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Opinion: Why A Smaller Central Bank Implies Major Financial Governance Changes In China

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The Chinese central bank recently cut 30 jobs. While laying off 4% of its total workforce may appear insignificant, it reflects significant shifts in Beijing’s perception of the country’s financial landscape.

The People’s Bank of China (PBOC) job cuts occurred against the backdrop of the establishment of the Central Finance Commission (CFC), a Communist Party organ that has replaced the Financial Stability and Development Committee (FSDC), which was established by the State Council in 2017 to serve as China’s supreme decision-making body on national financial affairs.
The FSDC’s office, which was previously housed within the PBOC, has been closed and merged with that of the CFC.

Vice-Premier He Lifeng oversees the office, which began operations in late September, according to the Post. It is located on Beijing Financial Street, just a short distance from the PBOC, where the CFC has assembled a team of over 100 officials, including securities and banking regulators, to address the country’s most pressing financial challenges.

The CFC now has decision-making power under this new structure, making the PBOC and other financial regulators merely enforcement apparatuses and front offices.

The agreement also removed the PBOC’s authority over the country’s largest financial conglomerates and the protection of consumer rights related to financial products.

Along with previous changes to the PBOC’s national network, such as the closure of county-level branches and Federal Reserve-style regional centres, China’s central bank is shrinking and weakening.

He Lifeng, Vice-Premier of China (Image by: DPA)

As a result, China is departing from the traditional Western model of financial market systems, in which an influential central bank, such as the US Federal Reserve or the European Central Bank, supervises banks and large financial institutions.

To be sure, the PBOC has never been an autonomous body. Rather, it has always functioned as a government organ. Nonetheless, its autonomy had grown noticeably during China’s economic reforms. That pattern has now shifted.

Beijing has compelling reasons to change. After two decades of euphoria, China’s financial sector has devolved into a minefield of bad debts and corruption scandals. A centralised power must clean up the mess, which will necessitate numerous political, social, and strategic realignments.

While the PBOC is not to blame for these problems, it has played an important role in the “financialisation” of the Chinese economy. For example, the PBOC praised itself for establishing an onshore corporate and municipal bond market, but that market has also enabled local Chinese governments to borrow excessively.

The PBOC has long been regarded as a pro-market agency in China’s hybrid state-market system, pushing for deregulation and liberalisation. However, there are growing concerns that some of the reforms may have gone too far by ignoring the country’s distinct political and social realities.

When something goes wrong, it can quickly escalate into a social and even security issue, necessitating the collaboration of multiple departments to clean up.

The stock market crash in the summer of 2015, as well as the subsequent capital flight, demonstrated to Beijing that financial matters cannot be treated as technical matters and delegated to specialists.
Then there’s the issue of corruption and fraud. The development of China’s financial markets and lax supervision have created ample room for money-power deals.

After two decades in operation under its corrupt chairman Lai Xiaomin, a former PBOC official who was executed in January 2021, China Huarong Asset Management Corp, which was founded in 1999 to process bad loans offloaded by China’s largest bank, has created far more bad loans.
An article published earlier this year by China’s disciplinary commission chastised the country’s financial executives for considering themselves “elites” and adhering to Western practises.

The restructuring of China’s financial governance structure comes against the backdrop of a possible “financial war.”

Financial sanctions imposed by other countries cannot be completely ruled out in the face of rising geopolitical tensions. It now makes sense for Beijing to delegate responsibility for preparing for this black-swan scenario to the highest levels of government.

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