An important step has been taken in institutional reform, with 31 provincial-level branches of the central bank collectively listing for reform today | Functions | Central Bank

The re establishment of 31 provincial-level branches and the revocation of regional branches are important steps in the reform of central bank institutions.

On August 18, 2023, in accordance with the deployment of the "Plan for the Reform of Party and State Institutions" to "coordinate and promote the reform of the branches of the People's Bank of China", 31 provincial branches of the People's Bank of China, 5 branches of planned cities in Shenzhen, Dalian, Ningbo, Qingdao, and Xiamen, and 317 local branches were listed on the same day. Each branch of the People's Bank of China shall affix the logo of the State Administration of Foreign Exchange, and each provincial and autonomous region branch shall affix the logo of its branch business management department.

A few months ago, the State Council's institutional reform plan was released to comprehensively promote the reform of the branches of the People's Bank of China. Among them, the People's Bank of China's regional branches and branch business management departments, directly affiliated business management departments of the head office, and provincial capital city center branches will be abolished, and provincial-level branches will be established in 31 provinces. Plan independent city branches will be established in Shenzhen, Dalian, Ningbo, Qingdao, and Xiamen. The county branch of the People's Bank of China will no longer be retained, and relevant functions will be transferred to the local branch of the People's Bank of China. For areas with a large volume of foreign exchange settlement and sales business at the border or in foreign trade, the People's Bank of China's local branches shall be dispatched to perform relevant management and service functions.

The central bank is the center of the financial system, and based on this, as a macroeconomic regulatory department for formulating and implementing monetary policy, the structural adjustment of the central bank affects the whole body, attracting market attention.

Due to the wide scope and strong reform efforts of this reform, it has become a focus of market attention. How should we have a correct understanding of the People's Bank of China's restoration of provincial branch reform? How to adjust the relevant staff to no longer retain the county branch? What is the positioning of modern central banks after the reform?

A regulatory insider told First Financial that the purpose of the reform is to comprehensively strengthen macroeconomic regulation and financial regulation. The People's Bank of China's role as a central bank has not been weakened, but its positioning has become clearer and more clear. The county branch is not a one-time withdrawal, but rather to make good use of the personnel strength of the People's Bank of China's county branch and enhance the grassroots supervision power of regulatory departments.

From the perspective of comprehensive analysts, looking back at the past reforms of the People's Bank of China, they were all aimed at strengthening and improving macroeconomic regulation, and enhancing the efficiency of monetary policy transmission. After this institutional reform, the People's Bank of China will focus on building a modern central banking system, focusing more on improving the quality and efficiency of financial services, maintaining currency stability, preventing and resolving systemic financial risks, and promoting high-quality economic development through high-quality financial development.

Returning to Provincial Branches: Further Clarifying the Responsibilities of the Central Bank and Local Regulatory Departments

The regional branch system of the central bank, which has been in use for more than 20 years, has become history, and the People's Bank of China has resumed the provincial branch model.

Previously, the institutional setup of the central bank was as follows: 9 cross regional branches and two business management departments in Beijing and Chongqing.

Among the 9 cross regional branches, the Shanghai branch governs Shanghai, Zhejiang, and Fujian; Tianjin Branch has jurisdiction over Tianjin, Hebei, Shanxi, and Inner Mongolia; Shenyang Branch has jurisdiction over Liaoning, Jilin, and Heilongjiang; Nanjing Branch has jurisdiction over Jiangsu and Anhui; Jinan Branch has jurisdiction over Shandong and Henan; Wuhan Branch has jurisdiction over Hubei, Hunan, and Jiangxi; The Guangzhou branch has jurisdiction over Guangdong, Guangxi, and Hainan; Chengdu Branch has jurisdiction over Sichuan, Guizhou, Yunnan and Xizang; The Xi'an branch has jurisdiction over Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang.

At the same time, 25 central branches have been established under the 9 major cross regional branches, serving as secondary dispatched agencies to fulfill the functions of implementing monetary policies, maintaining financial stability, and providing financial services in accordance with the law within the jurisdiction.

