Aurelia Butler

The writer is an associate at Oxford university’s’s China Centre and research associate at SOAS University of LondonIn the US and Europe, the costs of regulatory failure and financial instability have been illustrated painfully by the implosions of Silicon Valley Bank, Credit Suisse and other smaller banks. The lessons from these episodes should not just be drawn in these regions. We would do well to note that China’s globally important financial system has some of the same vulnerabilities as well as many of its its own making. And such risks may be heightened by a recent regulatory shake-up. China has been dealing with failures of several smaller and regional banks over the past few years that notably triggered protests by depositors at banks in Henan province. These failures seem to have abated for the time being, but the People’s Bank of China regarded some 316 such banks as high risk at the end of 2021, according to its quarterly review. In early March, China announced at the National People’s Congress extensive regulatory changes that will see finance become much more centralised and subject to greater political control. State institutions in the financial sector will be transformed. A new national financial regulatory administration is taking over banking and insurance regulation. It is also acquiring some supervisory functions for financial holding companies as well as some oversight responsibilities in consumer and investor protection from the People’s Bank of China and the China Securities Regulatory Commission. The latter will remain a separate entity, taking on bond issuance supervision for China’s financially stressed local governments. Reforms to state institutions, however, are only part of a broader plan in which the Communist Party’s role will be strengthened to give it more control. A Central Financial Commission is going to be established, along with a Central Financial Work Committee, to oversee party-related affairs in the financial system. The aim is to ensure that full regulatory power and oversight are brought to bear in all sectors of the economy along with political direction. The sweeping changes are reminiscent of the so-called “rectification” campaign waged against the technology and data platforms from 2020 until recently, and testify to the government’s angst about financial instability. 

The key question now for China, as for its western peers, is whether greater centralisation and politicisation of financial regulation is appropriate if the country wants to achieve a better balance in the trade-off between stability and efficiency in capital allocation. China’s choice of centralisation and control is a big bet on stability. It could lessen fragmentation in the system, and short-circuit the tendency of financial intermediaries to engage in often destabilising arbitrage between the silos of regulatory and provincial agencies. It might also help to make the allocation of capital more effective from the Communist Party’s standpoint and bring some kind of order to the dysfunctional financial state of local governments. Yet, centralisation and political control could also turn out as agents of, rather than barriers to, financial instability. Whether in a capitalist or a party-state system such as China, financial instability is never more likely than when the balance sheets of financial institutions are highly correlated. As it is, China’s 4,000 or so banks are already under state control and account for the bulk of the financial system since the authorities shrunk shadow banking. In decentralised systems, coordinated balance sheet swings will usually not happen. Smaller and rolling shocks can be handled much better and pose much less systemic risk. Regulators can act more selectively to remove or lower implicit guarantees, and roll-over bad debt. This could reduce the risk of broader moral hazard in the system where risk-taking is back-stopped by the state. Greater centralisation in China might actually handicap the government, accentuating financial instability risk as market participants all confirm to a behavioural model the party deems appropriate. Greater uniformity in the system’s balance sheet behaviour would then amplify fault lines such as bad debt, illiquidity and other problems, including poor decision-making. If all banks lend to the same sector, for example, then bubbles are likely to occur.In their 2014 book on the financial crisis Fragile By Design, Charles Calomiris and Stephen Haber emphasised that countries get the banking system that their political institutions will permit. We would all do well to bear this in mind as China’s politicised finance sector moves towards more centralised control that reflects the party’s choices under president Xi Jinping. More

