A Study On The Legal System Of China 's Quasi - Financial Institutions

Shadow Banks are considered to be the main reason of the global financial crisis in2008, which have attracted the attention of financial regulatory authorities. The Financial Stability Board made broad definition of Shadow Banks. Because Shadow Banks don’t report to the government authorities, it is difficult to know their statistics. The exact size of Shadow Banks in China is also unknown. Due to the rapid development, the Chinese Shadow Banks have attracted a national and even global attention.Shadow Banks are divided by the State Council into three categories in China, one of which is referring to one type of credit intermediaries that don’t have the financial licenses and are regulated and supervised inadequately. In recent years, such credit intermediaries have developed very rapidly, and could be called "Quasi-Financial Institutions". It has been proven that the Quasi-Financial Institutions take their own advantages to provide financial services and have achieved good economic and social effects. However, along with the continuous expansion of the scale and increase of the number of these institutions, many problems have occured. The average management level of the whole industry is low, and some managers and staff are not qualified. Some institutions are even involved in illegal events, such as fund-raising, usury, and using violence in debt collection. It is of theoretical and practical significance to study on the legal system of the regulation and supervision of Quasi-Financial Institutions in China.The first chapter studies the theoretical basis of regulation and supervision of Chinese Quasi-Financial Institutions."Quasi-Financial Institutions" is not a legal term. They are financial institutions in essence, and are small part of Non-Bank Financial Institutions, mainly including the Micro-Credit Companies, Financing Guarantee Corporations, Pawn Brokers, Finance Leasing Companies, Commercial Factoring Companies, etc.. They have the function of financial intermediation. Compared to the large commercial banks, Quasi-Financial Institutions have a comparative advantage in reducing the transaction costs and improving the information asymmetry in financial markets for financing small and medium-sized enterprises.Regulation is the internal requirement for preventing financial risks. Quasi-Financial Institutions do not absorb deposits and have no systemic risks, however, they still face great risks. Therefore, they have to be regulated and supervised. According to the theory of financial intermediation, there is a serious "financial repression" in China. The government should relax the regulation of financial system and market, and try to diversify the financial intermediaries. The objectives of the regulation and supervision of Quasi-Financial Institutions in present stage are to promote the healthy development of Quasi-Financial Institutions, and to protect the legitimate rights and interests of investors and financing parties, and to maintain the fair competition order of the financial market, and to ensure that the Quasi-Financial Institutions operate properly, complying with the monetary policy of the central bank. Hence, some principles should be applied in regulating Quasi-Financial Institutions, such as the regulator should act according to the law, and the regulator should prevent the risks of Quasi-Financial Institutions from happening, and the regulation should not become a barrier in the development of Quasi-Financial Institutions, and compared to internal control, the external control is more important, etc..The second chapter studies the regulatory framework of Quasi-Financial Institutions in China. With the emergence and development of Quasi-Financial Institutions, the regulatory framework of Quasi-Financial Institutions also has undergone many changes. In the evolution process, the understanding of Quasi-Financial Institutions is changing. The rules used for regulating and supervising Quasi-Financial Institutions have little legal force, most of which are normative documents of governments and their departments. Quasi-Financial Institutions are subject to some departments of central and local governments, rather than the national financial regulatory agencies. The content of rules of regulation and supervision of Quasi-Financial Institutions is relating to market-access, business operation and market-exit. While specific regulatory requirements for different kinds of Quasi-Financial Institutions are different, the market-access rules are the key areas of the regulation, and the administrative measures are used usually. It has been proved that Quasi-Financial Institutions have been developed rapidly and the regulatory framework of Quasi-Financial Institutions has made some progress. The design of regulatory framework of Quasi-Financial Institutions itself is an innovation of the financial regulatory system, which has improved the status of local governments in managing financial field. However, the current regulatory framework still has some flaws. Even more, some part of the current regulatory framework is illegal.The third chapter studies the institutional structure of regulation and supervision of Quasi-Financial Institutions in China. There are some issues with the institutional structure. For example, the regulatory authority is lacking the capacity of regulation and supervision, and it is not independent which is very important to the regulator, and the regulatory power is not adequate to implement the rules. The key issue of the institutional structure is the allocation of regulatory power, which can be discussed in two dimensions. Relating to the vertical allocation of the regulatory power, it is important to deal with the relationship between the central government and local governments properly. The Quasi-Financial Institutions could be regulated and supervised totally by local governments, but the corresponding supervisory mechanism should also be designed to restrict the regulatory power of local governments by the central government. Relating to the horizontal allocation of the regulatory power, an independent regulatory agency could be established to regulate the Quasi-Financial Institutions subject to its jurisdiction, because it would be more helpful to improve the efficiency of regulation, if the institutional structure is simpler.The fourth chapter studies the specific rules of regulation and supervision of Quasi-Financial Institutions in China. It is focusing on the market-access rules, operational rules and market-exit rules about Quasi-Financial Institutions. In the analysis part relating ro market-access rules, there are discussions about the capital requirements, equity structure requirements, and investor’s qualification requirements. In the analysis part relating to the business operation rules, there are discussions mainly about some prudential requirements of the capital adequacy ratio, equity concentration, related party transactions, internal control and so on. In the analysis part relating ro market-exit rules, it is focusing on market withdrawal mechanism, as well as the problem with restructuring of the Micro-Credit Company into the village bank.The fifth chapter studies the construction of the legal system of the regulation and supervision of Quasi-Financial Institutions in China. The target of the legal system is to achieve effective regulation. Therefore, the value orientation in the Quasi-Financial Institutions legislation includes that the financial efficiency is prior to financial security, and that the regulatory power should be allocated rationally and restrainted effectivly, and that the dfficiency of regulation and supervision should be improved. In the process of constructing the legal system of the regulation and supervision of Quasi-Financial Institutions, it is necessary to learn lessons from the systems of foreign countries and regions that work well and to apply relevant principles proposed by international organizations combining with our national conditions, so as to reduce the cost of constructing legal system. Now we need to legislate at a higher level immediately to form a legal system composed of laws, administrative regulations, rules, and normative documents, etc.. Relating to the legislative structure, it is necessary to consider the China’s legal system as a whole and the legislative purpose. It is proper to legislate according to different types of Quasi-Financial Institutions. With the development and innovation of China’s financial industry, different types of Quasi-Financial Institutions may do the same, thus it is possible to make a uniform law. Relating to how to design specific rules of the regulation and supervision of Quasi-Financial Institutions, it is suggested to legislate the regulatory authority status, power, and duty explicitly, and to set the threshold of market-access reasonably, and to make prudent rules according to the specific operation and risks of different types of Quasi-Financial Institutions, and to ajust the rules in light of the abidence, and to establish some protection mechanism especially for the counterparty in a weak position, and to establish a communicaition and coordination mechanism for regulation.