▲

Tracing back to 1997, in order to govern the "three disorders" of finance, prevent and resolve financial risks, the first National Financial Work Conference proposed to effectively implement monetary policy, strengthen supervision and management of the financial industry, and change the situation where branches of the People's Bank of China are set up according to administrative divisions. Several regional branches across provinces, autonomous regions, and municipalities were established nationwide, with a focus on strengthening supervision and management of the financial industry within their jurisdiction.

In order to implement the requirements of the National Financial Work Conference, in 1998, the People's Bank of China established 9 branches and 2 business management departments, forming a four level branch system including regional branches, provincial capital city center branches, city center branches, and county branches. Among them, regional branches fulfill central bank responsibilities in 2-5 provinces respectively; Given that the financial services of the central bank are aimed at the grassroots level, the functions of foreign exchange management, technology, payment and settlement, financial statistics, national treasury, currency issuance, and security are still managed by the central branch of the provincial capital city according to the principle of locality.

The purpose of the reform plan at that time was to enhance the independence of the central bank and reduce local government intervention in the formulation of monetary policy and banking supervision by local branches of the central bank.

"This is a lesson learned from the practice of China's financial history." A regulator told a reporter from First Financial that some local governments have a tendency to prioritize development, weak regulation, and light risk. Some have improperly intervened in the selection of cadres, corporate governance, and business operations of financial institutions, while others have conducted credit assessments and rankings on financial institutions, accumulating financial risk hazards. Establishing regional branches is beneficial for the central bank to fulfill its monetary policy functions while maintaining the fairness of financial regulation.

"The branches of the People's Bank of China fulfill their various responsibilities in accordance with the law and operate under the vertical leadership system of the head office. The establishment of regional branches across provinces has greatly reduced the behavior of original provincial branches competing with the head office for scale and loans in accordance with local government requirements. At the same time, it has broken the allocation of rediscounting and re lending funds by the central bank according to administrative divisions, which is conducive to the circulation of funds in the unified national market," said the person close to regulators.

In addition, before the official establishment of the former China Banking Regulatory Commission in 2003, the People's Bank of China integrated monetary policy and banking supervision. In market analysis, the establishment of regional branches has achieved cross provincial allocation of branch leaders and middle-level cadres, and cross provincial implementation of financial supervision, which is conducive to eliminating the interference of social networks and relationships on financial supervision. It has played a positive role in cleaning up rural foundations, cracking down on local debt evasion and abandonment, disposing of local financial institution risks, and punishing those responsible for financial institution violations at that time.

However, after years of reform and opening up, a legal and market-oriented business environment has been formed in which the government exercises administration in accordance with the law and market entities operate in accordance with the law. The necessity of regional branches of the People's Bank of China has significantly weakened, and their adaptability has begun to emerge: they are not in line with the basic pattern of provincial governments managing the economy, and they are not in line with the local party and government's territorial responsibility for financial risk disposal.

For example, due to the obvious characteristics of the provincial economy in China, after the revocation of the People's Bank of China's provincial-level branch, there are situations where the coordination of economic and financial work with the provincial party committee and government is not smooth in provinces where the branch is not located.

Lian Ping, Chief Economist and Dean of the Research Institute of Zhixin Investment, believes that the timely adjustment of local branches of the central bank will be beneficial in solving the long-standing problems of regional banks being unable to effectively balance economic differences in different regions and mismatching with the mechanisms of other local financial regulatory departments, achieving a reasonable match between local branches of the central bank and China's administrative divisions.

For example, in recent years, financial risks have been prone to high incidence, intertwined with local government debt risks and real estate risks. The risks of small and medium-sized financial institutions continue to be exposed, and the crackdown on illegal financial activities is not yet in place. The 2021 Central Political Bureau meeting called for the establishment of a local fiscal and financial risk disposal mechanism responsible for local party and government leaders.

"Currently, local authorities are responsible for handling financial risks and cracking down on illegal fundraising and financial criminal activities. The People's Bank of China bears the legal responsibility of preventing and resolving systemic risks and maintaining financial stability, while its branches are responsible for maintaining regional financial stability. The performance of their duties across provinces is not compatible with the new situation and requirements," an industry expert told reporters.

Market analysis generally believes that returning to provincial branches is conducive to further clarifying the responsibilities of the central bank and local regulatory authorities, to ensure that the central bank can focus more on macroeconomic regulation and macroprudential supervision.