Britain and the EU are boosting co-ordination of efforts to tackle climate change and respond to a massive US green subsidy programme, in a sign of warming relations between the two sides.Rishi Sunak, prime minister, said this week that Britain and the EU could co-ordinate moves on a new carbon border tax that would place a levy on imported carbon-intensive goods arriving in Europe.On Thursday, the government will launch a consultation on whether to introduce a UK “carbon border adjustment mechanism” as part of a broader net zero strategy.Grant Shapps, energy secretary, said the consultation would address the risk of future “carbon leakage”, where businesses move production to a country with weaker climate regulations in order to avoid paying a carbon levy.Sunak told MPs this week the government was making progress on a so-called “CBAM”, saying the idea was “reasonable and sensible” and that, while he was UK chancellor, he had discussed the issue with German leader Olaf Scholz.Sunak told the Commons liaison committee there “may be opportunities for co-operation” with the EU, just as the two sides had been in talks over their emissions trading schemes.British officials said the aim was to work with like-minded countries and that the UK and EU were giving serious consideration to linking their carbon pricing systems. “It makes sense,” said one.Meanwhile, Kemi Badenoch, UK trade secretary, on Wednesday held talks with Valdis Dombrovskis, EU trade commissioner, to discuss a co-ordinated response to US president Joe Biden’s controversial Inflation Reduction Act.Badenoch’s allies said Biden’s $369bn subsidy programme threw up similar challenges for both the EU and UK, along with other allies of Washington, such as Australia and Japan.Jeremy Hunt, chancellor, told MPs on Thursday he would publish a full response to the IRA later in the year. “That doesn’t necessarily mean matching subsidy for subsidy, but it means that making sure the overall package, which means people choose to invest in the UK, remains attractive,” he said.Discussions between London and Brussels on climate-related issues are the latest signal of improving EU-UK relations following the resolution last month of a corrosive row over post-Brexit trading relations in Northern Ireland.The Treasury raised the prospect of a CBAM in its net zero review in October 2021, although warned that the process could be hugely complicated to implement.The EU’s CBAM, which is close to approval and will start levying charges in 2026, has already proved controversial. China has asked for discussions at the World Trade Organization, saying it could be discriminatory.The tax seeks to level the playing field for the domestic companies regulated by the EU’s emissions trading system, by imposing a levy on imports of carbon intensive products.The similar designs of the UK and the EU emissions trading systems leaves open the possibility of formally linking the two.Sarah Williams of Green Alliance, an environmental organisation, said that linking the UK and EU “carbon pricing systems makes a lot of sense” and that the Northern Ireland deal opened “the opportunity to build a more co-operative relationship with the EU”. Jonny Peters, a senior policy adviser at climate change think-tank E3G, said a UK CBAM was likely to look very similar to the EU’s, since both would be covered by WTO rules, and the UK and EU emissions trading systems are “pretty much identical”. More

US Treasury Secretary Janet Yellen said she expected former Mastercard chief executive Ajay Banga to be elected president of the World Bank as nominations drew to a close.Speaking to lawmakers on Wednesday, Yellen said that if Banga secured the role, he would be “charged with accelerating our progress to evolve the institution to better address 21st-century challenges”.There were no further publicly declared candidates when nominations closed at 6pm in Washington. Although confidential nominations are possible, two people familiar with the situation said they were unaware of any other candidates in contention.While the US, the bank’s largest shareholder, has traditionally chosen the World Bank president, it requires backing by other member countries.Banga’s push for the job comes as the lender finds itself under fire for failing to adequately address the scale of the global climate crisis while maintaining its mission to reduce poverty. The bank’s current president, David Malpass, resigned from his post almost a year early last month, having faced intense pressure over his refusal at a conference last September to say whether he believed humans caused climate change. He later said his comments had been misinterpreted.Banga has spent recent weeks on a “listening tour”, flanked by Treasury representatives, to tout his credentials and gather information that could prepare him for the role.In an interview with the Financial Times earlier this month, Banga said the lender must do “everything it can” to squeeze more cash from its balance sheet while preserving its gold-plated credit rating.

A G20-commissioned report, released last summer, found multilateral development banks, including the World Bank, were potentially being more conservative than necessary to maintain their triple A credit rating from the three big rating agencies.Banga said he would push to secure private sector support for projects underwritten by the bank, while looking into the G20-commissioned report into the so-called “capital adequacy frameworks” of multilateral development lenders such as the World Bank.Earlier this year, Yellen urged the bank’s leadership to “quickly” put in place reforms to free up more money to address climate change. More

