China’s Financial Regulators’ Criticism of Barbarian Highlights Structural Deficiencies, Say Experts

Du Qingqing, Zhang Feifei / Yicai

2016-12-05

(Yicai Global) Dec. 5 – In a rare practice, two executives of China's financial regulator last Friday publicly criticized some financial institutions engaging in high-risk speculation in the stock markets by taking advantage of regulatory loopholes.

It was a manifestation of structural deficiencies in financial regulation in China, which means there are some blind spots not covered by any of regulators overseeing the industry, an industry expert told Yicai Global.

Financial regulations in China are implemented by several parallel governing bodies, such as the central bank, China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) and China Banking Regulatory Commission (CBRC).

What the executives said last Friday is an indication that regulators feel helpless about the existing regulation and separation of powers within the industry, said Dong Dengxin, director at the Securities Research Institute of Wuhan University of Science & Technology.

With the current model, there are blind spots in cross-industry capital regulation, he said. "Some leveraged financing activities involve banking, insurance and private equity transactions. On the surface, all regulators have jurisdiction over such activities, but such activities are not controlled by any single body, which is the drawback of the industry-specific regulation."

Under the existing industry-specific regulation system, if financing is conducted through multiple channels, each product has to be procedurally compliant with the law, said Professor Zhu Minglai at the insurance department of Nankai University. Such financing activities require cross-market regulation, which involves joint operations by different regulators.

Some insurance companies compete with each other for the control of listed companies, noted Dong as an example of financial irregularities, saying that they are driven by short-term financial gains. They typically attract retail investors through the herd instinct to invest in the stocks by adjusting the profit distribution plans of the listed companies, and then they cash in the stocks at a high profit after the share prices increase multiple-fold.