(Unofficial Translation)
Q: What is the background of thisamendment?
A: This year marks the 20th anniversaryof the State Council's endorsement of the PBC's status as the central bank ofChina. The enlargement of the PBC's functions reflects the continuous reformefforts in China's financial system.
OnJanuary 1, 1984, the PBC started to function as the central bank, marking the abolishmentof the mono-banking system in a planned economy, which combined currency issuewith credit extension and book-keeping for the entire economy. Hence a centralbank system in line with the development of a market economy was adopted.
Withits exclusive power of issuing currency, the central bank has the capacity ofmaintaining financial stability and advantages to conduct financialsupervision. Financial supervision is an administrative power that could be exercisedindependently. Different country may choose different supervisory regimeaccording to their different history, culture, and political, economic andfinancial conditions. During the past 20 years of reform and opening up, China'seconomy has been gradually integrating into the global economy, as the world isbeing economically and financially globalized, which poses a severe challengeto the independence of China's monetary policy. Development of financialderivatives and universal finance as well as the application of electronictechnology has dramatically changed the temporal and dimensional feature offinancial business, which in turn requires more skillful and professionalfinancial supervision. To accommodate to the changing situation, the PBC hasbeen continuously enhancing and strengthening its monetary policy function, whilethe State keeps adjusting the financial supervision regime. In order to enhancemanagement of the financial sector, maintain financial stability and improvebanking supervision, the CPC Central Committee and the State Council decided toestablish a separate banking regulatory commission. On December 27, 2003, thefifth meeting of the Standing Committee of the National People's Congressapproved the amendments to the "Law of the People's Republic of China on the People'sBank of China" and the "Commercial Banking Law" and ratified the "Law onBanking Regulation and Supervision", which legally acknowledged theachievements gained in China's financial reform.
The"Law of the People's Republic of China on the People's Bank of China" and the "CommercialBanking Law" were amended mainly to legally define the division of laborbetween the PBC and the CBRC, providing legal basis for administration of thesetwo institutions and leaving room for further development of the bankingsector. The statistics and monetary supply management are two of the keyelements of the central bank's monetary policy formulation and implementation.Monetary supply is composed of cash and deposits with commercial banks, and themonetary policy instruments mainly aims to influence activities of commercialbanks and financial institutions. In this sense, while monetary policyformulation and implementation could be independent from the financialsupervision, they also have close interlinks. Therefore, the amendments dividethe responsibilities of the PBC and the CBRC as completely as possible, whileat the same time repeatedly stress the coordination and information sharingbetween them, so as to maximize the effectiveness of monetary policy implementationand efficiency of supervision and minimize the unnecessary burden on financialinstitutions. Under the leadership of the CPC Central Committee and the StateCouncil, the PBC and the CBRC will cooperate closely in fulfilling theirrespective duties and jointly facilitate the development and stability of China'sfinancial industry.
Q: What is the purpose of theamendment to the "Law of the People's Republic of China on the People's Bank ofChina"?
A: In order to further improve thefinancial supervisory regime, the State Council decided to establish the ChinaBanking Regulatory Commission to exclusively supervise banking institutions,including banks, asset management companies and trust and investment companies.After the above-mentioned financial supervision function being removed, the PBCis mainly responsible for formulating and implementing monetary policy, keepingon improving rules on the operation of financial institutions, so as to betterfulfill its duty as a central bank in macroeconomic management and financialrisk prevention and mitigation. This amendment to the "Law of the People'sRepublic of China on the People's Bank of China" is mainly to reflect thealteration of the PBC's responsibility and the reform of the financialsupervisory regime.
Inaccordance with the need of reforming China's financial system, the PBC hasassumed responsibility of the central bank since January 1, 1984, formulatingand implementing monetary policy, providing financial services and supervisingthe banking, securities and insurance industries. The " Law of the People'sRepublic of China on the People's Bank of China" was promulgated in 1995, whichlegally defines the status of the PBC as the central bank of China.
Duringthe 20 years of the PBC's operation as a central bank, financial supervisoryregime has undergone several significant restructuring. In December 1992, theSecurities Committee of the State Council and the China Securities RegulatoryCommission (CSRC) were established to jointly supervise the securities industrywith the PBC. In November 1997, the PBC's mandate of supervising securitiesfirms was taken over by the CSRC, which then became the single supervisoryauthority of securities industry. In November 1998, the China Insurance RegulatoryCommission was established to supervise the commercial insurance marketnationwide. In April 2003, the China Banking Regulatory Commission wasestablished to exclusively supervise banks, asset management companies andtrust and investment companies. The main responsibility of the PBC was shiftedto "formulating and implementing monetary policy, keeping on improving rules onoperation of financial institutions, so as to better fulfil its duty as acentral bank in macroeconomic management and financial risk prevention andmitigation". It is of utmost necessity to amend the "Law of the People'sRepublic of China on the People's Bank of China" to reflect the change of thePBC's responsibilities and a series of reform efforts in the area of thefinancial supervisory regime.
Q: What are the main contents ofthis amendment?
A: The original "Law of the People'sRepublic of China on the People's Bank of China" consisted 8 chapters and 51articles, defining the three aspects of the PBC's main responsibilities, i.e.monetary policy formulation and implementation, financial supervision andfinancial services. In the amended " Law of the People's Republic of China onthe People's Bank of China", there are 25 revisions with the total articlesincreasing to 53, including adoption of 4 new articles, deletion of 2 articlesand revision of 19 articles. The modified responsibilities of the PBC includeformulating and implementing monetary policy, maintaining financial stabilityand providing financial services. In conclusion, changes of the PBC'sresponsibilities can be summarized into "one reinforcement, one shift and twoaugments".
"Onereinforcement" refers to the reinforcement of the PBC's responsibility in thearea of monetary formulation and implementation. Specifically, Article 12 inthe "Law of the People's Republic of China on the People's Bank of China"requires the PBC's Monetary Policy Committee to play an important role inmarcoeconomic management and monetary policy formulation and adjustment.Article 23 allows the PBC to use financial bonds in its open market operations,introducing a new monetary policy instrument. Article 31 requires the PBC tomonitor the developments in financial markets, conduct management of thefinancial markets and facilitate balanced development of the financial markets,etc.
"Oneshift" refers to the shift of the PBC's responsibilities from the previousdirect supervision on banking financial institutions, including licensingmarket access of financial institutions, approval of financial business,qualification review for senior management in financial institutions andday-to-day regulation and supervision, to maintaining financial stability, inother words, conducting management of the financial sector, preventing andmitigating systemic risks. In particular, Article 1 replaces "strengthensupervision and control over the banking industry" with "maintain financialstability". Article 2 indicates the PBC is to prevent and mitigate financialrisks and maintain financial stability under the leadership of the StateCouncil. The previous Article 31 is deleted, which indicates "the People's Bankof China shall, in accordance with regulations, examine and approve theestablishment, modification and termination of banking institutions, as well asthe scope of their business operations", and is replaced by "the People's Bankof China shall, in accordance with the law, monitor and regulate developmentsof the financial markets so as to promote the financial markets develop in acoordinated way". A new Article 34 is introduced, indicating "where the bankingfinancial institutions have payment difficulties that may trigger financialrisks, the PBC shall have the authority to conduct examination and supervisionon the banking financial institutions with the approval of the State Council,so as to maintain financial stability".
"Twoaugments" refers to two new mandates that the PBC resumes: anti-moneylaundering and management of credit information. As indicated by the firstclause of the Article 4 in the amended "Law of the People's Republic of Chinaon the People's Bank of China", the PBC shall guide and arrange anti-moneylaundering work in the financial sector and be responsible for monitoring ofmoney laundering-related fund movement.
