China targets high-quality growth

Yun KrieglerTuesday 14 May 2024

China has prioritised financial reform as it makes the shift from fast growth to more sustainable and greener economic development. Global Insight assesses what the changes mean for foreign companies and their advisers.

Among the Chinese government’s top priorities for 2024 is financial reform. This will be key for the world’s second largest economy as it seeks to achieve a growth rate of five per cent of gross domestic product (GDP) during the year.

China’s priorities for 2024 were set out by its Premier, Li Qiang, in March as he presented the government’s ‘work report’ during the ‘Two Sessions’ – the annual meetings of the National People’s Congress and the country’s top advisory body, the Chinese People’s Political Consultative Conference.

The ‘Two Sessions’ are known for providing an important indication of the central government’s policy direction for the coming year and as such are closely watched by businesses and investors. Although no major stimulus measures were announced, the government’s emphasis on the implementation of its financial regulatory reform, its policies to support the financing needs of five key sectors and its determination to further open up the financial services market have all hinted at new opportunities for foreign companies, investors, banks, finance businesses and their international legal advisers.

Enter the ‘super’ regulator

Among a raft of changes and measures introduced as part of the financial reforms, the structural overhaul of China’s supervision system for the financial sector is the most significant.

A newly established ‘super’ financial regulator – the National Financial Regulatory Administration (NFRA) – was created in May 2023, replacing the China Banking and Insurance Regulatory Commission (CBIRC). But it wasn’t until November that the NFRA’s responsibilities and structure were fully revealed.

At the central government level, all financial sectors, excluding the securities industry, will be regulated by the NFRA, including the approval and supervision authority of financial holding companies, which has been transferred from the People’s Bank of China (PBOC). The PBOC will now be more focused on monetary policy formulation and macro-prudential supervision. The NFRA has also taken over the role of financial consumer protection from the China Securities Regulatory Commission (CSRC).

Banks and financial services institutions in China will have to navigate through a drastically different regulatory regime following the overhaul. Global companies, however, can expect to operate under a more familiar regulatory set-up and on a somewhat levelled playing field given the new regulator’s stronger focus on corporate governance and compliance. ‘The new regulatory regime, which is overseen by a single, multi-sector, super regulator, is a familiar one to large global banks and international financial institutions’, says Liam Flynn, European Regional Forum Liaison Officer of the IBA Banking & Financial Law Committee and co-head of the Financial Regulation team at Irish law firm Mason Hayes & Curran.

The idea is to have a single regulator with the oversight of authorisation, prudential, conduct, corporate governance and other regulatory issues

Liam Flynn
European Regional Forum Liaison Officer, IBA Banking & Financial Law Committee

Ireland undertook a similar reform in 2003 and 2004, when it established a single multi-sector financial regulator. ‘The idea is to have a single regulator with the oversight of authorisation, prudential, conduct, corporate governance and other regulatory issues across different sectors, so there can be greater consistency and sophistication in the national financial regulator’s approaches and standards’, explains Flynn. He adds that the expectations for companies across these various sectors will also be similar.

For example, the Chinese financial institutions involved in asset and wealth management – such as trust companies, insurance companies, banks and financial holding companies – were previously supervised by separate regulators. Under the new regime, they will be supervised by the NFRA’s asset and wealth management institution supervision department. ‘The reform enables the new regulator to […] better prevent business from profiting from possible regulatory arbitrage by institutions previously under different regulatory authorities’, says Dorothy Xing, a banking and finance partner at Beijing-based law firm East & Concord.


Since its establishment, the NFRA has already published numerous sector-specific measures to strengthen the supervision of financial companies. These include interim measures for the supervisory rating of trust companies and rules on the risk management of banking and insurance institutions. ‘A common theme […] is the regulator’s increased focus and greater expectations on financial institutions’ corporate governance, risk control, operating rules and internal management. This is in line with other key legislative developments, such as the amendments to the Company Law’, explains Xing.

The past few years have already seen more stringent enforcement from financial regulators in China. In 2023, the total value of fines issued for non-compliance and rule breaches by banks reportedly exceeded CNY 2.8bn (£308.6m). Most enforcement actions relate to lending, corporate governance and internal control violations.

