China Banking Regulator Warns of Rising Risks

September 2, 2013, 4:24 PM

China Banking Regulator Warns of Rising Risks

China’s banks don’t properly serve the country’s real economy, and the financial system has become so complex that risks are falling through the gaps in the regulatory system. That is now a familiar message from the cohort of bearish analysts and hedge-fund managers counting the cracks in China’s economic model. It is less familiar coming from China’s banking regulator. In a question-and-answer interview in this week’s Seeking Truth magazine, the Communist Party’s theoretical journal, China Banking Regulatory Commission Chairman Shang Fulin says the financial system’s support of the real economy “needs to be vastly improved,” and he warns of the need to “prevent regulatory arbitrage” and “reduce the risks of financial contagion.”“With the financial system’s evolution, the increasing diversity of financial innovation, and the rapid expansion of off-balance-sheet activities, financial products that cross over between markets have emerged in large numbers,” Mr. Shang says. “The scope, nature and distribution of financial risks are changing, and their complexity and interconnectedness is rising.”

Those risks are rising in part from a regulatory regime that has reached its use-by date.

When China first set up its regulators more than a decade ago, it established regulatory silos for what was at the time three distinct and self-contained pillars of the financial sector: banks, securities firms and insurance companies. Those divisions are less useful now. Not only has the trust sector – which was miniscule when Beijing was setting up its regulatory regime – surpassed insurance in terms of assets under management, but the pillar industries are no longer so self-contained as banks, insurers and fund managers all cooperate to design and package investment products.

Last month China’s State Council moved to guard against those risks by setting up a body that would strengthen financial policy coordination among financial regulators and monitor financial products overseen by more than one regulatory authority. The body will be led by the central bank and include Mr. Shang as well as the heads of the China Securities Regulatory Commission, the China Insurance Regulatory Commission and the foreign-exchange regulator.

The silos have created regulatory duplication, overlaps and gaps, and Mr. Shang says the new oversight board will help to resolve those problems. Perhaps the biggest surprise is that the members weren’t meeting already. Although a more appropriate measure might be to merge the regulators, because all three have become powerful in their own right, wholesale reform might be a bridge too far for the meantime.

Mr. Shang is also clearly preoccupied with the way funds banks raise by selling wealth-management products to customers are being invested, saying the products should be standardized – code for invested in bonds and securitized assets rather than directly making or buying loans – and that the funds should be “invested in real economic activity and not in bubbles.”

He said that when it comes to wealth management, banks need to explore new products and new models.

“There is a structural gap between the supply of capital and companies’ real needs.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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