英国顶级高校伦敦政治经济学院毕业论文2012完全英.doc

24MG415Summative EssaySystem reform and policyProblem of regulating financial market(in China)Candidate No 363322010-2011Public Management and GovernanceDepartment of ManagementCourse: MG 415 Policy Analysis, Evaluation and ImplementationDate of Submission required: 23rd May 2011(5,655 words, excluding references)A Concise Analysis and Evaluation on the Financial Regulation in ChinaIntroduction: Since China initiated its economic reform more than 30 years ago, Chinas financial industry has grown up so rapidly that it attracts increasing international attentions. According to statistics (the People bank of China, 2011), the total assets of Chinas financial industry in 2009 amounts to 153,800 billion U.S.dollars, which is more than 300 folds of that in the year 1978 when China newly unveiled its economic reform and opened up to the outside world. A striking feature with Chinas financial industry is that, for decades, it had survived so many turbulences and challenges, including the economic chaos in late 1980s resulting from food price reform, spillover of the financial crisis in the Southeast Asia, direct and intense competitions from foreign banks after Chinas accession to the WTO in 2002, as well as the current financial crisis commencing from 2008. No wonder that people, especially the young Chinese patriotic claim that Chinas financial industry, particularly Chinas financial regulators have been performing well enough. This leads to the illusion that the current financial regulation in China is near perfection, and even that regulators from modern western countries should reflect and consider learning something from their Chinese peers. Trying to answer this question, I will elaborate on it in this essay, which consists of 4 sections. In Section1, I will focus on the theories of financial regulation and try to examine the following points: why should we regulate financial industry? What is the general approach for financial regulation? What can be deemed as the appropriate qualitative and quantitative measurements for financial regulation and supervision? In Section 2, I will explore into the current structure and arrangement for financial regulation in China and trace back to its history background. Also, a comparison is made on the financial regulation practices between China and U.K., to investigate whether or not apparent similarities and differences are existing between the two countries with regard to the regulatory and supervisory structure, sources of funding, regulatory objectives and so on. The Section 3 will focus on analysis and comment on the Chinas financial regulation. Mainly, it will review whether the current regulations have brought about effective outcomes, advantage and disadvantage of the current regulatory arrangement, and various recommendations for policy and system reform and their validity.Also,it will discuss path dependency in Chinese financial regulation through consideration of the nature of Chinas economic reform for decades. This will finally lead to Section 4, which is the conclusion of this essay. Because the banking industry possesses more than 93% From China Financial Stability Report 2010 Available from /english/of Chinas financial resources,My essay will mainly focus on financial regulation in Banking. Section 1 Rationale, general approach and measurement of financial regulation. Financial industry seems to be one of the most fragile industries in the world. Since the Industrial Revolution in western countries in the 18th century, the world has experienced financial crisis dozens of times, from the Great Depression in the late 1920s, Asias financial crisis in 1997, and down to the current credit crunch. This will certainly raise questions on the importance and effectiveness of financial regulation. From time to time, the public, politicians, and the academics have asked the same questions. Does the current financial regulation provide sufficient oversight and at the same time mitigate financial risks? Would the situation have been not so bad if we had been given better alternative regulation arrangements? These tricky and haunting questions have profound and deep meaning. One will not understand clearly until he (she) is convinced by the theories of financial regulation. From the 18th century to the earlier 1930s, across the major western civilized countries, the major duties of financial regulators, mainly the central banks, were to act as lenders of last resort and implement the deposit insurance system. These two main policy arrangements were heavily criticized by Hayek (1976) and Dowd (1996), who argue that market can correct its own error and imperfection through expansion and self-adaptation at last. The total power of central banks should be diminished so as to tackle inflation. At the same time, all people should be free to use currency of their own choices so as to avoid the negative impact of inflation. Moreover, they claim that there should be no wrong with free trade and laissez-faire in financial services sector if free trade is generally desirable. Their claim has been echoed by other academic liberals (Benston, 1996; Kane,1997) who further argue that even there is market failure, financial regulation may still be undesirable, unnecessary and cant in practice solve the failures, and may lead to abundantly excessive regulation costs and induce serious moral hazards. These liberal ideologies in economics may not turn out to be completely convincing if one considers the devastating results of financial crisis throughout human history. Stiglitz (1993) examines the importance of information in financial market and identifies seven market failures and claims that information is a public good and that regulation can lead to Pareto outcome by providing enough information that otherwise would not be provided under