The financial regulatory reform will lead to higher requirements regarding compliance and risk control for domestic companies, as well as tougher enforcement actions being taken by the new regulator, says David Liu, Co-Chair of the China Working Group within the IBA Asia Pacific Regional Forum and a partner at JunHe, based in Shanghai.

According to Liu, financial services compliance is already a rapidly growing area for Chinese law firms, and the rising level of fines resulting from non-compliance and rule violations – as well as the increasing number of new rules and measures issued by the NFRA – will drive up financial companies’ efforts on compliance, as well as their budget.

‘Quality’ growth

China’s GDP growth target of five per cent, the lowest in years, has been viewed by numerous global financial institutions as ‘ambitious’ due to the many challenges the country faces.

The government calls for lenders to provide financial support to areas that are important to higher-quality economic growth and to reduce systemic risks

David Liu
Co-Chair, IBA China Working Group

The International Monetary Fund, for example, has predicted a rate of growth rate of 4.6 per cent for China in 2024, citing the country’s property sector crisis, local government debt risks, reduced export demand and headwinds from weaker productivity and population aging as some of the main issues.

Premier Li has acknowledged these challenges and said that ‘the foundation for the continuous recovery and improvement of our country’s economy is still not solid, with insufficient demand, overcapacity in some industries, weak societal expectations and many lingering risks’. However, in his ‘work report’, he also underlined the important role the latest financial reform and a raft of new measures in the sector could play in stabilising the country’s economy and boosting its growth in a ‘quality’ way.

For example, in an effort to ease the debt crisis in the slumping real estate sector, the central government introduced its ‘16 measures’ plan in November 2023, which encourages banks to lend to qualified property developers. One of the measures in the plan involves loan repayment extensions, for instance.

The central government has also called for financial institutions to strengthen the allocation of resources in strategically important areas for society and the economy, such as innovation in science and technology, green development, private small and micro enterprises, pension and long-term care insurance, and digital transformation. These incentives have been branded as the five priority areas where the financial sector could support the so-called ‘real economy’ and high-quality financial development.

‘The aim of the reform and financial measures is to transform China’s “large” financial market to a “strong” financial ecosystem’, says Liu. ‘Recent events in the real estate market have revealed the risks related to excessive corporate leverage. The government calls for lenders to provide financial support to areas that are important to higher-quality economic growth and to reduce systemic risks, so a virtuous cycle between the financial sector and the economy can be achieved.’

However, Liu says that to achieve the dual purposes of building a stable financial system and promoting lending to support the economy, the new financial regulator must find an appropriate balance in its supervisory approach. ‘If it regulates with a heavy hand, it may restrain banks’ development and lending activities, but a lax approach will lead to market disorder and financial risks. The balancing act will also largely depend on a […] number of follow-on regulations and administrative measures that will show how these policies are being implemented in practice’, says Liu.

The pressure on Chinese banks to reduce interest rates in the key home mortgage and local government debt sectors has already prompted some global credit rating agencies, such as S&P, to cast a cloudy outlook on Chinese banks’ 2024 earnings and credit profiles.

External expertise

Lawyers and their financial sector clients must embrace the new way of working, while the regulatory structural changes may affect the practice of law in certain areas.

The unified regulation of the domestic bond market is also an important part of the reforms. Previously, enterprise bonds, which were mostly issued by local government, were supervised by the National Development and Reform Commission, but in October 2023 they were placed under the CSRC’s supervision. ‘The recent consolidation of the regulatory responsibilities for enterprise bonds and corporate bonds will lead to necessary adjustments in relevant legal work’, says Yuan Ting, a partner at Zhong Lun in Beijing.

Driven by their mandates to support the central government’s five prioritised areas, banks and their legal advisers will need to develop expertise in these industries and in new financial products. ‘The policy mandates spurring banks to provide credit to stimulate the economy and support emerging but strategically important industries will require commercial banks to have more expertise in different areas and sectors when making lending decisions, as it is more difficult for them to identify eligible borrowers in these industries and effectively control risks’, says Liu.