Itis worth noting that the first clause of the Article 4 also provides legalbasis for the PBC's management of credit information, which states the PBCshall fulfill "other functions prescribed by the State Council". Theresponsibility, organizational structure and staffing scheme for the PBC, whichis drafted and published by the Office of Staffing and Organization andapproved by the State Council, explicitly indicates "the PBC is to regulatecredit information and promote the establishment of a social credit informationsystem". Accordingly, though the amended "Law of the People's Republic of Chinaon the People's Bank of China" does not explicitly indicates the regulatoryresponsibility of the PBC in credit information management, it is still one ofthe PBC's mandates.
Q: How does the amended "Law of thePeople's Republic of China on the People's Bank of China" reflect the PBC'sresponsibility in maintaining financial stability?
A: Financial stability is a ratherbroad concept, referring to a state of financial conditions. Previously, thePBC was responsible for both monetary policy formulation/implementation andfinancial supervision, the function of maintaining financial stability was thenreflected in various operating functions. Presently, the PBC is no longer responsiblefor any supervisory function, such as approving market access of financialinstitutions and their business scope, maintenance of the financial stabilityis then mainly reflected in the following aspects:
-First,providing bailout assistance to highly risky financial institutions as thelender of last resort;
-Second,sharing regulatory information and taking every necessary measures to preventsystemic financial risks;
-Third,joining a coordinating mechanism for financial supervision under the StateCouncil.
ThePBC, as the central bank, is the bank of banks, bank of government and bank ofcurrency issuance. It has the means to act as the lender of last resort andsafeguard the state's financial stability, therefore assumes the responsibilityfor financial stability. Nonetheless, the PBC would not act as the lender oflast resort very often to maintain financial stability, otherwise moral hazardproblems will arise, undermining the foundation of the credit culture. Instead,it is only through a combination of various instruments against systemic risksthat financial stability could be eventually achieved. Therefore, from theperspective of systemic financial risk prevention and mitigation, the amended"Law of the People's Republic of China on the People's Bank of China" adopts 10new clauses or so, entitling the PBC with the mandate to maintain financialstability and defining various legitimate means that the PBC can adopt tomaintain financial stability.
Tobe specific, Article 1, 2 and 13 of the amended "Law of the People's Republicof China on the People's Bank of China" indicates that the PBC and its branchoffices assume responsibilities for financial stability. Article 4, 27 requirethe PBC to secure the well functioning of the payment and settlement system, soas to enhance financial stability. Article 30 indicates that the PBC shallprovide central bank lending to mitigate financial risks, so as to maintainfinancial stability. Article 31 indicates " the People's Bank of China shall,in accordance with the law, monitor developments on financial markets, conductmacroeconomic management on financial markets and facilitate their balanceddevelopment", requiring the PBC to fulfill its financial stabilization dutyfrom the perspective of securing the stability of financial markets. Article 34indicates "where the banking financial institution has payment difficultiesthat may trigger financial risks, the People's Bank of China shall have theauthority to conduct examination and supervision on the banking financialinstitution with the approval of the State Council", giving the PBC thesupervisory power that is necessary to resolve financial risks on the basis ofanalysis on the profiles and severity of risks. Article 35 requires the PBC,the banking supervisory body and other financial supervisors to establish amechanism of supervisory information sharing, providing information basis forthe PBC's financial stability efforts. In addition, given that the financialstability involves various specialized supervisors on banking, securities,insurance and the state fiscal agencies, which entails coordination at higherlevel between relevant policy measures and longer-term framework for financialrisk prevention and mitigation. Consequently, the amended "Law of the People'sRepublic of China on the People's Bank of China" indicates "the State Councilshall establish a coordination mechanism for financial supervision andregulation and the details shall be determined by the State Council".
Q: How does the amended "Law of thePeople's Republic of China on the People's Bank of China" define the role ofthe Monetary Policy Committee?
A: According to the original "Law ofthe People's Republic of China on the People's Bank of China", the PBCestablished the Monetary Policy Committee in 1997 with the approval of theState Council, which is a consultative and advisory body for the PBC's monetarypolicy formulation. The main responsibility of the Monetary Policy Committee isto discuss the formulation and adjustment of monetary policy, application ofmonetary policy instrument, coordination of the monetary policy with othermacroeconomic management policies and other important issues of monetarypolicy, and to provide advice for monetary formulation and implementation inline with the State's macroeconomic management objectives. The State Councilhas promulgated the "Regulations on the People's Bank of China's MonetaryPolicy Committee", defining the committee's responsibilities, composition andworking procedures.
Themodification of the PBC's responsibilities enables it to focus more on itsmarcoeconomic management function in the financial sector. In order to allowthe full play of the Monetary Policy Committee's consultative and advisory rolein the central bank's monetary policy formulation and implementation, theamended "Law of the People's Republic of China on the People's Bank of China"introduces a new provision, indicating "the PBC Monetary Policy Committee shallplay an important role in State's macroeconomic management and monetary policyformulation and adjustment".
Q: The amended "Law of the People'sRepublic of China on the People's Bank of China" still allows the PBC to keepnecessary supervisory function. Is it in conflict with the CBRC's supervisoryresponsibility?
A: Not at all. In the current financialsupervisory regime, to fulfil its duties of monetary policy formulation andimplementation, financial stability and systemic financial risks prevention andmitigation, the PBC must keep the supervisory power on money market and somefinancial business. For instance, the PBC is still responsible for regulationand supervision of the national inter-bank bond market, inter-bank lendingmarket, inter-bank foreign exchange market and gold market and license approvalof commercial banks' purchase and sale of foreign exchange. Among thesenecessary regulatory mandates that still remain in the PBC, some can be easilydistinguished from the CBRC's supervisory responsibility. For instance, PBC'sremaining supervisory functions mentioned above and the direct monitoring andexamination power indicated in Article 32 of the amended "Law of the People'sRepublic of China on the People's Bank of China". However, as the CBRC isdirectly responsible for market access approval of banking financialinstitutions' business, when the PBC executing its mandate of regulation andsupervision on financial markets, there may be some overlapping between thesupervisory responsibility of the PBC and the CBRC. Given that the "Law of thePeople's Republic of China on the People's Bank of China", the "CommercialBanking Law" and "The Law on Banking Regulation and Supervision" are reviewedsimultaneously, there are some institutional arrangements in these three lawsto solve such problems. For instance, the "Law of the People's Republic ofChina on the People's Bank of China" entitles the PBC to propose anexamination, thus avoiding duplicated examination on banking financialinstitutions. The PBC's full-fledged examination power in exceptional cases mayprevent and mitigate financial risks and maintain financial stability atminimum price. Therefore, the PBC's keeping of necessary supervisory functionis an efficiency-enhancing institutional arrangement and also an institutionalfoundation for efficient supervision by both the PBC and the CBRC.
ThePBC's supervisory mandate is defined in Article 32, 33 and 34 of the "Law ofthe People's Republic of China on the People's Bank of China". As indicated inArticle 32, the PBC has the right to conduct direct examination and supervisionon 9 activities of financial institutions, other institutions and individualsthat are directly related to its monetary policy formulation andimplementation, its business operation and provision of financial services,including compliance with the reserve requirement, activities related tospecial lending of the PBC, compliance with regulations on Renminbi, etc. Inother words, usually the PBC does not conduct examination and supervision on acomprehensive or day-to-day basis. However, when there is a need forexamination and supervision on banking financial institutions arising in thePBC's efforts to implement monetary policy and maintain financial stability,the PBC may propose an examination to be carried out by the CBRC, for instance,in the case of banking financial institutions' violations of regulations oninterest rate or payment and settlement. Nevertheless, where banking financialinstitutions have payment difficulties that may trigger financial risks, asindicated in Article 34, the PBC is entitled to conduct comprehensiveexamination and supervision on the banking financial institutions with theapproval of the State Council, so as to maintain financial stability.