free financial market. Llewellyn(1999) outlines 6 potential benefits of financial regulation:to reduce transaction costs for consumers;to mitigate or ameliorate market failure so as to achieve efficiency gains;to improve and maintain consumer confidence;to generate positive externalities;to expel hazardous firms from the market through efficient authorization procedures;to make sure that consumers can have informed and reasonable judgments and decisions by increasing transparency of contracts and disclosing due comprehensive market information. In addition to the comprehensive rationale for financial regulation, he further points out that efficiently framed regulation has its limitation and in reality is unable to cover all the risks, therefore, efficient regulation should never diminish the incentive for consumers to exercise due care while they are purchasing financial products and services. Goodhart(1998) demonstrates that regulation should be needed so as to refrain monopoly or oligopoly from exploiting consumers, to protect smaller, retail clients who are less informed, to maintain financial systemic stability. They further examine and prove that systemic risk involved in banking industry is considerably more evident than in non-banking financial services in that the failure of one bank can be of contagion and lead to the withdraw of deposits from other banks and there is no well-established secondary market in bank loans. Davies (2008), however, puts it very simple that we need regulation of financial firms because we need to protect the Lender of Last Resort and deposit protection schemes. Moreover, there is information asymmetry between financial services providers and consumers, and financial regulation and supervision may be able to correct such asymmetry. Goodhart (1998) identifies the general approach of financial regulation through incentive structures: Regulation should be regarded as a set of contracts;More emphasis should be laid on internal risk analysis, management and control systems and so on.Since the late 20th century, scholars have proposed a couple of measurements to facilitate regulation from Macro-prudential to Micro-prudential dimensions. Sundararajan (2002) created financial soundness indicators which include core set and encouraged set. The core set indicators mainly cover capital adequacy, asset quality, earning and profitability, liquidity and sensitivity to market risk and other factors of deposit-taking institutions. These detailed indicators include regulatory capital to risk-weighted assets, nonperforming loans to total gross loans, return on assets, liquid assets to total assets, duration of assets and so on. Financial regulators are strongly recommended to apply these core set indicators. Additionally, the encouraged set indicators cover wider range of factors in nonbank financial institutions, corporate sector, households and real estate markets. Hilbers(2000) proposed macro-prudential indicators which integrates aggregated micro-prudential indicators with macroeconomic indicators. The aggregated micro-prudential indicators, which are based on the CAMELS framework (capital, assets, management, earnings, liquidity and sensitivity to market risk), include aggregate capital ratios, sectoral credit concentration, expense ratios, return on assets, central bank credit to financial institutions, foreign exchange risk, market prices of financial instruments and other ratios. The macroeconomic indicators, on the other hand, focus on economic growth, balance of payments, inflation, interest and exchange rates, lending and asset price booms, contagion effects and other factors. These factors can be measured by aggregate growth rates, current account deficit, volatility in inflation, volatility in interest and exchange rates, lending booms, financial market correlation, directed lending and investment and other ratios or figures. It is all known that academics around the world still produce no significant and reliable quantitative measurement to gauge consumers protection in financial services. This possibly is due to the facts that consumers are well protected in term of financial cost and return on financial products since interest rate can float freely under free market economies. Consequently, it is less important to measure consumer protection in this respect. However, In less developed countries where interest rates are still under strict regulation and not allowed to float freely, it might not be the same case. Consumers protection may matter much more because consumers usually receive less interest than they should have when depositing money in banks.Short summary of Section 1: To some extent, the various rationales of financial regulation reflect the changes and evolution in fundamental economic theories, that is, the laisser faire and neoclassical economics versus State interventionism. It seems that the current basic financial regulation arrangement may continue to function because of the pivotal role of financial services and also because of market failure and information asymmetry. Moreover, academic advancement in the past decades has allowed financial regulators to measure outcomes of financial regulation quantitatively to some extent.Section 2 Comparison on financial regulation between China and the U.K.: History, Similarities and Differences.a. The historical evolution The history of Chinas financial regulation can be traced back to 1948 when the Peoples Bank of China was firstly established in December of 1948. The Peoples Bank of China continued to exist as the only financial institution which was authorized to take savings and enterprises deposits and provide loans to State-owned factories and other governmental productive units. Actually, there was no real financial market because deposits and loans were the main financial products which were not tradable. Moreover, the Peoples Bank of China had been playing dual roles (both business operator and regulator together at the same time from 1949- 1978. In the year 1983, five years after China initiated its economic reform, the State Council decided to separate commercial business from the Peoples Bank of China and let it function as a central bank. According to the 2003 amended law of the Peoples Republic of China, the Peoples Bank of China performed mainly the following statutory functions:issuing and administering the Renminbi; maintaining financial stability by preventing and mitigating financial risks.