Recently, the People's Bank of China (PBoC),
together with the National Development and Reform Commission (NDRC), the Ministry of Justice, the Ministry of Finance, the
China Banking and Insurance Regulatory Commission (CBIRC), the China Securities
Regulatory Commission (CSRC), the State Administration of Foreign Exchange (SAFE)
and other relevant departments have drafted the "Financial Stability Law
of the People's Republic of China (Draft for Comment)" (hereinafter
referred to as the "Financial Stability Law"),
which has attracted the attention of the society and the market. The PBoC
pointed out that the enactment of the law is an
institutional consideration, aiming at establishing institutional
arrangements for preventing, resolving, and dealing with risks, improving the
long-term mechanism for maintaining financial stability, enhancing China's
financial legal system, further fine-tuning the financial safety net, and
firmly guarding against systemic risks.
In the view of researchers at ANBOUND, the introduction
of the Financial Stability Law is of outstanding
significance in terms of institution establishment, and
it also builds the institutional foundation and general operational framework
for preventing systemic financial risks.
It can be seen that the legislation of the Financial
Stability Law summarizes the relevant experience in dealing with a series of
regional financial risk problems. In particular, as China's economic growth is slowing down, problems accumulated in
the past are constantly emerging and exposed in the context of
"deleveraging". Institutions and enterprises that used to operate in a "highly
leveraged" mode, such as Anbang Insurance, Baoshang Bank, Hengfeng Bank,
Founder Group, HNA Group, as well as a number of large and debt-ridden real
estate enterprises, are no longer sustainable. The debt problems and
operational problems of these institutions and enterprises are often
extensional and continuous, which will affect the stability of the financial
system. In the absence of a systematic system and mechanism, the relevant risks
can only be dealt with by financial regulators or local governments on a
"case by case" basis. This approach often fails to maintain the confidence
of the financial market and establish stable expectations due to the
non-transparent handling process, which often results in "excessive
contraction" of the financial system and the phenomenon of "asset
shortage" often mentioned in the market. If the relevant laws are
established in an institutionalized and legalized manner, it will be the result
of the further maturity of the financial market and the continuous improvement
of the market system, which can make the financial market more rational.
The draft of the Financial Stability
Law has clear provisions on the authority, responsibility, and funding for the prevention and resolution of financial
risks. In addition to clarifying the Financial Stability and Development
Committee as the main body responsible for preventing and defusing financial
risks, the responsibilities of local governments, financial authorities, and
regulators are also distinctly clarified. For the
source of funding, on the one hand, the establishment of funds to prevent
financial risks is required; on the other hand, the responsibilities and uses
of industrial risk funds, deposit insurance funds, and local risk funds are
clarified. The funding and use of relevant funds will also be based on
the experience and mechanism of international financial risk prevention and
control. In this way, the draft essentially constructs the implementation
mechanism for preventing and dealing with financial risks.
Different from the previous general government
bailouts of troubled financial institutions and enterprises, the most important
element of the financial stability law is to
distinguish the main responsibility of financial institutions themselves for
risks, and to clarify the responsibilities of industry supervisors and local
governments. It requires that the main responsibilities of financial
institutions themselves, their major shareholders, and actual controllers be
clarified, the prudent operation obligations of financial institutions be
strengthened, and the access and supervision requirements for major shareholders
and actual controllers to be strengthened. It clarifies local governments'
responsibility for maintaining stability, and promptly and proactively defusing
regional financial risks. The draft also stated that the supervisory responsibility of financial regulators should effectively
perform their duties of financial risk prevention and control, and to prevent and
dispose of risks in a timely manner. The PBoC will play the role of lender of
last resort to guard against systemic financial risks.
As for the principle of maintaining financial stability,
Article 4 of the Financial Stability Law stipulates,
"To maintain financial stability, the control of the source of financial
risks shall be strengthened, financial activities shall be fully under
supervision, financial risks shall be handled in accordance with the
market-oriented and law-based management, the legitimate rights and interests
of market players shall be fairly protected, and moral hazard shall be
prevented." This statement, in fact, is to clarify the source of
risk and its own responsibility, while adhering to a market-oriented
and law-based restructuring mechanism. First, financial institutions must
be licensed to operate and abide by the law. Second, deposit insurance funds
and various risk protection funds can act as liquidation and escrow
institutions to take over troubled institutions. Third,
the loss should be written down in the risk handling of the troubled financial
institution. If necessary, the original shareholders or actual controllers will
be completely eliminated, rather than a debt-equity swap in the general sense. Fourth, the reorganization needs to guarantee the creditor's
rights and interests not less than bankruptcy liquidation, and to safeguard the
creditor's interests. A number of financial instruments can be used to
provide necessary liquidity support during liquidation and restructuring.
Researchers at ANBOUND have noted that the current handling of some financial
risk problems is basically proceeding along these
lines, and the financial stability law affirms some of the more mature
practices in the current handling of financial risk problems, forming
institutional rules.
At present, there is a more urgent need to address the
problem of debt risk of some large and medium-sized real
estate enterprises in China. Most of the troubled real estate enterprises
are still in the process of debt restructuring. The new regulations not only
provide legal basis for these practical problems, but also provide
institutional support and guidance for financial supervision and government
departments to play a leading role. Although most of
the enterprises with risk problems are private enterprises, it is not
impossible for some state-owned enterprises such as “urban investment
enterprises” to have risk problems in the future. Considering the impact of
Yongmei Group's default on the bond market and financial system in the past,
the related risk spillover and the chain shock will be greater. Therefore,
the construction of the relevant regulatory system needs to be carried out in a
timely manner.
The promulgation of the Financial Stability Law can
systematically solve institutional problems of risk prevention, control, and handling.
From the perspective of financial market development and financial stability,
it is a sign of further maturity and soundness of relevant laws and
regulations. In the absence of relevant mechanisms, both investors and financial institutions have no idea how to deal
with the debt problem and how to resolve risks, which will more easily
trigger market panic and cause the spread of risk. This has been reflected in
the shocks to the financial markets caused by the problems of Baoshang Bank. It should be pointed out that the establishment of relevant
risk mechanism is of great significance to the marketization of financial market, so as to
facilitate financial market participants to truly assess market risks and
establish stable expectations. From the perspective of market
development, the introduction of the Financial Stability Law is of great significance to the financial system's continuous maturity and
market-oriented development.
Final analysis conclusion:
The introduction of the Financial Stability Law is a sign
of the maturity and rationality of China’s financial market and the financial
system. It not only puts forward relevant responsibility requirements for the
prevention, control, and handling of financial risks to government departments at all levels and regulatory departments of various
industries, but also further solidifies the responsibility of market players to
avoid the rapid spread of financial risks while protecting the interests of
investors and creditors.