For example, when lending to startups in the field of new technologies, banks may need to rely on external expertise, such as advisers who possess the relevant experience and who understand sectorial risks and intellectual property, in addition to traditional banking and finance lawyers.

The sector’s two-way street

The ‘Two Sessions’ also signalled China’s commitment to further open up its market and attract foreign investment. It’s a timely announcement, as foreign direct investment into China hit a record low last year, plummeting 81.7 per cent to around $33bn. The financial services sector is seen by the government as both a key facilitator in this process and a beneficiary of it.

The NFRA’s international department recently published a document confirming the regulator’s commitment to ‘promote high-level opening-up of the banking and insurance industries’. Foreign financial institutions, according to the Chinese regulator, have become an important force in the country’s financial market and their role and engagement in developing the country’s financial sector will continue to deepen.

‘We’ll steadily push toward high-level systemic openness in the financial sector, enhancing the facilitation of cross-border investment and financing, and attracting more foreign financial institutions and long-term capital to operate and invest in China’, said Xiao Yuanqi, a deputy director of the NFRA, at a press conference in early 2024.

In recent years, China has rolled out more than 50 measures to attract foreign investment in the financial sector and to encourage Chinese financial institutions to expand abroad. These measures as they pertain to foreign institutions include the relaxation of certain approval conditions, such as for the granting of insurance broker licences to investors, and the lifting of ownership caps for wealth management, asset management, securities, futures and funds companies. Foreign companies are now permitted to hold 100 per cent of the shares in banks and insurance companies in China.

At the local government level, there are also new measures and substantial incentives to encourage the establishment of foreign-invested financial institutions.

‘At a high level, China is the second most populous country and second largest economy in the world. Large banks and financial [companies] will consider opportunities in China’, says Flynn. ‘But it’s not easy expanding businesses in China, particularly when the country is going through some challenges, such as the property sector slump. But among our financial sector clients, there is an interest in China’s securities businesses and the fund management sector.’

With more preferential policies and fewer barriers, the number of foreign-owned or invested financial institutions has been growing steadily and their scope of businesses has also been expanding. US-based AllianceBernstein, for example, obtained a licence to run its wholly owned mutual fund business in China in January, making it the latest foreign asset manager to tap into China’s $3.8tn mutual fund market. In the same month, six foreign banks, including HSBC and Standard Chartered, were granted licences allowing them to act as lead underwriters for debt issues in the country, pushing the total number of licensees to eight.

German insurer ERGO, which is part of Munich Re, is another foreign company that has increased its investment in China in the past year. The insurance group increased its stake in the ERGO China Life joint venture to 65 per cent from 50 per cent in November 2023, and more recently expanded its China presence by launching a new insurance brokerage joint venture.

‘Since 2023 it’s clear that the government has been increasing its efforts to open up the financial sector to foreign investment. We’ve seen deals where foreign investors are acquiring shares in leading Chinese financial [companies]. They are not only injecting capital, but also are increasingly involved in designing and launching new products and management’, says Xing.

It’s important [that] foreign companies are able to contribute cutting-edge skills, know-how and technical breakthroughs in the areas they are investing

Dorothy Xing
Partner, East & Concord

Compared to the government’s previous approach, Xing says the focus of the latest open-up drive is not only on attracting capital, but also prioritising bringing in international standards and know-how to support the overarching goal of achieving ‘higher-quality’ development. ‘It’s more important [that] the foreign companies are able to contribute cutting-edge skills, know-how and technical breakthroughs in the areas they are investing, such as digital finance or commercial pensions’, she says.

There are certain areas in which foreign banks and financial institutions could also learn from their Chinese counterparts, says Flynn. ‘The penetration of Fintech and innovation in the digitalisation of financial services, such as add-on insurance and embedded insurance, is way ahead of the West. Western markets could learn from China’, he believes.

Although international law firms aren’t permitted to advise on Chinese law and regulations, there will be fresh opportunities for them to assist their home market clients in strategic planning and product design as China’s financial sector opens up and matures further.