(the Peoples Bank of China, 2011) In 1998, to cope with the rapid and disorderly growth in securities and insurance industries, the State Council decided to institute the China Securities Regulatory Commission and the China Insurance Regulatory Commission. This could be bookmarked as the actual date when China implemented the separate financial regulation and supervision. In the year 2003, the China Banking Regulatory Commission was established to take over the major banking regulatory functions from the Peoples Bank of China. This is a significant move which marks officially the regulation model of Chinas financial regulation, namely, banking, securities and insurance sectors operate separately and are subject to separate supervision and regulation. However, as a couple of Chinas giant financial institutions (such as PingAn Group and China Merchants Bank) have begun to expand their business from banking to securities and insurance, the 3 main financial regulatorsChina banking regulatory commission, China securities regulatory commission,China Insurance Commission. had to formulate periodical meeting policy and published the Memorandum of Understanding for Chinas separate financial regulations so as to facilitate the coordination, collaboration and cooperation in performing regulations. The Bank of England, on the other hand, is the oldest central bank around the world which was founded in 1694. Maintaining monetary stability and financial stability is the core purposes of the Bank (the Bank of England, 2011). In 1997, the UK government began the reform of financial services regulation. From 1997 to 2004, the U.K. government created the Financial Services Authority and transferred responsibilities of regulation on various financial services from the Bank of England, the London Stock Exchange, the Building Societies Commission, and other several self-regulatory entities. This led to the birth of the single and (mega) regulator of most financial services markets, exchanges and firms. Meanwhile, FSA is an independent non-governmental body and accountable to the Treasury Ministers and Parliament. The FSAs statutory objectives, which are stipulated by the Financial Services and Markets Act2000, include market, financial stability, consumer protection and reduction of financial crime. (FSA,2011) Moreover, the HM Treasury, the Bank of England and the FSA have coordination mechanism under the terms of Memorandum of Understanding so as to facilitate regulation and pursue financial stability. The review of history of financial regulation and current institutional structure between the U.K. and China demonstrates that their starting point is totally different, the former derived from the late 17th century when Britain just accomplished the Glorious Revolution and accelerated its growth during the Industrial Revolution, experienced separate regulation and finally created a single regulator. While, China, the latter, actually abandoned the rigid Stalin Mode1 in 1980s and replicated the Western developed nations mode (including the U.K.) more or less, but still maintained the separate regulation and supervision mode.b.Similarities: Both the nations have central banks whose core responsibility is to maintain financial stability. Moreover, both have coordination mechanism and the Memorandum of Understanding to facilitate financial regulation. The China Banking Regulatory Commission also copies the 3 dimensions of regulation from the U.K. which is system, prudential and conduct of business regulation (the China Banking Regulatory Commission, 2011). Furthermore, regarding regulatory approach, China also replicates the risk-based regulation and supervision. Both nations central banks and financial regulators have overlap functions in terms of maintaining financial stability.c.Differences:Difference 1st. Multiple regulators versus single (mega) regulator The most striking difference between the 2 nations is that, in addition to the central bank, China has 3 financial regulators who monitor banking, securities and insurance separately. Moreover, the Ministry of Finance of the Peoples Republic of China does not get involved in financial regulation except for allocation of budget spending to the Peoples Bank of China and other 3 financial regulators. While the FSA, collaborating with the Bank of England and accountable to HM treasury, is the single (mega) regulator for all financial services sector. Furthermore, the HM Treasury is in charge of overall institutional structure of regulation and the legislation which governs it. (HM treasury, 2011)Difference 2nd: Funding of regulators. The 3 China financial regulators are pure central governmental sectors and their regulatory operations rely solely on public budget from the Ministry of Finance (Ministry of Finance China,2011) while the funding of FSA is from the fees collected from the regulated firms.Differences 3rd: The governance structure of the financial regulation The Chinas Central Bank, and the other 3 financial regulators are all under the leadership of the State Council. The above 4 financial regulators have the same statutory official ranking and every essential policy decision made by any of the 4 sectors should be under the official permi