The plans for a dedicated commission to supervise banks and other institutions on the Mainland is a recognition of the crucial importance of China's banking system to sustaining economic growth and development.
The idea of setting up a Banking Regulatory Commission to be responsible for banking supervision in the Mainland of China has been confirmed at the recent meeting of the Tenth National People's Congress, as part of a package of wide ranging institutional reform of the State Council. In the relevant press announcement, it was mentioned that the Banking Commission is expected to "consolidate the supervisory functions over banks, asset management companies, investment trust companies and other deposit taking institutions". Its principal responsibility would be to "promulgate legislation in relation to supervisory policies for the banking industry, regulate market entry and operation, investigate behaviour that may be against laws and regulations in accordance with the law".
Obviously details will need to be worked out, and perhaps they have been worked out already. With keen interest, I await further elaboration concerning such important details as the functions and responsibilities of the Banking Commission and the supervisory policies to be pursued. As a significant banking supervisory authority, the HKMA stands ready to provide whatever further assistance is requested of us, in addition to the assistance we have been providing in the training of banking supervisors. A robust banking system is important to any economy. It is more so for the Mainland economy, given the particularly heavy reliance on the banking system there in intermediating funds, in view of the still nascent stage in the development of the equity and debt markets. The sustainability of the rapid pace of growth and development of the Mainland economy, and therefore the economic interest of Hong Kong, depends to a significant extent on it.
Even without the details, it seems to me that the proposal is a sensible one, given the many pressing issues concerning the banking industry of the Mainland, and the equally challenging and varied central banking issues to be tackled. Giving the banking issues dedicated attention, through the creation of a specialised agency with the necessary authority, may increase the chance of success in resolving them. It is important, however, to recognise that there is no single model of central banking that fits all. There are many successful cases of an integrated approach to the maintenance of monetary and financial stability by the central bank, and there have also been a few significant moves in recent years towards separation, each for its own domestic reasons. To me, the domestic circumstances in the Mainland, prima facie, justify separation, although there is clearly also a need to ensure that the separation does not create gaps in the inter-related monetary and financial systems that might undermine stability or the effectiveness of financial intermediation. I am thinking, in particular, of how the central bank could function cost-effectively as lender of last resort, without the intimate knowledge of the health of individual banks that is available, on a timely basis, only to the banking supervisor. There is also the question of the construction, operation and maintenance of the financial infrastructure - an aspect of central banking that is typically neglected because it is nobody's responsibility. The highly essential cross-fertilisation of people with skills in markets and supervision will become a little more difficult to promote.
But it is clear that, as a central bank, the People's Bank of China has too much on its plate (perhaps in terms of the complexity rather than the variety of its responsibilities), particularly in view of the ambitious agenda of financial reform and liberalisation. Hitherto, capital controls have been providing the much-needed insulation of monetary stability from the risks of financial globalisation, while enabling the Mainland to benefit from the substantial inflow of direct investment (and foreign funds to benefit from the attractive returns). But the benefits of financial globalisation must not be ignored. Financial risks are to be managed not avoided. In my opinion, there is a lot to do before the Mainland can comfortably cope with the potency of international finance when operating freely.
I suspect that is why it is considered necessary, through the establishment of the Banking Commission, "for the role of the People's Bank of China, as the central bank, in the system of macroeconomic control to stand out even more". The relevant press announcement said that, "after relinquishing responsibility over banking supervision, the People's Bank of China will strengthen its function in the formulation and implementation of monetary policy, improve market regulation and policies on macro-monetary control".
We in the HKMA look forward to witnessing these important institutional changes and we stand ready to assist in any way we can.
Joseph Yam
17 April 2003
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