Why China is changing its economic and technological regulations

by James · March 21, 2023

moment in China’s political calendar when we begin to get a sense of what to expect from China in the coming years. This year, technology and finance were on the radar. (Photo by Lintao Zhang/Getty Images)

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At the recent meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, known as the Two Sessions, China made important changes to its economic and technological regulations to meet significant challenges at home and abroad. Beijing is keen to secure financial stability at home and achieve breakthroughs in so-called “chokepoint technologies” as it deals with an increasingly fraught relationship with the United States.

However, a lingering question remains: Will China’s dynamic private sector be sufficiently empowered by the reforms?

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Strengthens financial supervision

There were several major changes to China’s financial regulatory regime announced at the NPC: the China Banking and Insurance Regulatory Commission will be retired and replaced by a new regulatory body called the National Financial Regulatory Administration (NFRANFRA), while the China Securities Regulatory Commission (CSRC) will be elevated to to become a state body directly under the Council of Ministers.

The NFRA will take over some of the People’s Bank of China’s (PBOC) regulatory responsibilities, such as supervision of fintechs and state-owned financial firms, as well as the CSRC’s consumer protection work.

It’s no surprise that Beijing is making changes to its central financial regulatory system that will allow it to keep a more watchful eye on fintechs. Without adequate regulation of this fast-growing segment of financial services, China has resorted to sporadic attacks, first on cryptocurrency, then on peer-to-peer lending, and finally on fintech giants such as Ant Group. In theory, the new regulatory body will be able to supervise these companies more effectively than the PBOC – which has many other important tasks.

The CSRC’s new responsibilities will include reviewing corporate bond issuance, which will give the agency a greater role in local government bond issuance. This is for the best: Local government debt in China has reached astronomical levels, requiring tighter oversight. Total debt for local governments in China is $9 trillion, according to Reuters. Local Government Financing Vehicles (LGFVs) have $790 billion worth of sovereign bonds maturing this year, according to Fitch Ratings.

Meanwhile, the People’s Bank of China (PBOC) will also be restructured. The Chinese central bank will replace its eight regional branches with provincial-level branches. Furthermore, its county-level sub-branches will be closed and their functions transferred to prefecture-level offices.

One way to think of these reforms is as an attempt to bring China’s financial regulatory regime more in line with international standards, with the PBoC focusing on monetary policy and macroprudential oversight like the central banks of most major economies, and the NFRA overseeing compliance and risk. management in the financial sector, as well as investor protection.

Confidence in technology

While the economic reforms are primarily aimed at domestic challenges, China’s technology regulatory changes are a response to US sanctions aimed at crippling progress in sectors such as semiconductors, artificial intelligence and defense and aerospace. The United States has placed more than 600 Chinese firms in these industries on a trade blacklist that prohibits them from accessing American technology and components without Washington’s approval.

The US and China have long been at odds over China’s trade practices, which Washington considers unfair, and failed to resolve their differences with the Phase 1 trade agreement signed in January 2020. Chief among US concerns is China’s policy of civil-military fusion . , which may make it difficult to determine whether certain US technologies will be used for normal commercial purposes or by the Chinese military.

Now largely cut off from advanced foreign semiconductor technology, China believes it has no choice but to focus on self-sufficiency. It is against this backdrop that Beijing has ordered the Ministry of Science and Technology (MOST) to set up a new Communist Party committee to directly oversee science and technology. This committee will answer directly to Xi Jinping and be charged with making technological breakthroughs in so-called “chokepoint technologies.” In addition, MEST will be streamlined and longer participate in the review and management of certain scientific research projects.

There are also practical reasons to move to a highly centralized approach. Since 2015, China has spent a staggering $150 billion developing its domestic semiconductor industry, but the results have been decidedly mixed. Given the decentralized nature of the policy, investment has sometimes been misdirected as local governments competed fiercely for government funding.

Private sector excellence

Although there is no doubt about the Chinese leadership’s commitment to regulatory reforms in finance and technology, the reforms will not come to full effect if the private sector is not given sufficient room to thrive. This applies to both finance and the hard technologies that Beijing is focused on mastering.

In financial services, China’s pace of innovation has slowed dramatically from the mid-2010s when it was the undisputed global leader in digital financial technology. The reason is that the central government has used a heavy hand to control systemic financial risk and curb the power of certain oligopolies.

Faced with increasing economic challenges, China cannot rely on state leadership alone. Nevertheless, it is still unclear whether the private sector will let go of its short leash. Earlier this month, state radio quoted Xi Jinping as telling private firms: “Be rich and responsible, be rich and benefit others, be rich and loving.”

An important bellwether for the future prospects of the Chinese fintech sector will be the progress of Ant Group’s long-delayed IPO. Now that Jack Ma has relinquished control of Ant, Beijing can finally give its blessing for the IPO. But as of January, the company said it had no plans to go public.

Ant’s valuation has fallen from USD 235 billion just before the failed IPO to USD 64 billion as of January.

The completion of the Ant deal – which would still be a blockbuster, if significantly reduced from its original record high of $34 billion – would signal that the tech crash is finally over and that China’s fintech sector can breathe a little easier.

For now, we’re all still waiting with bated breath.

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I am the founder and director of Kapronasia, one of Asia’s leading providers of consulting services with a focus on the fintech industry. I have been involved in financial technology for over 20 years and cover all topics fintech and blockchain. Before Kapronasia I was Global Banking Industry Manager for Intel based in Shanghai, China and before Intel I was CIO for Citigroup Portugal. I have testified before the US Congress on issues of fintech in China and am the author of ‘Chomping at the Bitcoin: The History and Future of Bitcoin in China’ published by Penguin. I have a BS in Computer Science from Syracuse University and an MBA from INSEAD.