Photographer: Tomohiro Ohsumi/Bloomberg

China Sets Up New Financial Affairs Office Amid Market Turmoil

Updated on
  • Department to fall under State Council's general office
  • Leaders seek to boost investor confidence in market regulation

China’s Cabinet has created a new department to coordinate financial and economic affairs, according to a person familiar with the matter, as the country’s leaders seek to restore investor confidence in the government’s regulation of markets.

The department under the State Council’s general office is tasked with coordinating between China’s financial and economic regulators and gathering data from local offices, according the person, who asked not to be identified because the move hasn’t been publicly announced. Agricultural Bank of China Vice President Li Zhenjiang was tapped as deputy director responsible for its daily operations and took the new post last week, the person said.

The move signals a broader recognition among Communist Party leaders that the current structure must be revamped to properly manage the gyrations of China’s markets and its economic slowdown. Investors have voiced renewed concern about the government’s credibility following a series of interventions since this summer to arrest a market slide that led equities to fall globally.

The Shanghai Composite Index has plunged more than 17 percent since late December, and leaders had to abandon a newly imposed stock circuit-breaker system after stock slides twice halted trading for the day last week.

Previously, State Council oversight of finance and securities fell to a department that handles myriad other issues including land, environmental protection, forestry and tourism. It’s unclear how much power the new department will have given that President Xi Jinping manages a separate body that steers financial policy, the Central Leading Group on Financial and Economic Affairs.

Taking Responsibility

A commentary published in The Procuratorial Daily, the paper of the top prosecuting body, said responsibility should be taken for the circuit breaker policy.

"The negative effects, huge losses and damages to the economy caused by a wrong decision need some one to take the responsibility," the commentary said. "The key reason in authorities making random decisions is the lack of regulation and the difficulty of accountability."

Leaders are planning a broader streamlining of China’s complex regulatory structure. The government is considering a plan to combine the three regulators that oversee securities, insurance and banking, according to other people familiar with the plan. Those discussions gained pace following the market turmoil and the government’s decision to devalue the yuan. The currency has lost nearly 9 percent of its value against the dollar in the last two years.

Bond Market

China’s bond market is a typical example of the country’s conflicting regulatory scheme. The central bank governs bond sales in the inter-bank market, the China Securities Regulatory Commission oversees bonds issued by listed companies and the National Development and Reform Commission approves bond issuance by non-public firms.

The State Council didn’t respond to a faxed request for comment, while a press officer at Agricultural Bank of China declined to comment on Li’s status. A China Insurance Regulatory Commission spokesman declined to comment, and the securities and banking regulators also didn’t respond to faxed requests for comment.

Effective, Efficient

Liu He, an economic policy adviser to President Xi Jinping, wrote a preface of a recently published book saying that China should speed up “the establishment of financial regulation mechanisms that fit the profile of modern finance, to be able to enhance coordination and advance cooperation, and have effective and efficient functions."

Comments posted Monday on the People’s Bank of China website meanwhile suggest it is trying to correct the impression China intentionally weakened the yuan by setting the fixing lower last week -- a move that contributed to the global market turmoil.

Investors misunderstood the PBOC’s intentions in its recent moves on the yuan’s daily reference rate against the dollar, said Ma Jun, chief economist at the PBOC research bureau, days after a 0.5 percent devaluation contributed to the global slide. Ma said the fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued.