Opinion: The Challenges and Benefits of China’s Latest Financial Stability Legislation

The legislative process for the Financial Stability Law in China is moving forward. The 14th Standing Committee of the National People’s Congress will review the latest draft at the end of June. This draft, first discussed in December 2022, focuses on enhancing systems for managing financial risks throughout their lifecycle [para. 1]. The draft law features six chapters and 49 articles, establishing mechanisms for financial stability, risk prevention, and resolution, and defining responsibilities and liabilities. One notable aspect is the creation of a Financial Stability Fund, which drew great public interest, evidenced by 738 individuals submitting 3,631 comments during the public comment period [para. 2].

In recent years, Chinese policymakers have prioritized financial stability, focusing on preventing systemic risks. Despite rapid growth in the financial sector, issues like non-compliant and illegal activities, compounded by regulatory gaps, have led to significant risk accumulation. Incidents such as the Baoshang Bank bankruptcy highlighted the urgent need for a structured approach to risk management. This experience underscores the necessity of codifying lessons learned into law [para. 3]. However, significant challenges remain. The China Financial Stability Report (2023) noted that while large banks have managed relatively well, small rural and financial institutions, as well as some life insurance companies, present notable risks due to management failures and other issues. Proper risk management requires a systematic approach, which the Financial Stability Law seeks to establish [para. 4].

Crafting such comprehensive legislation is complex. The new law must integrate with existing ones, like the People’s Bank of China Law and the Commercial Banking Law, without causing legal inconsistencies. Legislators must also address market concerns, such as the need for a clearer financial stability mechanism, better-defined responsibilities, and advanced risk resolution measures [para. 5]. Legal provisions typically aim for broad flexibility, yet specific actionable mechanisms are essential. For instance, the draft stipulates that institutions facing significant prudential supervision issues must proactively manage risks, with a variety of actions such as asset-liability adjustments, scaling down operations, and personnel changes, among others. Detailed criteria for these actions and the use of the Financial Stability Fund need to be precisely defined during the legislative process [para. 6].

The draft also covers how financial risk resolution aligns with judicial procedures, emphasizing the protection of stakeholders' rights during these processes. Affected parties can raise objections with the State Council’s financial management departments and, if necessary, file lawsuits. These provisions are crafted to address previously identified issues, ensuring their effective implementation is crucial [para. 7]. Effective financial risk management is a complex, multi-departmental effort, with cooperation between central and local authorities being key. The draft specifies that local governments should manage risks within rural financial institutions and lead resolution efforts, while also respecting the independent operations of these institutions, thereby addressing past coordination failures [para. 8].

Ultimately, financial stability is critical for China’s economic development. Integrating financial stability into the rule of law will bolster efforts to prevent and manage financial risks. All stakeholders anticipate that lawmakers will create robust legislation to strengthen financial stability and secure the economic foundation [para. 9].