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IMPROVING CHINESE FINANCIAL REGULATION DRAWING ON GLOBAL EXPERIENCE

Chapter One

Introduction

1.1 Background to the Study

Financial regulations refer to a form of supervision or regulation that subjects the financial institutions to some restrictions, requirements and guidelines with an aim of maintaining financial system integrity. These rules are mainly promulgated by international groups or government regulators to protect the investors, promote financial stability and maintain orderly markets. In both developing and developed world, financial regulations break down into two main sets: compliance, and safety and soundness regulations. Financial institutions play an instrumental role in the national and international economy. The key financial institutions are depository institutions, Insurance and investment institutions. The depository institutions (such as banks, credit unions, and saving and loans [S&Ls]) transform the liquid liabilities (saving accounts, current accounts, and certificate of deposit) into a relatively more illiquid assets such as business loans, mortgages, credit card balances and mortgages (International Energy Agency, 2008). The depository institutions also run the payment system where the bank balances are exchanged between parties inform of wire transfers, checks, and debit and credit cards. The investment banking and stockbrokers firms play a central role in both capital market and individual investment on the other hand, insurance companies provide policies for financial protection against such issues as disability, health, accidents and other financial losses (Boyer, 2004). The central role played by these institutions makes their regulations inevitable.

The primary objective of adopting regulations on safety and soundness, is to protect the fixed-amount creditors (claimants and beneficiaries of insurance companies, bank depositors, and the brokerage firms account holders) from financial losses emanating from financial institutions insolence owing to these amounts, while at the same time marinating financial system (stability Bair, 2008). Even though government regulations cannot be able to prevent all the financial institutions insolvencies, various jurisdictions around the world have created mechanisms aimed at protecting at least small group of creditors from the failure by the financial institutions. Despite the development of financial institutions, there has been widespread concern that the financial institutions regulations need to be enhanced further. The global financial crisis of 2008/2009 was to a large extent as a result of insufficient and ineffective reach of regulations, and it is a widespread view that the solution of the financial crisis lied in taking existing regulations and spreading them in a more comprehensive manner across jurisdiction and institutions. The range of financial institutions regulations around the world which can be applied to minimize the late of such a crisis can include making regular inspections, setting minimum standards for conduct and capital, and investigation ad prosecuting the misconducting institutions.

The regulators usually try to create market confidence, reduce financial crime, promote financial stability, and regulate foreign participation in local and international financial markets. The financial regulation structure around the world is made up id different combinations and setups with laws acting to empower governmental and non-governmental agencies to enforce the regulations. Different countries and economic blocks have regulatory authorities in charge of enforcing the financial regulation ruled. For example in the US, the financial institutions are regulated by such institutions as US Securities and Exchange Commission, Federal Reserve System, Financial Market Regulatory Authority and Federal Deposit Insurance Corporation. In China, the authorities in charge of imposing and enforcing financial regulations include ‘China Securities Regulatory Commission’, ‘China Banking Regulatory Commission’ and ‘China Insurance Regulatory Commission’ (Basel Committee on Banking Supervision, 2008).

For the Chinese corporate and individual investors, the 2015 summer stock market meltdown acted as an indication that the country to have stable financial institutions regulatory system that will ensure that accounts holders, investors and all citizens in the country are cushioned against poor performance by the financial institution is the country. The stock market meltdown led the government in investigating various bankers and financial institution officials who were suspected to conduct illegal trading. The speculation of the existence of the illegal trading in the country’s financial market acts as a pointer to the failed regulatory system in the country. The government has been toying with the idea of creating a ‘super-regulator’ which will combine separate government agencies into the powerful single entity that will be responsible for monitoring all the financial institutions in the country ranging from banks, insurers, asset managers, to brokerages (Wray, 2008). Failure in the Chinese financial system to cushion citizens from the financial shocks creates a large room for improvement if this system is to compete on the global scale.

1.2 Significance of the Study

The study investigated the successful experience of financial regulation across the word to provide a useful indication for Chinese financial market regulation. It is of practical importance as China is one of the important powers to drive up the global economy. China has the second largest economy in the world regarding nominal GDP and is considered by IMF as the largest by purchasing power parity (Islam, Hossan and Matin, 2015).  According to a report by McKinsey and Company China has a major role in the rebalancing the global financial system toward the emerging market (Verdier, 2015). The financial market in China has become very developed, deeper and robust, with the value of its economic assets (including bonds, equities, and loan) amounting up to $17.4 trillion trailing only that of the USA as illustrated in figure 1.0. Below.

Figure 1.0 Chinese outstanding financial assets

This shows that the financial stability of China is of great importance not only to the country itself but also to the global stakeholders. Regulating the financial system in this country will go a long way in ensuring global financial security, stability and people will have more confidence with the financial, system (Persaud, 2008). As such this study will seek to find ways in which the developed county’s regulations can be integrated into the Chinese financial system to give…………….