Liu Xiaochun, Vice President of Shanghai New Financial Research Institute, believes that canceling the People's Bank of China's regional branches and restoring provincial branches is also beneficial for streamlining the internal management system of the People's Bank of China.

Modern central banks have a clearer positioning and their functions have not been weakened

According to the content of this reform plan, the People's Bank of China will transfer its daily regulatory responsibilities for financial holding companies and other financial groups, as well as its responsibilities for protecting financial consumers, to the State Administration for Financial Supervision and Administration. Afterwards, there was a discussion in the market about the divestment of the central bank's financial management function.

In fact, the purpose of transferring some of the financial regulatory responsibilities of the People's Bank of China is to achieve full coverage of financial regulation. The reform not only did not weaken but also strengthened the modern central bank positioning and functions of the People's Bank of China, which is an important measure to build a modern central bank system.

In recent years, China's financial generalization has been prominent, with enterprises operating finance recklessly, some unlicensed behaviors and products with financial characteristics deviating from regulation, and illegal financial activities being repeatedly prohibited, making financial risks prone to high incidence.

For example, before the reform, financial holding companies were supervised by the People's Bank of China, and their subsidiaries such as banks and insurance were separately supervised by corresponding regulatory agencies, requiring a lot of coordination. In terms of consumer protection, both the "One Party, Two Sessions" are responsible for consumer protection, and there is also a crossover.

In response to the above issues, this financial reform has strengthened the unified supervision of the financial industry by establishing the State Administration for Financial Supervision and Administration, responsible for institutional supervision, behavioral supervision, functional supervision, penetrating supervision, and continuous supervision, and overall responsibility for protecting the rights and interests of financial consumers, reflecting the concept of including all types of financial activities in regulation. The People's Bank of China is still responsible for leading the additional supervision of systemically important financial institutions.

Industry analysis believes that the above reform measures are conducive to consolidating regulatory responsibilities. The essence of this financial reform is to clarify regulatory responsibilities, solve problems such as unequal regulatory powers and responsibilities, inability to find responsible parties for risks, and unrealized risk disposal responsibilities, which is conducive to urging financial regulatory authorities to take the initiative, strengthen supervision, and eliminate financial risks in their early stages. Once a risk occurs, the responsible party can also be identified and held accountable.

In addition, this reform has stripped the People's Bank of China of its non core responsibilities. As a central bank, the People's Bank of China has not been weakened, and the positioning of the central bank's macroeconomic regulation department has become clearer, with purer functions and more precise performance.

The above-mentioned regulatory officials told reporters that after the reform, the People's Bank of China will focus more on and professionally fulfill the following responsibilities around the core tasks and goals of the central bank: first, be responsible for currency issuance, regulating money supply and circulation, and maintaining currency stability; The second is to regulate financial activities, promote financial reform, strengthen effective allocation of resources across time and space, and promote full employment and economic growth; The third is to fulfill the function of lender of last resort, implement macro prudential management, prevent and resolve systemic financial risks, and maintain the stable operation of the financial system. By effectively fulfilling their duties, we aim to achieve the goals of currency stability, full employment, financial stability, and international balance of payments, and serve high-quality economic development with high-quality financial development.

The report of the 20th National Congress of the Communist Party of China proposed to "deepen the reform of the financial system, build a modern central banking system, strengthen and improve modern financial supervision, strengthen the financial stability guarantee system, legally include all types of financial activities in supervision, and safeguard the bottom line of preventing systemic risks.".

The above-mentioned regulatory officials told reporters that the main tasks of building a modern central bank system in the current and future period include: firstly, improving the monetary policy system, maintaining currency stability and economic growth. Implement normal monetary policy. Establish a sound monetary policy regulation mechanism. The second is to deepen the reform of the financial system, expand high-level opening up of the financial industry, and enhance the ability of financial services to serve the real economy. The third is to promote the strengthening and improvement of modern financial supervision, strengthen the financial stability guarantee system, and guard against the bottom line of systemic risks. The fourth is to establish an independent financial budget management system for the central bank, to achieve a healthy and sustainable balance sheet of the central bank, thereby ensuring that the People's Bank of China fulfills its duties in accordance with the law, and promoting the achievement of national financial stability and macroeconomic regulation goals.