China has now concluded that the stock market crash over the summer was the result of poor inter-agency coordination. In the latest attempt to prevent this from happening again China is considering bringing together its banking, insurance and securities regulators into a single super-commission, sources told Reuters.

People's Bank of China
People’s Bank of China

The three regulatory agencies that may be merged are the China Securities Regulatory Commission (CSRC), the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC). Currently, these three regulators operate independently, each reporting to the State Council, or cabinet.

The benchmark index for China’s mainland stock markets, the Shanghai Stock Exchange Composite Index, fell by more than 40% between mid-June and August on a combination of Beijing clamping down on margin trading and index company MSCI not including mainland stocks in its emerging markets index. Maybe if the guys restricting margin trading in an effort to temper the market’s unbridled rally in the first half of the year had been told this was likely to spark a massive sell off, they might have thought twice about it, hence the reason to bring all three regulators together. The ensuing plunge send Beijing into a tizzy of uncoordinated movement to stop the panic, that resulted in  unprecedented measures that embarrassed the government and led many to believe China was stepping back from reforms to let the market move freely

The uncoordinated policy response prompted senior leadership to begin internal discussions about merging the three main financial regulators, part of a broader goal to reform China’s markets, a senior official at one of the regulators told Reuters.

Unnamed sources told Reuters that industry insiders have expected a shake-up in the regulatory apparatus in the months following the crash, and that Beijing had already begun exploring a replacement for China Securities Regulatory Commission (CSRC) head Xiao Gang.

The People’s Bank of China’s is being considered as the institution to oversee the three regulators under one roof, as a way of strengthening its regulatory clout, according to Chinese news agency Caixin.

In a Nov. 3 speech to Communist Party officials, President Xi Jinping stressed the need to improve financial system regulation.

“Frequent exposure to risks and recent capital markets turmoil indicate that the current regulatory framework and financial industry development have institutional contradictions,” Xi said, according to Caixin.

“It’s quite difficult to differentiate between a securities company versus an insurance company versus an asset management company, yet they are under different regulatory umbrellas and belong to different regulators. This leads to a lot of overlap,” Zhou Hao, an economist at Commerzbank in Singapore told Reuters.

Discussions around a unified financial supervisory commission have been ongoing for more than a decade, said Reuters.

The multi-agency approach to regulating banks, brokers, insurers and investors has been in place since 2003. Yet during that time, the financial industry has undergone enormous change such as the advent of high-speed stock trading, stock investing through margin trading schemes, and retail investment products sold on the Internet.

Any move to centralize regulatory supervision would shift power away from the three current agencies and create a more direct link between market oversight and China’s leadership. A new institution would be overseen by the State Council, the senior regulatory source told Reuters.

No decision has yet been made, and any process of integration would likely take some time.

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