Corporate governance will be crucial benchmark

Editor’s note: Four Chinese financial regulators have jointly released a document outlining 22 targeted measures to improve the governance of financial institutions. The 21st Century Business Herald spoke to Dong Ximiao, chief economist at Merchants Union Consumer Finance and executive director of the Shanghai Institution for Finance and Development; and Lou Feipeng, a researcher at Postal Savings Bank of China, about the measures. Below are excerpts of the interviews. The views don’t necessarily represent those of China Daily.

By 2029, China will establish a desired governance framework for financial institutions. The document focuses on strengthening and improving shareholder governance. It underscores the importance of identifying major shareholders and actual controllers, which is a manifestation of thorough supervision. This approach extends regulatory oversight beyond registered shareholders to the individuals who ultimately control and are accountable for institutions, shifting the focus of supervision from mere compliance to substantive governance.

The framework also operationalizes the higher-level legal principles set out in the draft revision to China’s banking supervision and regulation law. It refines the law’s regulatory mandate over major shareholders and ultimate controllers into actionable rules for ownership identification and monitoring of related-party transactions.

Regulatory oversight will examine the genuine commercial purpose of related-party dealings, significantly reducing the scope for regulatory arbitrage through complex corporate structures.

The document calls for stronger risk monitoring and early-warning mechanisms in corporate governance. Tougher penalties for violations, together with a lifetime accountability mechanism, are expected to have a cleansing effect on the financial sector.

The new framework will also prevent individuals with serious compliance issues from moving freely between financial institutions, thereby reducing the risk of misconduct spreading across the sector.

In addition to stronger disciplinary measures, the document aims to improve internal governance by guiding financial institutions to establish incentive and accountability mechanisms that support sustainable development and long-term strategic objectives.

Institutions with sound governance, clear allocation of responsibilities and robust risk management will be better positioned to earn regulatory confidence and market recognition.

For large financial institutions, the primary challenge lies in managing extensive business operations and subsidiary networks, where sheer size can make effective oversight difficult. Their priorities should therefore include strengthening top-level governance, improving board oversight, checks and balances, and building group-wide look-through risk management frameworks to prevent risks from spreading across different business lines.

Smaller financial institutions should focus on removing noncompliant shareholders, eliminating hidden related-party transactions and establishing streamlined internal control systems with clearly defined responsibilities, rather than attempting to replicate the governance models of large institutions.

Institutions with stronger governance will enjoy superior risk management and greater capacity for sustainable, long-term growth, while the traditional growth model driven primarily by rapid expansion will become increasingly unsustainable, reshaping the competitive landscape.