China's cabinet is taking a key first step toward tighter control of its financial regulatory apparatus, a source told Reuters, after repeated regulatory missteps have dented confidence as the world's second-largest economy struggles.

A source close to the leadership said the State Council has set up a working group to upgrade the cabinet's financial department to bureau level to serve as an interim manager of the process until a "super regulator" structure can be put into place.

The source said the group would be headed by Xiao Jie, a former vice finance minister and tax chief now serving as deputy secretary general of the State Council.

The move comes after renewed turmoil in China's stock and currency markets - the central bank's move to soften the exchange rate last week triggered panic selling in shares - has sparked fresh concerns that the current regulatory structure is not up to the task of maintaining market stability in the context of weak economic performance.

"The leadership is very unhappy about the stock market crisis. A merger of the regulators may take years to complete," said the individual close to China's leadership, adding this timeframe has prompted leaders to look for a sort of midwife structure that could help give birth to the new institution.

Officials at the cabinet did not respond to requests for comment.

A 'super regulator' would theoretically supervise China's insurance, stock and banking regulators - an idea that Beijing started looking into after last summer's stock market crash was blamed in part on poor coordination between financial regulators. But this could take months or years to implement.

Promotion should increase the status of the cabinet's department and of its chief, giving him the leverage to force regulators accustomed to acting independently to coordinate with each other.

Xiao Jie is not associated with any of the institutions he would help coordinate, so would not be seen as serving the interests of one over the other.

INCREASED URGENCY

The central bank, too, is trying to increase its say in supervising China's financial markets, adding to the uncertainties over possible regulatory reforms, sources said.

"It's hard to predict when reforms may start, but the central bank and the three regulators need to strengthen their communications and coordination," said an influential economist who advises China's parliament.

It's unclear whether a new structure would actually improve the regulatory situation, and some analysts say the issue is less about structure than about fundamental attitudes in Beijing.

"China's market disasters share a common and dispiriting cause," Arthur Kroeber, head of research at Gavekal Dragonomics, wrote in a research note.

"This cause is not ... that China is on the brink of an economic or financial collapse and its leaders have begun to panic... At root, the difficulty is that the Communist Party seems uninterested in setting a clear course toward a more market-driven economy."