Banking Regulation in China

The Role of Public and Private Sectors

W. He, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137367556
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Banking Regulation in China provides an in-depth analysis of the country's contemporary banking regulatory system, focusing on regulation in practice. By drawing on public and private interest theories relating to bank regulation, He argues that controlled development of the banking sector transformed China's banks into more market-oriented institutions and increased public sector growth. This work proves that bank regulation is the primary means through which the Chinese government achieves its political and economic objectives rather than using it as a vehicle for maintaining efficient financial markets.

1

Introduction

1.1 Preliminaries

Following criticisms of financial market regulation in the aftermath of the Global Financial Crisis (GFC), there has been a resurgence of interest in exploring regulation in relation to public and private interests. Many countries have revisited their financial regulatory frameworks, and embarked upon various reforms in an attempt to overcome regulatory deficiencies exposed by the GFC, to improve regulatory structure and regulatory culture, and to better serve the interests of the public. During the reform process, governments and regulators have been compelled to reconsider the balance between public and private interests within financial regulation and its application to the financial services market.

In the past three decades, China’s domestic banking sector has experienced rapid growth.¹ In 2013, Industrial and Commercial Bank of China was the largest bank worldwide in terms of total assets.² At the same time, China’s economic dealings with the rest of the world have become much more significant. Trade with China is critically important to the world’s economic future. One key component of the international trade relationship with China is the provision of financial services. Foreign banks are becoming increasingly involved in extending their banking operations in China. On the other hand, given the dominance of banks in China’s financial sector, banking and banking regulation in China is of paramount importance. The health of the economy depends on a properly functioning banking sector. Understanding the dynamics of China’s banking regulation is essential for the rest of the world, yet it remains an under-researched area. China’s banking system is still “a black box that operate(s) in mysterious ways.”³

1.2 This Book

There exists extensive legal and economic literature on China’s banking sector and its regulators. The leading Chinese banking law academic, Zhou Zhong Fei, has offered an extensive study of China’s banking laws. In his book Banking Laws in China, he deals with the most fundamental transformation of China’s banking system, involving the restructuring of the central bank, the People’s Bank of China (PBoC) and the separation of its regulatory and monetary functions.⁴ This transformation resulted in the establishment of a separate regulatory body, the China Banking Regulatory Committee (CBRC), which was authorized to take on the main regulatory role. Zhou has also investigated the independence and accountability of the PBoC from a legal perspective.⁵ The fact that lending by Chinese banks is primarily guided by the State and by policy directives of the regulators has also been widely commented on by practitioners and international institutions.⁶

However, few researchers have investigated the drivers of banking regulation in China in the context of its socialist market economy and its associated banking model, and the extent to which each of two competing theories, the public interest and private interest theories of regulation, apply in the Chinese context. Public and private interest theories of regulation are positive theories of regulation that examine why regulation occurs in the form it does. The public interest theory explains regulation as a government output designed to mitigate market failure and to advance social welfare. In contrast, the private interest theory of regulation contends that regulation exists to assist and protect the interests of private entities. This theory analyzes the way in which regulation is used by interested parties, including governments, to secure benefits for themselves.⁷ One of the aims of this book is to explore the application of these two theories of regulation to China’s banking regulatory framework.

In addition, few studies have examined how banking regulation has played out in practice in China: that is to say, as to whether or not regulatory goals, such as prudential and consumer protection objectives have been achieved. Another point of interest that also remains to be investigated is the role that foreign banks have played, or have been called on to play, in assisting the Chinese government to achieve its policy objectives. Furthermore, the extent to which consumers in the banking sector are protected under the current regulatory framework also remains under-researched.

Broadly, in the context of China’s socialist market economy and its banking model, this book investigates the country’s attempts to achieve its objectives, the extent to which those attempts have in fact achieved those objectives, and how its banking regulation serves both public and private interests. In particular, the research attempts to answer the following questions:

• Is Chinese banking regulation primarily driven by public interest, or by the private interests of the Chinese central government, local governments, and Chinese banks?

• Is public interest as prominent in regulatory action as it is suggested to be by official policy and official regulatory objectives?

