Shanshan Li

Opinion | China’s move to centralise oversight of financial sector shouldn’t be feared

Stronger party control over the financial sector will allow the building of a more cohesive framework for further orderly decentralisation

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President Xi Jinping (centre) speaks at the five-yearly central financial work conference in Beijing on October 31, 2023, where the strengthening of centralised and unified leadership over the financial sector was emphasised. Photo: Xinhua

Shanshan Li

Published: 4:30pm, 27 Nov 2024

In 2017, at its highest-level financial work conference, China stressed the need for the country’s financial affairs to be under centralised and unified party leadership. This was reaffirmed at the five-yearly conference last year, which spoke of strengthening party leadership over the financial sector.

Since last year, China’s evolving financial regulatory reform has sparked widespread debate in the international media. Critics warn that heightened centralisation and political oversight could, through interventions in capital and credit allocation, exacerbate financial instability.

They argue that uniform adherence to centrally approved guidelines could lead to synchronised market behaviour, amplifying procyclical risks and inflating asset bubbles. Others contend that China’s reforms represent a fundamental reorientation of its financial system, with a focus on financial institutions as utilities rather than as market-driven entities.

But these critiques often fall short of fully capturing the complexity and broader context of China’s regulatory approach.

China’s approach of “centralised and unified leadership” is deeply rooted in its governance structure, which blends political centralisation with partial fiscal decentralisation. This arrangement, often described as a “quasi-fiscal federalism”, grants local governments much autonomy in economic decision-making, but without formal bankruptcy mechanisms. Many local financial institutions maintain close ties with local governments, adding complexity to the financial landscape.

Beijing has worked to recalibrate the balance of power between central and local governments and to mitigate implicit guarantees that distort market behaviour. Yet, given China’s size and the growing complexity of domestic and international environments, these reforms necessarily proceed gradually.