Specific challenges to the People’s Bank of China in a new wave of financial reforms

The People’s Bank of China (hereinafter PBOC) is facing several challenges in a new wave of financial reforms in China. The PBOC’s independence is always criticized. Taking into account the Chinese political system, however, central bank independence is less significant in China than in western countries. By contrast, legal provisions relating to the PBOC’s accountability to the National People’s Congress, the State Council and the Judiciary need to be improved. To fulfil its financial stability mandate, the PBOC should be provided with law-based financial stability instruments. The importance of a central bank in financial regulatory system has increasingly been recognized across countries after the global financial crisis. It is recommended that China’s Coordination Meeting System be legally upgraded to become a financial stability oversight committee, established within the PBOC, which brings together the expertise of central and local financial regulatory agencies and even independent experts in relevant fields. With respect to China’s deposit insurance scheme, priority should be given to preventing runs, and the moral hazard consideration should be secondary to preventing runs in the trade-off between preventing runs and limiting moral hazard.