China's Role in Global Financial Regulatory Reform

By PETER KNAACK

Despite having weathered the global financial crisis better than any other country, China is now facing a new set of challenges that arise from the consequences of its 2009 stimulus program and the distortions of a domestic financial system that remains in transition to a market economy. Beijing is in the process of devising a new set of policies that seeks to address these challenges while simultaneously laying the foundations for a much more prominent role on the international financial stage, one of an exemplary and significant stakeholder  rather than that of a developing country. My research trip to Beijing and Hong Kong in the summer of 2013 enabled me to attain a first-hand glimpse into the potential near-future of China as a global financial power as well as the obstacles to its realization.

In 2011, with the generous help of a US-China Institute grant,  I was able to lay the groundwork for one year of language training and research in China in the academic year 2012/13. As part of my research plan, I enrolled in the Inter-University Program at Tsinghua University and also as a visiting scholar at Peking University (PKU) under the supervision of Prof. Wang Yong. In intensive language classes specially tailored to financial regulation in China, I learned to read and understand internal Chinese policy documents about financial issues that are not accessible to many foreigners. I also helped to start a biweekly discussion group on the politics of finance in China with fellow doctoral students at PKU, under the supervision of Prof. Wang Yong. Building on what I learned at both universities, I ended the academic year by giving a presentation on my dissertation topic, in Chinese, for Prof. Wang’s students at the School of International Studies of PKU. The presentation was followed by an inspiring half-hour Q&A session with all participants.

While enrolled at the Inter-University Program at Tsinghua University, I was able to tailor language classes that focused specifically on financial regulation in China. This training allowed me to read and understand internal Chinese policy documents about financial issues that are not accessible to many foreigners. Why? In addition, fellow doctoral students at Peking University (PKU) and I started a biweekly discussion group on the politics of finance in China, under the supervision of Prof. Wang Yong.

A conference at the Stanford Center at PKU in May gave me the opportunity to meet with two insiders of China’s financial establishment, a former bank CEO and a former securities regulator. The latter kindly agreed to an extensive interview that helped me attain a much better understanding of the politics of financial regulation in Beijing. In addition, interviews with several financial diplomats from Brazil and the European External Action Service provided information about China’s financial regulators from an international perspective.

In June I spent two weeks in Hong Kong engaged in further field research. I was able to interview Dr. He Dong, Executive Director (Research) of the Hong Kong Monetary Authority, and two officials of the Banking Supervision office. At the same time I conducted archival research at the Universities Service Centre (USC) of the Chinese University of Hong Kong (CUHK). The staff at USC was incredibly helpful and knowledgeable, identifying the internal (??) journals that deal specifically with my topics of interest. I have put together the results of this field research in an article titled “Why Is China Gold-Plating Basel III?: Financial Regulation and Global Governance”. My supervisors Prof. Katada and Prof. Wang are currently reviewing the article draft, and I have submitted the paper to the Tenth Annual Graduate Seminar on China at CUHK, the 7th Annual Conference on the Political Economy of International Organizations at Princeton University, and the European Association for Chinese Studies Young Scholar Award. I am eagerly awaiting the feedback from my supervisors and the larger scholarly community in order to improve the quality of this article for an eventual publication in a scholarly journal. In the event of acceptance at conferences or by journals, the support provided by the US-China Institute will be duly acknowledged.

The main finding of my summer research as elaborated in this paper is that China is currently in the process of establishing a strict regime of financial prudential regulation that goes above and beyond international standards, at least in some areas. This decision entails considerable costs for the financial services sector because tight prudential regulation reduces its areas of operation and profit margins. Yet a look into the domestic political economy of China reveals the benefits of this policy. Adjustment costs for Chinese banks are relatively low in comparison to foreign peers. From a government perspective, strict regulatory standards are helpful tools for macroeconomic management in an economy that has showed tendencies of over-heating in the post-crisis period. Furthermore, Chinese banks are seeking international reputation as a prerequisite for overseas expansion. Over-compliance with international standards may also raise the profile of Chinese financial regulators, both in international forums and domestically. This peculiar alignment of interests among different stakeholders provides an explanation for China’s uncommon position and informs the wider debate about the country’s integration into international institutions.

In sum, my work in Beijing and Hong Kong during the summer of 2013 enabled me to enter the scholarly debate on the political economy of China’s financial system with a first academic paper based on original research. This inspiring and highly productive research trip would not have been possible without the generous grant provided by the USC US-China Institute. I would like to express my gratitude and appreciation to the grant review committee for their support.

Click here to view projects of other 2012-2013 USCI Graduate Summer Fieldwork Grant receipients.