Reform and the regulators

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Talk of reform in China is cheap， and steps toward real change are increasingly costly.

China watchers read pomp and circumstance into the State Council announcement that it would create a new financial regulator

The new regulator， charged with coordinating monetary policy and maintaining financial stability， will not reduce the roles of the current oversight lineup， a tangled web including the China Banking Regulatory Commission （CBRC） and China Securities Regulatory Commission （CSRC）

The agency is a disappointment for those waiting for an omni-regulator， one that would have veto power over China’s various supervisory bodies and the means to battle stifling bureaucracy. Instead， China should brace for an additional layer of red tape to be wrapped around the financial sector.

Imagine adding another booming voice to the investigation on internet finance that the State Council announced on August 1. The People’s Bank of China， CBRC， CSRC， China Insurance Regulatory Commission， the Ministry of Industry and Information Technology， the Ministry of Public Security and the Legal Affairs Office will all chime in on the online financing platforms of firms such as Alibaba and Ping An Insurance. There’s hardly room for another opinion.

Adding new oversight bodies bodes even more poorly for those working towards reform， namely because it is powerful institutions such as these that inhibit change.

China is in the process of drafting several plans for reform. These include a blueprint for urbanization， which is due out this year， as well as a comprehensive framework for opening the capital account. The plans are highly anticipated and the world’s financial markets are waiting in earnest for a timeframe for yuan liberalization.

Unfortunately， when a deadline for allowing free exchange of the yuan finally arrives there won’t be much fanfare as long as regulators feel emboldened to interfere.

In the case of yuan liberalization， the process is doomed to suffer continuous setbacks as long as the State Administration of Foreign Exchange（SAFE） remains powerful. Regulators such as SAFE rely on a closed capital account to stay relevant. Free exchange will give it little purpose and cost people jobs and influence.

This is why Premier Li Keqiang had to fight both the banking and securities regulators to push through plans for a free trade zone in Shanghai， where the yuan will reportedly be convertible.

When taking the pulse of reform in the country， observers will watch the strength of financial regulators A sure sign that China is preparing once and for all to allow its currency to flow freely will be the dismantling of bodies such as SAFE.

But ditching the foreign exchange administration isn’t in the cards. In fact， the agency is only gaining power. In early August， the central bank said it would create a new agency， via SAFE， to help invest China’s US$3.5 trillion in foreign reserves.

Building up regulators and agencies such as this is the same as erecting a barrier to reform.