Inconclusion, as the banking supervisory authority, the CBRC has the mandate ofsupervising banking financial institutions, but it does not exclude the PBC'ssupervision power on the functions of financial institutions. Moreover, theCBRC's institutional supervision and the PBC's functional supervision arefocused on different aspects and can be easily differentiated in practice. Wewill coordinate examinations on the financial institutions in accordance withthe division of labor defined by the law, thus avoid any overlapped examinationon banking financial institutions and therefore unnecessary additionalburden.
Q: What modifications are made on thePBC's functions in the amended "Law of the People's Republic of China on thePeople's Bank of China"?
A: In the amended "Law of the People'sRepublic of China on the People's Bank of China", the PBC has 13 functionsinstead of 11 in the original one. Those still remain include:
-Formulating and implementing monetary policy;
-Issuing RMB and regulating its circulation;
-Manage the State treasury;
-Holding, administering and managing the State foreign exchange reserve and goldreserve;
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Maintaining normaloperation of the payment and settlement systems;
-Be responsible for financial statistics, survey, analysis and forecast.
Onenew function is introduced, i.e., "guide and arrange anti-money laundering workin the financial sector and assume responsibility for monitoring moneylaundering-related fund movement". It also defines other responsibilities forthe PBC, such as "regulate and supervise inter-bank lending market andinter-bank bond market", "exercise foreign exchange administration, regulateand supervise inter-bank foreign exchange market" and "regulate and supervisegold market". In addition, Article 4 of the amended "Law of the People'sRepublic of China on the People's Bank of China" mandates the PBC to perform"other responsibilities prescribed by the State Council". According to thisArticle, responsibilities that are not defined in the "Law of the People'sRepublic of China on the People's Bank of China" but included in the"responsibilities, organizational structure and staffing scheme for the PBC"approved by the State Council are still the PBC's mandates, includingregulatory responsibility for credit information management and coordination ofanti-money laundering work among relevant authorities. In the future, the PBCmay assume more responsibilities as required by the State Council.
Q: How is the PBC's responsibility foranti-money laundering defined in the amended "Law"?
A: As the 10th provision ofthe Article 4 indicates, the PBC is responsible for "guiding and arranging theanti-money laundering work in the financial sector and be responsible formonitoring money laundering-related fund movement". In addition, according tothe modified "responsibilities, organizational structure and staffing schemefor the PBC" approved by the State Council, the PBC is also responsible forcoordination of anti-money laundering work of relevant authorities under theState Council. Recently, the PBC has been paying great attention to anti-moneylaundering as required by the State Council. In September 2001, the PBCestablished a leading group on anti-money laundering, guiding and arranginganti-money laundering work in the banking sector on a centralized basis,approving international cooperation projects in the area of anti-moneylaundering, studying and formulating anti-money laundering strategies of thebanking sector. In March 2003, the PBC established the Division of Anti-moneyLaundering and the Division of Payment Transaction Monitoring. In March 2003,the State Administration of Foreign Exchange also set up a Division ofAnti-money Laundering, particularly focusing on monitoring cross-border moneylaundering activities. In October 2003, in accordance with the"responsibilities, organizational structure and staffing scheme for the PBC"approved by the State Council, the PBC established the Anti-money launderingBureau, which is mainly responsible for arrangement and coordination of the State'santi-money laundering work, research and formulation of anti-money launderingprogram and policies, arranging international cooperation in the area ofanti-money laundering, collection and analysis of information on suspiciouspayment/transaction in both RMB and foreign exchange reported by relevantauthorities. Furthermore, in January 2003, the PBC published "Rules forAnti-money laundering Efforts by Financial Institutions", "Administrative Rulesfor the Reporting of Large-Value and Suspicious RMB Payment Transactions","Administrative Rules for the Reporting of Large-Value and Suspicious ForeignExchange Transactions by Financial Institutions", which provide effective legalsupport for the PBC's anti-money laundering efforts in the financial industry.
Inthis context, the newly added responsibility of "guiding and arranginganti-money laundering work in the financial sector and be responsible formonitoring money laundering-related fund movement" in the amended "Law of thePeople's Republic of China on the People's Bank of China" has provided a legalbasis for the PBC to fulfill its anti-money laundering mission.
