Business World

Thursday 29 September 2016

China taps UK for insights into how to enhance its financial regulation

Michelle Price and Benjamin Kang Lim

Published 17/05/2016 | 02:30

Canary Wharf financial district. REUTERS/Hannah McKay
Canary Wharf financial district. REUTERS/Hannah McKay

China has asked Britain for advice on plans to create a financial super-regulator, as it looks to improve financial oversight following last year's stock market crash, sources told Reuters.

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The move may put noses out of joint at the European Central Bank in Frankfurt, and at the US Fed, but highlights Britain's burgeoning relationship with Beijing on financial issues.

Unlike the federal structures in the Eurozone and US, Britain and China both have unitary systems.

The UK Treasury has lobbied hard to become China's partner of choice on a range of financial issues, and the two are collaborating on several economic and financial projects, including a stock trading link between London and Shanghai.

The relationship between the two countries seems to have survived last week's gaffe by Britain's Queen Elizabeth, who was caught on camera grumbling that Chinese officials accompanying President Xi Jinping on a visit to the UK last year had been "very rude to the ambassador".

The talks also signal Beijing's growing willingness to seek outside help to improve regulation of its financial infrastructure.

Issues, including last year's rollercoaster-like volatility on the key mainland China stock indexes has forced the world's second biggest economy to increase transparency, reduce systemic risk, and stop companies exploiting loopholes.

Several Chinese and British sources with direct knowledge of the talks said Beijing had sent delegations to London to study the UK regulatory framework, with two sources citing a visit in the first quarter.

UK government representatives also visited Beijing last month to discuss financial, economic and regulatory issues, two sources with knowledge of the visit said.

Weaknesses in Chinese regulation were exposed last summer when China's stock markets lost a third of their value in a month, having soared 150pc in the previous 12 months.

Government and regulators rushed out a series of measures to arrest the crash, including limiting short-selling, stopping new listings and strong-arming big funds to buy more stocks.

The interventions were widely criticized for over-riding market mechanisms, poor inter-agency coordination and creating moral hazard by implying government support.

Reuters reported in November that China was considering consolidating supervisory powers in one regulator covering banking, mutual funds, insurance and securities, but two Chinese sources with direct knowledge of the matter said no decisions had yet been made.

The Chinese sources said any proposals would include a few options for China's cabinet, the State Council, to choose from, but it was unclear if a proposal had yet been submitted.

Britain overhauled its regulatory system after the global financial crisis of 2008-09, handing enormous power to the Bank of England, which is responsible for averting risks to the financial system as a whole.

The new structure aims to reduce blind spots by more closely aligning macro-economic policies with on-the-ground regulation and supervision of financial institutions and markets.

China can't exactly recreate Britain's regulatory structure due to differences in their political systems and potential rivalries over where such a powerful regulator would fit among senior decision makers within the Chinese system. (Reuters)

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