China is Rushing to Build Firewalls in Response to the Upcoming Financial Crisis

This article follows up on the June 11, 2026 public account post “Whoever Dug the Hole Must Fill It—Don’t Try to Divert the Trouble,” which analyzed Xiaozhen’s views on the upcoming financial crisis, its root causes, potential triggers, and transmission pathways.

Our conclusion: A new round of global financial crisis is likely to be triggered by the Japanese yen, potentially sparking an Asian financial crisis similar to 1997, then detonating the U.S. AI bubble and impacting the entire world.

Based on this, China is urgently building firewalls to mitigate the impact of the impending financial crisis on its economy and global strategy.

🌐 [“Sudden Shift” in Policy Actions]

Analyzing national policy actions requires a baseline—an approximate sense of how fast policy moves in different areas.

In the financial sector, although the 2023 Financial Work Conference had already initiated a comprehensive overhaul of the financial system and improved regulatory frameworks, with many deployments and measures, overall progress from 2023 to 2025 was limited. For example, the recently reshuffled financial regulatory authorities had mainly focused on foundational work such as organizational restructuring and delineating central-local responsibilities.

But since March of this year, the pace has suddenly accelerated. In particular, recent long-pending major decisions have come in a flurry.

Note the earlier mention of the U.S. “AI + private equity” financial innovation that goes beyond traditional financial regulation. Almost every financial crisis originates from the explosion of some form of financial innovation, especially those tied to major bubbles:

• 2008 Global Financial Crisis: Subprime mortgages and real estate
• 2000 Dot-com Bubble: Venture capital, stock options, and the internet
• 1997 Asian Financial Crisis: Financial liberalization and short-term capital cross-border flows
• 1990 Japan’s Bubble Burst: Land trusts and real estate financial innovation

🛠 [Complete Overhaul and Power Struggles in Private Equity Regulation]

Against this backdrop, on June 5, 2026, the state issued the “Guiding Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of Private Investment Funds,” aiming to build a full-chain, penetrating regulatory system for private funds. This represents a comprehensive upgrade in private equity fund regulation. This move is sudden and significantly different from the reform direction in previous years.

Private equity fund management is one of the most contentious, troublesome, and resistant areas in financial regulation. Many illegal fundraising activities also appear in the guise of pseudo-private equity. Regulatory reform has been pushed for years with extensive exploration, but progress has been limited.

In this field, there has been considerable dispute between the CSRC (China Securities Regulatory Commission) and financial regulators. From the CSRC’s perspective, turning a blind eye is more favorable because expanding private equity grows its authority. But financial regulators bear the ultimate responsibility, so they are naturally anxious.

Shortly after taking office, former Director Li, in an interview with Xinhua News Agency interpreting the spirit of the Financial Work Conference, frequently mentioned “backstop regulation”—the first time this concept was introduced in the financial regulatory field, emphasizing “eliminating regulatory gaps and blind spots.” He also stated that financial regulators should take the lead in establishing a mechanism for attributing regulatory responsibilities and a backstop regulatory mechanism, ensuring that all financial activities, especially illegal ones, are monitored, managed, and accountable. For unclear responsibilities, financial regulators would provide backstop—a stance Li repeatedly emphasized when discussing central-local responsibility delineation with various regions.

📈 [From Mild Self-Regulation to “Cutting Through the Gordian Knot”]

Even so, private equity regulatory reform faced heavy resistance. As early as 2014, when private equity funds were placed under CSRC supervision, the scale was small and inconspicuous, so industry regulations were shelved due to controversy. Instead, the CSRC issued interim measures to regulate them. However, as private equity funds rapidly grew, departmental regulations proved insufficient.

Thus, on September 1, 2023, the “Regulations on the Supervision and Administration of Private Investment Funds” came into effect, with two implementation rules also taking effect in May and September of that year. In December 2023, the “Interim Measures for the Supervision and Administration of Private Investment Funds” were revised and public comments sought. The most notable change was a substantial increase in the threshold for private equity investments, signaling a shift toward favoring quality and limiting inferior players.

Subsequently, the reform of private equity fund management continued, mainly focusing on classification by risk level and unified inclusion under financial regulators for license-based management. In June 2024, the Beijing CSRC launched a pilot supervisory work for securities-type private investment fund managers in its jurisdiction. Overall, past management of private equity was relatively moderate—while thresholds were raised and supervision strengthened, self-discipline was emphasized, with administrative oversight as a supplement.

However, the June 5 framework document introduced a fundamental shift: administrative oversight is comprehensively strengthened, and private fund self-discipline becomes a supplementary measure. This has led to some seemingly unusual new measures by conventional standards:

• Immediately following the general requirements is “strengthening source monitoring,” with the term “consultation” appearing most frequently. Private fund registration and filing must go through “comprehensive research and consultation.” How this consultation will work is not yet determined, only mentioned that a system needs to be established.
• Another measure is “strictly controlling new government investment funds, with districts and counties generally not allowed to establish new ones.” Reading the full document, there is a sense of cutting through the Gordian knot.

🔒 [Overseas, Cross-Border, and National Team Ammunition Tightened]

Additionally, on May 22, eight departments severely investigated and punished institutions like Tiger Brokers for illegal cross-border business operations. Tiger Brokers and others have announced that from June 12, they will suspend inbound capital deposits and purchase services for existing investors in China—coincidentally the same day SpaceX went public.

Overseas investment regulation is also being updated and strengthened. On July 1, the “Provisions on Overseas Investment” will take effect, marking an upgrade from departmental rules to administrative regulations, similarly featuring “full-process, penetrating, strong protection” new characteristics.

As for the national team, Xiaozhen previously analyzed that their tactics have become more flexible—no longer routine intervention but acting as a strategic reserve. Similarly, in late April, the national team began its second round of share reductions this year, more moderate in style compared to the first round, but the action of stockpiling ammunition is obvious. This is precisely to build reserves for future intervention and market rescue.

As for personnel changes, Xiaozhen will not analyze them here. On May 29, the financial regulatory authority just got a new head. What she will do remains to be seen at the June Lujiazui Forum.

⚠️ [Strong Will Signal of Extraordinary Regulation]

The above changes, concentrated in May and June, are too rapid for conventional policy rollout. Long-standing intractable problems have been reshaped based on completely different logic than before.

This can only mean that the current reforms have gone beyond normal financial regulation and are driven by a stronger will to intervene.

Thus, Xiaozhen concludes that China is preparing for an impending financial crisis. To some extent, Xiaozhen believes that China’s escalating sanctions against Japan since this year, if viewed from the perspective of coping with the coming financial crisis, are precisely a proactive decoupling to reduce the impact from Japan.

If China and its neighbors hold firm, then this storm will not evolve into a second Asian financial crisis. As for who will ultimately bear the cost—whoever dug the hole must fill it.