China to set up new financial watchdog as part of reforms

China will set up a new financial watchdog to replace its banking and insurance regulators as part of an overhaul of state institutions after concern about exposure to its creaking property market.

The new body, which does not have an official name yet, would bring oversight of China’s financial system under direct control of the State Council, the top government body. There are also reports that the president, Xi Jinping, who will in all likelihood be granted a third presidential term on Friday, will revive the Central Financial Work Commission, an organisation that would supervise the financial system on behalf of the Chinese Communist party, although this has yet to be announced publicly.

The new financial watchdog, which will be voted on at this week’s annual parliamentary session, the National People’s Congress, will centralise control of China’s $60tn (£50.6tn) financial sector. It is part of a series of reforms that will “strengthen the centralised and unified leadership” of the party, according to the proposal.

In the speech from the outgoing premier on Sunday, Li Keqiang promised that Beijing would focus on stability and mitigating economic risk this year, particularly in the property sector. Last year China’s property sector shrank by 5% after government crackdowns on speculation and lending led to a cashflow crunch that caused developers to stall construction on millions of housing units. The zero-Covid policy, which was abandoned in December, also caused economic chaos as factories and construction sites were closed and workers were unable to leave their homes.

In February, Xi warned of three “systemic risks” to China’s economy: the embattled real estate sector, financial regulation and local government debt. The new financial watchdog will help to streamline party oversight of all of those sectors.

Part of the property crisis last year was caused by property developers issuing bonds that, via local governments, were packaged into asset-backed securities that were sold to financial institutions and investors. Those investors often had no idea that they were buying bonds linked to the property market. “So the risk spreads from the real estate sector, which is not financial, into the financial sector,” said Iris Pang, the chief economist for greater China at ING, a bank. The new, broader financial regulator will be able to “detect this kind of risk earlier than in the case of 2022”.

Pang also said that a new, more integrated regulator would be better suited to handling future financial developments, such as cryptocurrencies.

Among the other reforms outlined by the proposal are the creation of a new centralised data bureau, a reorganisation of the science and technology ministry and the slashing of jobs in central government departments by 5%.

Mary Gallagher, a professor at the University of Michigan, said the reforms are a “sea change for governance in China”.

The reduction in personnel suggests that Xi wants to “install younger and more loyal officials in a streamlined government. Unfortunately, given China’s scale and the big challenges ahead, these reforms could make effective governance even more difficult. Local governments have lost power and flexibility without any big gains in fiscal power,” Gallagher said.

Delegates will vote on, and almost certainly approve, the proposal on Friday.