DRAMA AROUND the future of one of China’s biggest bad-debt managers is highlighting the urgent need for the country to simplify oversight of its financial system.

As investors looked for clarity over a possible restructuring of state-owned China Huarong Asset Management Co., the issue was made more complex by the number of government agencies involved.

There’s the finance ministry, which is the company’s majority shareholder. It may sell its stake to the sovereign wealth fund, thereby transferring responsibility, according to a Bloomberg News report. The China Banking and Insurance Regulatory Commission (CBIRC) has its say as a top watchdog, and has asked banks to extend loans to China Huarong by at least six months, another report said. The central bank, which is considering taking on some assets, is required to step in as part of its mandate to maintain overall financial stability.

Above them there’s the Financial Stability and Development Committee, chaired by Vice Premier Liu He — a key adviser to President Xi Jinping. There are signs the influential body will expand its remit and increase oversight of local financial institutions.

The CBIRC is the only agency to have publicly commented on China Huarong, though regulators have held several meetings to discuss the company’s fate, people familiar with the matter have said.

How China handles the growing challenges to its financial system is becoming more relevant to global markets. With unprecedented capital inflows and wider access for Chinese money to invest overseas, it’s never been more important for Beijing to strengthen its regulation in a transparent way.

Central bank Deputy Governor Liu Guiping urged reforms in a detailed article in March. China’s has “scattered” financial rules and could learn from the setup in the US, which has the Dodd-Frank Act, and other major economies that overhauled their financial regulations in recent decades, he wrote. Liu’s main takeaway: China needs a coordinated financial stability law.

Liu submitted the proposal to the National People’s Congress and suggested introducing the legislation “as soon as possible when conditions are ripe.” Completion of such legislation may take three to five years, according to Yang Zhaoquan, a partner at Beijing Weinuo Lawfirm.

“Risky incidents have emerged one after another, harming the marketplace and damaging financial and social stability,” said Yang. “This calls urgently for more powerful legal tools.”

For a government obsessed with control, the Communist Party’s oversight of its $54-trillion financial system — which includes the world’s largest banking industry — looks disjointed. A lack of oversight allowed companies like China Huarong to dabble in risky businesses, and meant that others like Ant Group Co. grew far too influential.

When China started to experiment with market-oriented reforms in the late 1970s, the People’s Bank of China (PBoC) was the only authority responsible for managing and overseeing the financial system.

The subsequent economic boom led to the creation of multiple commercial banks, insurers and brokerages, prompting the government to set up separate watchdogs for each industry and relieve the PBoC from day-to-day oversight. First came a securities regulator in 1992, followed by an insurance regulator in 1998 and a dedicated banking regulator in 2003.

China dealt with the 2008 global financial crisis with an impromptu plan reliant on debt, resulting in the bloated financial system the country has today. Fueled by asset management products and peer-to-peer lending, shadow banking assets grew to $10 trillion in the decade that followed. The market was a lifeline for cash-strapped Chinese companies with no access to regular bank loans.

But then came the crackdown on financial risk. Since Xi made deleveraging a top priority in 2017, China has given more power to the PBoC and increased efforts to consolidate its many regulatory bodies by merging the banking and insurance watchdogs. Chinese banks may still have 3 trillion yuan ($463 billion) in legacy wealth-management products to clean up before an end-2021 deadline, according to S&P Global Ratings.

The country’s rapid integration with the global financial system means a bolder strategy is needed to strengthen its patchwork of rules and regulations.

“China used to be closed off,” said Liu Feng, chief economist at China Galaxy Securities Co. “But now, foreign capital is flowing in and our capital is going out, and that requires our law and regulation to match that of other countries.” — Bloomberg