• On occasions, and if so on what kinds of occasions, is the expressed public interest sublimated to the pursuit of private interests?

• To what extent has China leveraged the participation of foreign banks in its domestic market to achieve policy and regulatory objectives, and has this occurred in the pursuit of public or private interests?

• Is Chinese banking regulation committed to the protection of the interest of consumers?

The book ultimately answers the question, “What drives banking regulation in China?” In essence, the research analyzes the nature of banking regulation in China by using the theories of public and private interest as an instrument to evaluate particular regulations. It is intended to provide an understanding of the specific drivers and objectives of that regulation and examines some particular aspects in detail. The research also makes recommendations to policy makers in China for genuinely advancing the interest of the Chinese public.

The starting point of the book is identification of the Chinese notion of regulation. The Chinese term for “regulation” is “Jian Du Guan Li” or “Jian Guan” in short. “Jian Du” and “Guan Li” have, however, two different connotations. “Jian Du” means supervision or supervising and has a connotation similar to oversight or regulation. “Guan Li”, on the other hand, refers to management or managing. The meanings conveyed are distinct even though they occur together in a single term. In China’s banking sector, the PBoC and the CBRC are an integral part of the central government. For example, although it is not accountable to lower levels of government, the CBRC is responsible to the State Council.⁸ Given public ownership of Chinese banks, the explanation for the conjunction of terms in the phrase “Jian Du Guan Li” is that the Chinese central government is both umpire and player, and regulatory authorities tend to have a sense of ownership of banks, which is reflected in their approach to regulating them.

The second step in the book is to identify China’s policy and regulatory objectives in light of both the public interest and private interest theories of banking regulation. China’s institutional objectives in relation to banking have origins in three related organizations: the CBRC, which is the principal banking regulator; the PBoC, which is the central bank; and the central government.

The regulatory objectives of the CBRC can be primarily found in two sources: its enabling legislation and its official documents. Pursuant to the CBRC’s enabling legislation, the Laws of People’s Republic of China on Banking Regulation and Supervision (2003), in performing its function and exercising its powers, the CBRC is to achieve “the objectives of promoting the safety, and soundness of the banking industry, and maintaining public confidence in the banking industry,” and in achieving these objectives, the regulator “shall protect fair competition in the banking industry, and promote the competitiveness of the (Chinese) banking industry.”⁹

According to its institutional documents, the CBRC has condensed its regulatory objectives into four categories: “1. Protecting the interests of depositors, and consumers through prudential, and effective supervision; 2. Maintaining market confidence through prudential, and effective supervision; 3. Enhancing public knowledge of modern finance through customer education, and information disclosure; and 4. Combating financial crimes.”¹⁰

The CBRC has further elaborated on its objectives (in its annual reports) by categorizing them as general or specific. “General objectives: Promoting the safety and soundness of the banking industry to maintain public confidence in the banking industry; encouraging fair competition in the banking industry to improve its competitiveness. Specific objectives: Protecting the interests of depositors and consumers through prudential supervision; boosting market confidence by prudential supervision; increasing public knowledge about modern financial products, services and the related risks through education and information disclosure; and maintaining financial stability by reducing banking-related crimes.”¹¹

Thus, the regulatory objectives of the CBRC are built on three broad bases. The first objective of the CBRC is to ensure a safe and stable banking sector and to maintain market confidence. Secondly, the stated objectives have a particular focus on the protection of depositors, consumers, and the public as a whole. This reflects the collective goal of regulation in general: the public good. The CBRC has asserted that the satisfaction of customers is an important indication of supervisory effectiveness.¹² Maintenance of stability and confidence in the banking sector is also consistent with the public interest theory, which posits that regulation is designed to prevent market failure. The other regulatory objective is to encourage fair competition.

The CBRC has also articulated its objectives as short term, medium term, or lo...

Table of contents

• Cover
• Title
• 1 Introduction
• 2 Banking Regulatory Theories
• 3 Banking Regulation in China: Why, What, and How?
• 4 Regulating the Entry of Foreign Banks
• 5 Consumer Financial Regulation
• 6 Regulatory Dissonance
• 7 Regulatory Capture
• 8 Conclusion
• Notes
• Bibliography
• Index