Law, Finance, and Financial Regulation in China

Marginal roles of formal legal governance

• Absence of private enforcement (courts restricted)
• Supreme court announced not to take cases related to security markets till 2002
• Since 2003: take cases only for misrepresentation of information – not for insider trading or market manipulation
• Not a SINGLE civil law case has resulted in liability imposed by a court
• Inactive public enforcement
• From 1993-2001, 94% regulatory enforcements had no punishment (60% were ‘internal criticism’)

Function of Quota system

• Originally designed to control the size of financial markets
• Under regional decentralization/competition it becomes a de facto governance mechanism
• As information system
• Generates company information from “insiders”
• Reduces worst “lemons”
• As incentive system
• To disclose information truthfully

Chinese Economy: Regional Governance Structure