Banking regulation in China: what, why, and how?
| Date | 09 November 2012 |
| Published date | 09 November 2012 |
| DOI | https://doi.org/10.1108/13581981211279336 |
| Pages | 367-384 |
| Author | Wei Ping He |
| Subject Matter | Accounting & finance |
Banking regulation in China:
what, why, and how?
Wei Ping He
School of Law, University of South Australia, Adelaide, Australia
Abstract
Purpose – The purpose of this paper is to provide an overview of China’s contemporary banking
regulatory system, with particular focus on regulatory control of foreign banks trading in China.
The paper addresses three aspects of Chinese banking regulation: what does China regulate; why
does China regulate; and how does China regulate. Much of the discussion is concerned with China’s
regulatory agencies particularly with the role of the CBRC as the principal regulator in China’s
banking sector.
Design/methodology/approach – In the first instance the paper presents an overview of banking
regulatory models gained from a review of theoretical literature in the area. Then through a wide
ranging review of Chinese publications, both academic and official, the paper seeks to relate the course
of regulatory reform in China, both in terms of compliance with orthodox regulatory theory, and
the unique regulatory requirements of the Chinese banking system.
Findings – The paper recognises that China has embraced the need for banking regulation with the
establishment of an institutional structure that is responsive to both banking supervision and
government policy. Within that structure the role of the CBRC, the pervasive manner in which that
agency operates, and the content of its regulatory output have been identified and critically reviewed.
Originality/value – In its review of the modernization of China’s banking regulatory system, the
paper achieves originality from the author’s research into, and critical reflections on Chinese generated
literature, both institutional and academic, which is then communicated in a manner that will be
understood by readers familiar with Western banking regulatory theory.
Keywords Banking regulation, Banking regulationin China, Banking, China
Paper type Research paper
I. Introduction
In 2002, the 16th Chinese Communist Party National Meeting called for reform in
the financial sector (Zemin, 2002). Privately owned enterprises were recognized as an
essential component of the financial market. This policy statement embraced active
promotion of private ownership in China’s banking sector. The role of the government,
from being a dominant force in the market, was to be transformed into being a facilitator
of the market economy. This transformation was accompanied by other initiatives
including encouraging foreign banks to take minority stakes in historically state-owned
banks.
China’s banking sector has thus embarked on a reformatory journey since 2003.
This article commences with the establishment of the Chinese Banking Regulatory
Commission (CBRC) in 2003. That is the point from which the modernization of Chinese
banking regulation begins. It is the point at which China consolidated its regulatory
institutional structure by developing specialised regulators. Following this,
a comprehensive set of regulatory initiatives and a unique regulatory approach was
developed.
The purpose of the paper is to provide an overview of China’s contemporary
banking regulatory system, with particular focus on regulatory control of foreign
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
Banking
regulation
in China
367
Journal of Financial Regulation and
Compliance
Vol. 20 No. 4, 2012
pp. 367-384
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981211279336
banks trading in China. The paper addresses three aspects of Chinese banking
regulation: what does China regulate; why does China regulate; and how does China
regulate. These propositions wherever possible will be related to regulatory measures
in the areas of entry and operations of foreign banks in China. Much of the discussion
will be concerned with China’s regulatory authorities and in that regard is primarily
concerned with the role of the CBRC as the principal regulator in China’s banking
sector. The paper seeks to highlight the significant role that the CBRC plays in China’s
regulatory discourse, and consequently the construction of the banking regulatory
landscape in China. From here, readers will be in a position to form views as to the
nature of China’s banking regulatory system and as to some unique regulatory features
that may not be well understood in foreign jurisdictions.
II. What does China regulate?
When reviewing China’s regulatory institutional structure, a starting point is the
formation of the CBRC. With a view to creating specialised regulatory bodies, in April
2003, the 10th National People’s Congress Standing Committee approved the proposal
by the State Council that the CBRC should replace the People’s Bank of China (PBoC) as
the principal supervisory and regulatory body within the banking sector. The CBRC
was to be accountable to the State Council. The PBoC’s role was reduced to the
supervision of monetary policy[1].
By separating banking regulatory supervision and monetary policy, and creating
the CBRC, China took a significant step toward pursuing a better and stronger banking
regulatory framework. The CBRC operates pursuant to an express statutory grant of
the National People’s Congress. The main responsibility of the CBRC was for
prudential regulation and protecting depositors by reducing banking risk[2]. CBRC
provincial offices took over the regulatory role previously held by provincial branches
of PBoC (Wang, 2003). Therefore, as it was with PBoC, the regulatory structure within
the CBRC took on the provincial administrative model employed by the Chinese
government in its general administration. It is interesting to observe in this regard that
foreign banks are strategically regionally focused, concentrating their resources
particularly in three high-growth regions, Yangtze River Delta, the Pearl River Delta,
ant the Bohai Bay area (ANZ, 2009).
The establishment of the CBRC as a principal regulator has been highly regarded
as a milestone step forward towards a stronger and more effective banking regulatory
system. The major justification for divorcing the regulatory activities from the PBoC
was that, in engaging in monetary, as well as regulatory activities, the PBoC
would experience conflicts of interest (Shi, 2004) caused by the interaction of micro
(regulatory) and macro (monetary) policies (Goodhart and Schoemaker, 1993). The
creation of the CBRC also represented an acknowledgment by the Chinese authorities
of a deficiency in its banking regulatory system; particularly, a lack of market
discipline and inadequate regulation of risk management (Shi, 2004).
Although it has been stripped of banking regulatory power, nonetheless, the PBoC
still plays a crucial role in the Chinese banking sector. As noted above, unde r the
supervision of State Council, the PBoC is now primarily concerned with making and
implementing monetary policy, with a focus on the macro-economy, and the safe ty of
entire financial system[3]. In accordance with its enabling legislation, the PBoC
supervises interbank markets, the payment, and, the settlement system, and credit
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