China’s central bank recently eliminated 30 positions. While downsizing 4 per cent of its total headcount may seem like an insignificant move, it reflects big changes in how Beijing views the country’s financial landscape.
The job cuts by the People’s Bank of China (PBOC) took place against the backdrop of the creation of the Central Finance Commission (CFC), a Communist Party organ that has replaced the Financial Stability and Development Committee (FSDC), established by the State Council in 2017 to act as China’s supreme decision-making body on national financial affairs.
The office of the FSDC, which was originally located within the PBOC, has been closed and merged with the CFC’s office.
That office, which the Post reported started operations in late September, is managed by Vice-Premier He Lifeng. Situated on Beijing Financial Street, it is a stone’s throw away from the PBOC, where the CFC has drawn more than 100 officials – including securities and banking regulators – to handle the country’s most pressing financial challenges.
Under this new structure, the decision-making power is now concentrated at the CFC, rendering the PBOC and other financial regulators mere enforcement apparatuses and front offices.
The arrangement also took away the PBOC’s authority in overseeing the country’s largest financial conglomerates and safeguarding consumer rights related to financial products.
Along with earlier changes in the PBOC’s national network, including the closures of its county-level branches and Federal Reserve-style regional centres, China’s central bank is getting smaller and weaker.
With that, China is no longer following the standard Western model of financial market systems, where an influential central bank like the US Fed or European Central Bank oversees banks and large financial institutions.
To be sure, the PBOC has never been an independent agency. Rather, it has always been an organ within the government. Still, its autonomy had increased noticeably during China’s economic reforms. That trend has now been reversed.
Beijing has good reasons to make changes. After two decades of exuberance, China’s financial industry has turned into a landmine of bad debts and corruption scandals. The mess needs to cleaned up by a centralised power, involving many political, social and strategic recalibrations.
While the PBOC should not be blamed for these troubles, it has played a key role in the “financialisation” of the Chinese economy. For instance, the PBOC had patted itself on the back for creating an onshore corporate and municipal bond market, but that market has also facilitated excessive borrowing by local Chinese governments.
In China’s hybrid state-market system, the PBOC has long been hailed as a pro-market agency pushing for deregulation and liberalisation. However, there are also growing complaints that some of the reforms may have gone too far by neglecting the country’s unique political and social realities.
When something goes wrong, it can quickly turn into a social and even security problem, requiring joint efforts by multiple departments to clean up.
The stock rout in the summer of 2015, as well as the following capital flight, have made it clear to Beijing that financial affairs cannot be simply treated as technical matters and delegated to specialists.
Then there is corruption and fraud. China’s financial market development and lax supervision have created ample room for money-power deals.
China Huarong Asset Management Corp, which was founded in 1999 to process bad loans offloaded by China’s biggest bank, has created much more bad loans after two decades in operation under its corrupt chairman Lai Xiaomin, a former PBOC official who was executed in January 2021.
An article published by China’s disciplinary commission earlier this year blasted the country’s financial executives for considering themselves “elites” and following Western practices.
The shake-up in China’s financial governance structure also comes against the backdrop of a potential “financial war”.
Amid rising geopolitical tensions, the risks of financial sanctions imposed by other countries can no longer be completely ruled out. It now makes sense for Beijing to elevate the task of preparing for this black-swan scenario to the top leadership.