(Reuters) – Republican lawmakers on Wednesday prodded Wall Street’s top regulator to justify his agency’s efforts to regulate companies’ climate disclosures and criticized the U.S. Securities and Exchange Commission for what they said was hasty rulemaking. In an appearance before a House of Representatives panel overseeing federal spending, SEC Chair Gary Gensler defended the agency’s request for a 12% budget increase to respond to burgeoning growth in financial markets and the mounting risk of misconduct.Gensler said that, with the frequency of stock trades and volume of privately managed assets soaring, “we must be able to meet the match of bad actors.” He also described cryptocurrency markets as a “wild West” that was “rife with non-compliance.”It was his first testimony since Republicans took control of the lower chamber of Congress in November, bringing some of his staunchest critics into the majority.Conservative lawmakers and commentators have cast Gensler as an interventionist regulator saddling markets with left-leaning social policies unrelated to making money.The SEC last year proposed requiring publicly traded companies to disclose climate-related financial impacts, including physical risks from weather events, as well as carbon emissions that they, their energy providers and their suppliers produce. The agency cited widespread demand and emerging consensus among international regulators. Industry fiercely opposed aspects of the rule, including farmers who fear they may have to report emissions to customers covered by the rule. Republican lawmakers also repeatedly disputed the securities regulator’s legal authority to mandate climate disclosures.”Why is the SEC getting involved in emissions with this climate change?” asked Alabama Republican Jerry Carl. “I’m not a fan of it.”Gensler said investors by and large now demanded and many companies were providing climate disclosures. “Our role is to ensure that those disclosures… that investors are getting are not misleading,” he said.Carl cited Gensler’s past remarks that the definition of so-called Scope III emissions described in the 2022 proposal, which would govern carbon generated in companies’ supply chains, were “not well developed,” drawing speculation that the Commission may water down or entirely eliminate that part of proposal as some have called for in industries such as retail and aerospace.Gensler said he did not want to “prejudge” the rulemaking process. “It’s trying to bring some consistency to those disclosures,” he said.Gensler portrayed the $2.4 billion request for fiscal 2024 as marking a continued recovery from decline. Under the administration of former President Donald Trump, he said, staffing levels fell 4%. With about 5,300 positions currently, agency staffing is only 3% larger than it was before Trump took office, according to Gensler.Lawmakers questioned him about conclusions of a recent internal watchdog report that staff attrition and a heavy workload were endangering the quality of rulemaking.Gensler said turnover was in part driven by the desirability of SEC employees on a competitive labor market.”We run about 6% attrition right now, which is consistent with other agencies,” he said.The final budget will be determined by a narrowly divided Congress now deadlocked over raising federal borrowing limits. The SEC routinely tells lawmakers its budget is “deficit neutral” since its spending is offset by transaction fees assessed from the markets.(This story has been refiled to say Gensler, not Gensler’s, in paragraph 3) More

NEW YORK (Reuters) – Billionaire investor William Ackman who spent years telling corporations how to perform better is now taking on the U.S. government by calling for higher insurance limits to safeguard the banking system at the height of a banking crisis.Ackman, who runs hedge fund Pershing Square Capital Management, sent a letter to his investors saying the FDIC should raise its $250,000 per account limit days after U.S. regulators took over Silicon Valley Bank and Signature Bank (OTC:SBNY), triggering a crisis in U.S. regional banks.In his annual letter to shareholders he amplified a message he has been blasting for days on Twitter. “Banking is a confidence sensitive business,” and regulators’ conflicting public statements have “reduced investor, business, and consumer confidence in our banking system” he wrote.Taking an individualized, bank-by-bank deposit guarantee approach is a “policy mistake,” Ackman wrote, warning this could impair the economy at a time regional banks are instrumental in the real estate and construction loan business.Several days ago, the man who shares his opinions ranging from the dangers of sugary drinks to how tennis players could earn bigger paychecks, warned on Twitter that the U.S. economy may be headed for a “train wreck.”Last year Ackman, who had waged corporate battles at retailer Target (NYSE:TGT) and railroad Canadian Pacific (NYSE:CP), told investors he would take a “quieter approach” at a time when corporate America knows who he is and that he no longer needed the noisy tactics other corporate agitators do.This year, he has been tweeting a lot to his 689,800 followers and said in his letter that the social media platform was a “very efficient means to get the message out.”Ackman’s investment firm’s Pershing Square Holdings portfolio has returned 25.1% per year over the last five years, handily beating its broader stock market index which gained 9.4% a year during the same time. More