The Silk Road of regulation | Wolters Kluwer Financial Services
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  • The Silk Road of regulation

    By Selwyn Parker

    Published March 01, 2017

    As China’s giant economy rolls down the modern Silk Road into Asia and beyond, smaller nations in the region are hurriedly developing common standards of financial regulation that are helping feed a boom in cross-border trade.

    The latest country to exploit synergies with China is Singapore whose financial watchdog (MAS) has opened a regulatory dialogue that is set to pave the way for nothing less than a “new Asian financial landscape”, as the authority’s deputy managing director Jacqueline Loh described it recently.

    Appropriately, Ms Loh made the remark in China’s financial capital of Shanghai where the inaugural financial forum between the two cities was launched in 2015. Like countries in the region, Singapore is anxious to develop regulatory regimes that smooth the path for the coming tidal wave of trade carried on floods of renminbi, official name for China’s currency.

    Indeed the wave has already started. To take just Singapore as an example, in 2015 the total value of trade between China and the city state reached about US$90bn, according to the latest available figures. For the third consecutive year China was Singapore’s largest trading partner.

    Simultaneously, the rate of financial investments is going through the roof. In 2015 Singapore pumped US$7bn into China, up by 18.5 per cent over 2014 while Singapore’s investments into the banking hub of Shanghai totalled US$2.2bn, up by 160 per cent year on year.

    Integration

    All this helps explain why Singaporean authorities are pioneering regulatory integration with China’s financial markets. In early 2016 MAS signed up to participate in China’s inter-bank foreign exchange market and, in another boost for the growing power of the renminbi, the authority started buying yuan-based assets for Singapore’s official foreign reserves.

    These developments follow considerable preparatory work. Last April, MAS and the China Securities Regulatory Commission sat around the table to discuss supervision of capital markets and took another important step in July when the two organisations began talks on insurance regulation.

    Silk Road

    But what exactly is the Silk Road? Named for the ancient trading routes that connected China to the Mediterranean, the modern version was launched by President Xi Jinping just over three years ago. Unprecedented in scope, it’s the land-based element of the One Belt One Road, popularly known as “belt and road”, vision designed to massively increase the country’s investment and trade across the globe. The second element of belt and road is a maritime route linking China with Europe. Since the launch of this vast project, countries in the region have rushed to sign bilateral deals with China, among them India, Pakistan and Singapore.

    A key aspect of the project is an Asia-wide financial integration that in time may turn out to rival the influence of western-style regulation. After all, China’s financial sector exercises immense power that is spilling over into the wider region. As we’ve pointed out before, China’s fintech sector is developing at a furious pace. For example, financial services giant Ping An has 109 million core finance customers and boasts a total online user base of nearly 300m people.

    Similarly, the potential for firms such as Tencent, today a gaming and social networking site with 800m active users, to expand into finance and grow beyond its home base is enormous. As an indication of things to come, last year a Tencent subsidiary named WeChat started providing instant non-collateralised loans of up to US$30,000.

    Malaysia

    With Singapore in the vanguard, it’s inevitable that other Asia Pacific countries will also work towards compliance with China’s financial sector, incidentally triggering a scramble for compliance specialists [see below]. With the encouragement of central bank Negara Malaysia under its ten-year plan, Malaysian banks have been learning how to deal with multiple regulators over the last few years. As early as 2011 the BNM started prodding the financial sector to integrate with other standards as part of a more outward-looking strategy.

    Another powerful influence in financial integration is the Asean Capital Markets Forum, a body of regulators from ten countries that has been working to harmonise rules since 2004. Currently, the forum is developing indexes that will help investors value various classes of assets across the Asean region.

    Coup

    Enforcement authorities are deepening ties too. Late last year the China Securities Regulatory Commission (CSRC) combined resources with their counterparts in Hong Kong to crack a nearly 300m renminbi [US$43.6m] stock-manipulation fraud in a coup for the kind of cross-border cooperation that will become increasingly common in the near future. The two watchdogs now routinely swap alerts, documents, information and anything else that can help preserve the integrity of the markets.

    As the CSRC put it: “Preventing and cracking down on cross-border market manipulation, insider trading, misrepresentation and other misconduct in the securities and futures market is a long-term task for regulators in the Mainland and Hong Kong, both of whom put enforcement cooperation top on their agenda.”

    More to come

    It’s an indication of how recently financial integration with China began that the enforcement protocols that identified the manipulation were only signed in 2014. And, as we’ve seen, Singapore’s links are hardly more than a year old.

    It’s inevitable that these initiatives will be reflected by similar arrangements across the region as the Silk Road finds its way deeper into Asia.

    And in other news…Comply or die

    Tougher regulation is fuelling demand for compliance specialists in Asia and in particular in Singapore, according to financial recruitment consultants who say that competition for experienced professionals has gone through the roof.

    The main specialties required are anti-money laundering, financial crime and systems security, all of which are attracting the close interest of regulators. According to speakers at a conference in Singapore in January, the financial sector in the region is casting its net for compliance-savvy staff in London and other centres where post-2008 regulation is much more evolved.

    Demand is such that experts are being hired without even the benefit of an interview.

    The shortage in compliance skills is reportedly reflected right across Southeast Asia including in fast-developing nations such as Indonesia, Vietnam and the Philippines.

    About the author: Selwyn Parker is an author of books on finance and business topics, a specialist in financial history, and regular contributor to newspapers and magazines. Based in Spain, France and the UK, he focuses mainly on European developments. His latest book, The Great Crash, is a new history of the Great Depression that among other things explains the rise of regulation in the form of the SEC and related authorities. Selwyn is a regular contributor to Wolters Kluwer Financial Services.



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