By turning the new regulatory body into a Rottweiler, Beijing hopes to get a grip on debt. Photo: iStock
By turning the new regulatory body into a Rottweiler, Beijing hopes to get a grip on debt. Photo: iStock

President Xi Jinping has opened the door for confidante Liu He to push through economic reforms after China’s central bank was handed more power in a major shake-up in the financial sector. Details released during Tuesday’s session of the de facto parliament, the National People’s Congress, outlined plans for merging the banking and insurance regulators.

At the same time, the People’s Bank of China, or central bank, will be entrusted with writing the rules for the financial industry. A raft of ministries will also be created, including a new agricultural and rural affairs department, in the government’s biggest revamp in years.

The move is aimed at streamlining and tightening oversight of the US$42 trillion banking and insurance sectors as Beijing cracks down on corporate and local government debt.

“Finance is core to a modern economy, and we must pay high attention to prevent financial risks and safeguard national financial security,” the text of the proposal stressed, adding that “it’s intended to reconcile overlaps in regulatory oversight.”

At the heart of these policy changes will be President Xi’s trusted adviser Liu, who is widely expected to be named vice-premier later this week in charge of economic and financial affairs.

The Harvard-educated technocrat has also been mentioned as a possible successor to Zhou Xiaochuan, the erudite 70-year-old governor of the PBOC, who is due to step down this year.

If the role is confirmed, it would put Liu on a par with Zhu Rongji, the tough, no-nonsense head of the central bank and vice-premier between 1993 and 1995.

“The PBOC has more power: It has added the role of lawmaking to its previous role as the adviser on monetary policy,” Zhou Hao, an economist at Commerzbank in Singapore, told Bloomberg News.

“The PBOC’s role will largely be policy making and the newly merged bank and insurance regulator will mainly be the policy executor. And the other thing for sure is that Liu He will play a more important role in China’s reforms,” Zhou added.

Along with Wang Qishan, the feared anti-corruption tzar, the 66-year-old Liu is part of President Xi’s inner circle. Charming with a steely-edge, he delivered an insightful speech about China’s financial policy at the World Economic Forum in Davos in January.

Earlier this month, he even went to Washington to head off a looming trade war after President Donald Trump’s administration approved tough tariffs on Chinese-made washing machines, solar panels and steel. Liu appeared to come away empty handed.

Still, he is probably the architect of the regulatory merger under his boss President Xi.

“Deepening the reform of the Party and state institutions is an inevitable requirement for strengthening the long-term governance of the [Communist] Party,” Liu wrote in the government’s traditional mouthpiece, the People’s Daily, on Tuesday, adding that “reforms would be profound.”

Combing the China Banking Regulatory Commission and the China Insurance Regulatory Commission would certainly be considered “profound” with the PBOC writing the rulebook.

But then, the main aim of this ‘super regulator’ is to curb and control the excesses in the $7.6 trillion shadow banking sector, which is starting to send shivers down the spines of members of the State Council, or China’s cabinet.

Last week, it was revealed that Anbang Insurance Group, with 1.97 trillion yuan ($310.85 billion) in assets after being ranked 139 in the 2017 Fortune Global 500 list, had been taken over by the government.

“Illegal business practices by Anbang [have] seriously threatened the solvency of the company,” the China Insurance Regulatory Commission stated without disclosing further details.

By turning the new regulatory body into a Rottweiler, Beijing hopes to finally get a grip on a debt headache, which is rapidly turning into a migraine, and bring into line the shadow banking industry.

During the past two years, the government has rolled out a slew of measures to tame “binge” borrowing by private and public companies, as well as trying to switch off the subsidies drip of “Zombie” state-owned enterprises.

“We should understand the necessity of promoting this deep transformation,” Liu said in his People’s Daily article.

Indeed, the economy and the Communist Party have become grafted at the hip since President Xi was handed the opportunity to remain in office indefinitely after the constitution was changed on Sunday.

While he will continue with his anti-corruption campaign, overhauling sections of the economy has become a priority with Liu riding shotgun.

“He will be like a Chinese version combining both Larry Summers and Ben Bernanke, plus the chairman of the president’s economic council,” said Shen Jianguang, the chief Asia economist at Mizuho Securities Asia in Hong Kong.

With a high-profile portfolio, he will need an ‘economic magic bullet’ tucked away in his briefcase.

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