Focus
Financial Sector in China is becoming more market-driven and law-based
By Huang Yi | Updated: 2018-11-27 16:46

China’s banking industry, from an international point of view, is not only massive, but also stable in its overall operation. Opinions differ on the achievements of China’s financial sector reform and opening-up in the past four decades.

In my own opinion, the direction of China’s financial sector reform and the path taken in the past forty years are basically correct as we have been firmly pursuing a market-driven and law-based approach in this process.

Last year, Chinese President Xi Jinping pointed out clearly that market-orientation is an important principle in our financial work, and we should handle the relationship between the government and the market properly to give the latter the decisive role in the allocation of financial resources.

A series of major reform measures were issued in this sector in the past years which gave our commercial banks a dominant position in the market, and improved the corporate governance.

After 40 years of development, the “visible hands” ie the government, in general, intervene much less in terms of both scope and proportion, mainly acting in macro-control, financial regulation, financial stability management and the protection of consumers’ rights and interests, while the “invisible hands” take over its role and play a main role to allocate resources. 

However, after the global financial crisis in 2008, the former Federal Reserve chairman Alan Greenspan admitted to a US congressional committee that he had been partially wrong in his hands-off approach towards the banking industry and the presumption of neoclassical economics that people act in rational self-interest, which guided his 18-year stewardship of US monetary policy and finally led to the outbreak of the overwhelming crisis.

In fact, people are not all rational and the market is not flawless. The efficient functioning of markets relies on effective principles, rules and regulations. 

It has been proved in different times by various economies that only the modern legal system can sustain healthy and prosperous markets. However, how to view the process of the building of rule of law and the function of it in China’s financial industry over the past four decades? It seems to me that at the legislative level, through years of efforts, China has established a complete legal system from the Constitution to various laws, administrative regulations and departmental rules. 

Undoubtedly, the great achievements made in China’s financial industry owe a lot to the numerous legal systems worthy of full recognition and being sticking to. However, at the same time, there are also problems existing in the development of China’s banking industry, which is a revelation that our relevant laws and regulations also need to keep pace with the time to do further revision and improvement.

On the one hand, we need to continue with the ongoing reforms of financial institutions and mechanisms under market rules and coordinate well between the government’s function and the role of the market.

Besides, property rights, especially the protection of intellectual property rights need to be paid attention to and more guidance be given to the market for the setting up of proper orders via its spontaneous adjustment. Meanwhile, we should further strengthen and improve the ways and methods of the government’s macroeconomic regulations, in a bid to combine the “visible hand” and “invisible hand” in a balanced way.

On the other hand, the reform of the financial sector should be carried out under the rule of law, to make clear the relationship between the government and the market and the rules within both. As the modern rule of law requires the laws to be both complete and clear, reasonable, transparent and trustworthy, the laws guiding our financial system should also be so.

We need to focus on the legislative, law enforcement and judicial aspects to make the laws being applied smoothly in the whole financial system, and at the end establish a financial legal system with Chinese characteristics which is both in line with China’s national conditions and with international norms.

The author is the Vice-President of China Construction Bank. The views expressed do not necessarily reflect those of China Watch. All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.

China’s banking industry, from an international point of view, is not only massive, but also stable in its overall operation. Opinions differ on the achievements of China’s financial sector reform and opening-up in the past four decades.

In my own opinion, the direction of China’s financial sector reform and the path taken in the past forty years are basically correct as we have been firmly pursuing a market-driven and law-based approach in this process.

Last year, Chinese President Xi Jinping pointed out clearly that market-orientation is an important principle in our financial work, and we should handle the relationship between the government and the market properly to give the latter the decisive role in the allocation of financial resources.

A series of major reform measures were issued in this sector in the past years which gave our commercial banks a dominant position in the market, and improved the corporate governance.

After 40 years of development, the “visible hands” ie the government, in general, intervene much less in terms of both scope and proportion, mainly acting in macro-control, financial regulation, financial stability management and the protection of consumers’ rights and interests, while the “invisible hands” take over its role and play a main role to allocate resources. 

However, after the global financial crisis in 2008, the former Federal Reserve chairman Alan Greenspan admitted to a US congressional committee that he had been partially wrong in his hands-off approach towards the banking industry and the presumption of neoclassical economics that people act in rational self-interest, which guided his 18-year stewardship of US monetary policy and finally led to the outbreak of the overwhelming crisis.

In fact, people are not all rational and the market is not flawless. The efficient functioning of markets relies on effective principles, rules and regulations. 

It has been proved in different times by various economies that only the modern legal system can sustain healthy and prosperous markets. However, how to view the process of the building of rule of law and the function of it in China’s financial industry over the past four decades? It seems to me that at the legislative level, through years of efforts, China has established a complete legal system from the Constitution to various laws, administrative regulations and departmental rules. 

Undoubtedly, the great achievements made in China’s financial industry owe a lot to the numerous legal systems worthy of full recognition and being sticking to. However, at the same time, there are also problems existing in the development of China’s banking industry, which is a revelation that our relevant laws and regulations also need to keep pace with the time to do further revision and improvement.

On the one hand, we need to continue with the ongoing reforms of financial institutions and mechanisms under market rules and coordinate well between the government’s function and the role of the market.

Besides, property rights, especially the protection of intellectual property rights need to be paid attention to and more guidance be given to the market for the setting up of proper orders via its spontaneous adjustment. Meanwhile, we should further strengthen and improve the ways and methods of the government’s macroeconomic regulations, in a bid to combine the “visible hand” and “invisible hand” in a balanced way.

On the other hand, the reform of the financial sector should be carried out under the rule of law, to make clear the relationship between the government and the market and the rules within both. As the modern rule of law requires the laws to be both complete and clear, reasonable, transparent and trustworthy, the laws guiding our financial system should also be so.

We need to focus on the legislative, law enforcement and judicial aspects to make the laws being applied smoothly in the whole financial system, and at the end establish a financial legal system with Chinese characteristics which is both in line with China’s national conditions and with international norms.

The author is the Vice-President of China Construction Bank. The views expressed do not necessarily reflect those of China Watch. All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.