Law firms based outside of China should also expect increased demand fuelled by a new wave of global expansion by Chinese banks and financial institutions. As the NFRA’s deputy director has said, the opening up of China’s financial sector is a two-way development, meaning the country will encourage domestic banks to venture abroad in a bid to support national initiatives such as the ‘Belt and Road’ global infrastructure project and to boost the international competitiveness of the country’s banks.

Bank of China is an example of a domestic giant with a growing presence abroad. In 2013, it opened a new branch in Saudi Arabia’s capital Riyadh and a representative office in Papua New Guinea. Today, its global network extends to 64 countries and regions, including 44 locations within the Belt and Road programme. It was also one of the first Chinese banks to establish a branch in Ireland, which opened in 2017.

Mason Hayes & Curran reports that the Chinese community within Ireland’s financial services sector is growing, particularly in the leasing space. Globally, law firms are set to increasingly encounter China’s financial market, either because they’re advising their clients who are expanding in the country or as a result of Chinese companies venturing abroad.

Key takeaways from China’s ‘Two Sessions’

China’s week-long annual parliamentary session took place in Beijing in March. Commonly known as the ‘Two Sessions’, this series of meetings has set the top-level economic, political and foreign policies for the coming year. Below are some of the highlights, as the country targets a five per cent growth in GDP in 2024.

High-quality development: Buzz words such as ‘high-quality development’ were frequently used during the ‘Two Sessions’, signalling a new strategic direction for China’s development. Although there’s no clear definition of ‘high-quality’, it’s understood that this new model for growth will be different from the ‘high-speed growth model’ the country enjoyed in the previous decades, which featured a reliance on property and debt-driven infrastructure investment. The current approach instead emphasises improving productivity, innovation and the structure of the economy, as well as pushing for greener and more sustainable development.

As an example, the financial sector has been mandated to support the so-called ‘real economy’ and ‘high-quality development’ by allocating more resources towards strategically important areas, including innovation in science and technology, green development, private small and micro enterprises, pension and long-term care insurance, and digital transformation.

High-tech focus: The high-tech sectors – such as new energy vehicles, artificial intelligence, renewable energy and advanced manufacturing – have been hailed as the productive forces that will now become the engines of China’s growth. It was clear from the ‘Two Sessions’ that there’s a strong desire among the country’s senior leaders to push the country ahead in the global race for critical technologies. This is not only driven by China’s transition towards ‘high-quality development’, but also in response to a series of US sanctions, export controls and investment bans aimed at restricting China’s access to US technologies.

Deepening reform in key areas: Businesses and financial institutions can expect further reforms and regulatory changes, aimed at enhancing business environment, restoring confidence in the capital markets and protecting consumers and small investors.

In the financial sector, there will be further measures to reduce systemic financial risks, improve supervision and crack down on illegal financial activities.

China’s newly appointed top securities regulator has also promised to tackle fraudulent companies and investors and to protect small investors, using a suite of measures to improve the quality of listed companies and increase returns on investment. This announcement came shortly after the Chinese stock markets experienced extreme volatility and slumped to multi-year lows at the beginning of 2024.

The pressure on companies to place more effort and resources into corporate governance and compliance will continue to grow. This is also due to a significant number of amendments to key areas of law. The revised Company Law, for instance, will come into force on 1 July and has made various significant changes to China’s corporate law regime.

Further opening up: Another fundamental message during the ‘Two Sessions’ was that China will increase its efforts to attract foreign investment. The country’s economic blueprint laid out plans to open up further areas to foreign investment and to reduce restrictions on market access. For example, all such restrictions on foreign investment in manufacturing will be lifted, while those in service sectors, such as telecommunications and healthcare, will be reduced. In the financial sector, foreign companies are now allowed to hold 100 per cent of the shares in banks and insurance companies in China.

Several new measures have been introduced to make it easier for foreigners to work and travel in China. For example, the 15-day visa-free entry policy has been extended to a greater number of European countries.

Yun Kriegler is a freelance journalist and can be contacted at yun.kriegler@gmail.com