Focus is on managing risk so as not to lean on regulators, government aid
China's newly established financial stability fund, its deposit insurance fund and other industry security funds shall not be used as the go-to bailout option while the country is dealing with financial risks, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.
The country should expedite the launch of the financial stability law and clarify the criteria to trigger the disposal of financial risks as well as the procedures, mechanisms, sources of funds and legal liabilities during the process of handling risks, said Guo in an article published in a reference guide to help better understand the guiding principles of the 20th National Congress of the Communist Party of China.
He stressed that China must establish a complete system for the disposal of financial risks, clarify the relationship between regulators and the institutions that deal with risks, distinguish among conventional risks, emergent risks and major risks, implement risk disposal mechanisms according to the division of responsibilities, adopt various measures and tools reasonably, and give full play to market-oriented and law-based risk disposal platforms.
Yi Gang, governor of People's Bank of China, the nation's central bank, also said in an article that clarity on both responsibilities and the division of labor is a prerequisite for effective disposal of financial risks.
Highlighting the importance of building a risk disposal mechanism that matches power with responsibilities, Yi said financial regulators should shoulder the responsibility of handling risks associated with financial institutions within their respective jurisdictions; the PBOC is responsible for dealing with systemic financial risks; local governments should improve financial risk disposal mechanisms and implement territorial responsibilities.
He said self-help should become the main way of dealing with financial risks at present and in the future. Financial institutions and their shareholders that are market players must shoulder the main responsibility of operating independently, being responsible for their own profits and losses, and defusing their own risks.
He urged financial institutions to establish market-oriented mechanisms for capital replenishment, make allowance for probable losses in accordance with regulatory rules and requirements, and ramp up efforts to dispose of their nonperforming assets.
The right of financial institutions to operate independently should be respected and administrative interventions on their business activities should be reduced. The stakeholders must promote insolvent institutions to exit the market in an orderly and market-based way, bearing the loss through measures like waiving/transferring the institutions' shareholder rights and offering discounts on large-sum creditor claims, he said.
In order to prevent and mitigate financial risks, it is necessary for China to see responsibilities are fulfilled by all the stakeholders and allow each stakeholder to play its part, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co.
"We cannot entirely rely on financial regulatory authorities to dissolve financial risks. The financial sector must further improve the corporate governance mechanism of financial institutions to improve their endogenous institutions and capabilities for risk prevention, enhance financial regulatory systems at the local government level, and promote local governments to play a major role in dealing with risks within their respective jurisdictions," Dong said.