sector and reduce the quality of communication with the markets.
- The fact that the securities regulator will stay independent highlights Beijing’s push to develop capital markets and make China’s financial sector less dependent on banks. I view this as positive for the deepening and functioning of domestic equity and bond markets.
Other aspects of the government restructuring include:
- A restructuring of the Ministry of Science and Technology, with the aim of furthering Xi’s goals for breakthrough advances and self-reliance in tech.
- A new agency to oversee China’s data regulations, which may have important implications for e-commerce firms and the information/data environment in China more broadly.
We’ll have more to say on these in coming days, as more details come out.
Politics and geopolitics: Harsh words for the US
On Monday, Xi gave a speech at the NPC to China’s government-controlled chamber of commerce. While that talk may have been intended in part to emphasize Beijing’s support for the private sector, it wasn’t exactly sunshine and rainbows.
Xi used this occasion to directly criticize the United States for its “containment, encirclement and suppression” of China. Xi and other officials have typically referred to the US more obliquely, and it was particularly notable that he named the US in a meeting with the private sector. The message of the talk was that while Beijing will do more to improve the environment for domestic private firms, those firms must also serve the country in addressing both external and domestic challenges.
In terms of external challenges (US containment), Xi is calling for domestic firms to focus on innovation in their core businesses (i.e., not diversify into lucrative sidelines like property development), move up the value chain, and advance China’s self-reliance in critical technologies. On the domestic side, Xi closed the speech by calling on private firms to advance the ‘common prosperity’ agenda, including through “harmonious labor relations” that allow the “fruits of firm development to be shared more equitably” – an implied push on employee rights/pay and perhaps pushback on executive compensation.
On Tuesday, foreign minister Qin Gang picked up where Xi left off with an NPC press conference that went hard on Washington. Qin warned that while the Biden administration says it is intent to “establish guard rails” against a crisis, it is pursuing a course of confrontation and conflict with China. Qin did not suggest a fundamental recalibration of China’s foreign policy, but it was vintage “wolf warrior” in tone – including towards Japan and to some extent even Europe.
The implications from Xi and Qin are as follows:
- While the strident tone from Beijing does not suggest a further increase in geopolitical tail risks with the US – such as over Taiwan or Russia/Ukraine – it makes it unlikely that the US and China will lower tensions from their current high level anytime soon. It will be important to see whether Biden and Xi speak after the NPC, particularly with frictions likely to come from a potential meeting between House speaker Kevin McCarthy and Taiwan president Tsai Ing-wen in California in April that will trigger Beijing’s ire. (For our most recent note on the US-China outlook post-balloon episode, please see HERE.)
- Thus far at the NPC, Xi feels less urgency to boost growth and confidence than many expected. I wasn’t surprised to see conservative growth targets come out on Sunday (see our analysis HERE), but the extent to which Xi is striking such an aggressively political tone – which is likely to deepen angst for both domestic firms and foreign firms – is notable.
- Xi’s pledges to improve the environment for private firms are worth watching, but thus far the domestic business community (in my perception) is waiting for follow-through in areas such as leveling the playing field with state firms and improving property rights. Additional statements from Xi and the new premier in coming days (see below) are worth monitoring. More broadly, Xi’s speech to the private sector indicates that while regulatory tail risks (such as a new rectification campaign) are low for now, the private sector will remain under implicit and explicit pressure to back Xi’s domestic and international imperatives.
Coming up at the NPC:
- 12 March: appointment of the new financial and economic team
- 13 March: NPC concludes with a speech by Xi and press conference by new premier Li Qiang
