Legislation and supervision under financial opening-up
The achievement of China’s financial opening-up over the past five years
Since the entry into the World Trade Organization on December 11, 2001, China has continuously expanded the market access and business scale for foreign-funded financial institutions. Firstly, the scale and field have been expanded for foreign-funded banks?RMB business, and the procedures have been simplified for the establishment and business approval of these banks. Secondly, China has fulfilled its promise of opening the securities industry by introducing the QFII system in the A-share market and allowing foreign capital to hold stakes in securities companies and fund management companies. Thirdly, foreign insurance companies are now permitted to run all across China comprehensive insurance businesses except for those prohibited in relevant laws; the ceiling for foreign capital’s stake in insurance companies has been raised; and foreign-funded insurance brokerage companies are allowed to run large-scale commercial insurance brokerage, international marine insurance and reinsurance business. Fourthly, the financial market is increasingly open. International financial institutions received the first permission to issue bonds in China denominated in RMB; the interbank bond market introduced qualified foreign institutional investors; besides, the country has opened its automobile finance market.
In the meantime, financial opening up has promoted reform and development of the financial industry. On July 21, 2005, China put into practice the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. To support the reform on the rate-forming mechanism, the foreign exchange market expanded or launched such derivative financial businesses as FX forward and FX swaps; the China Construction Bank, the Bank of China, and the Industrial and Commercial Bank of China have undergone shareholdings reforms one by one.
Financial legislation and supervision is the guarantee for sound financial development
Financial legislation can provide financial activities with fair and just trading rules, and guarantee the normal exchange of rights and interests of financial participants, thus contributing to the maintenance of a sound financial order. Effective financial supervision, to a large extent, can solve the problem of information asymmetry, cut trading costs, raise efficiency, encourage business innovation, guarantee fair competition, and maintain the stability of the financial system. In an open financial market, the core of financial supervision lies in systemic risk control. Therefore, rigid controls must be imposed on cross-market, cross-industry and cross-border financial risks.
Financial legislation must be further strengthened. The legislation mode of “ositive list” (what is not allowed is prohibited) must be changed into “egative list” (what is not prohibited is permitted) step by step. Financial legislation serves as a basis and reference for financial supervision; financial supervision raises the demand for legislation and will test whether or not the legislation is rational and scientific. With China opening its financial sector in an all-around manner, financial legislation and supervision in all countries and regions are now affecting each other. Therefore, only good interaction between financial legislation and supervision can offer a guarantee for a healthy development of the financial industry.
Progress and prospects for legislation and supervision in an open financial market
After years of construction, China has established a comprehensive, multi-layer financial legal framework, with financial laws as the core and rules and regulations and normative documents as the support. After the WTO-entry, China has made a couple of amendments and supplements on laws in the economic and financial fields. For instance, Insurance Law was revised in 2002. In 2003, amendments were made to Law on the People’s Bank of China and Law on Commercial Banks, and newly issued laws were Law on Banking Regulation and Supervision, and Law on Securities Investment Funds. In 2004, Foreign Trade Law and Law on Negotiable Instruments were amended. In 2005, Securities Law and Company Law were amended. In 2006, Partnership Law was amended and Law on Enterprise Bankruptcy was issued.
Under the circumstances of the opening of the financial sector to the outside in an all-around manner, legislation in the financial field must be reinforced according to the spirit of the WTO and the reality of China’s financial development. First, the financial legal system should be further improved. Second, current rules and regulations should be raised to the level of the law. Third, law execution should be strengthened and the capability to administrate by law should be improved.
Financial supervision should not only follow the principle of prudence by controlling risk; it must also encourage innovation and create a vigorous financial system. The Basel Accord I has been implemented in China for years; in the future, the Basel Accord II must be put into practice step by step, and institution by institution. The securities industry must explore a supervision mode with government supervision as the core and self-discipline as the support. A constant supervision must be strengthened in the aspects of the capital adequacy ratio and information disclosure; and supervision and punishment must be reinforced on such frauds as money laundering and inside transaction. In the insurance industry, the focus of supervision must switch from market behavior to solvency and information disclosure. Beside, legislation and supervision must face up to the demands from mixed-operations of the finance industry, i.e., from institutional supervision to functional supervision, and from separate supervision to integrated supervision.
Author: Zheng yang, Director General, Foreign Exchange Administration Department, the PBC shanghai Head Office
Source: CHINAMONEY Journal
