Legal Regulation Of The Informal Finance

More than30years of reform and opening up, China’s economic growth rate hascreated a miracle in the history of the world economy, which the private economy hasmade an indelible contribution. Whereas, the contribution made by the privateeconomy of the socio-economic development has not illustrated enough their positionin the formal financial system, in which SMEs accounted for99%of the number ofenterprises,55.16percent of GDP,74.17percent of the share of national new outputvalue,58.19percent of social sales,46.12percent of the tax,62.13percent of totalexports, and accounting for the proportion of jobs in urban areas is about75%. Butonly a very small number of SMEs can obtain the necessary funds from the formalbanking financial institutions. As Kellee S. Tsai said, the most dynamic part ofChinese economy is missing formal credit, private enterprise does not directly benefitfrom state-owned banks credit allocation. Meanwhile, the threshold of the securitiesmarket shut out the vast majority of SMEs into the capital market, in the case of notfinance from the formal financial system, the majority of SMEs in the early days, thecapacity expansion period or economic recession, select the informal finance.At the same time, the vast rural areas of China appear phenomenon of reverseoutflow of funds, which rural credit cooperatives, postal savings banks and otherfinancial institutions in rural areas absorb deposits from the rural areas, then, thesecapital enter into the city. If all rural credit cooperatives convert into commercial bank,and their mode of operation are similar to large commercial banks, they may begradually volume reduction as large commercial banks’ atrophy in the rural. Faced ofthis pattern, the informal finance played an important and irreplaceable role in rurallong-term financial system.Informal finance has played the important role in promoting the development of the private economy and the rural economy, but how to plunge into turmoil? Isinformal finance is more vulnerable than the formal financial system, and more likelyto lead to systemic risk？Otherwise, why the informal finance has been deemed to beillegal and banned by the government for a long time? Based on a series of doubts anda storm triggered by private lending in recent years, this thesis attempts to analyzein-depth the legal regulation of the informal financial problems, comb the existinglegal norms of informal finance and take the history, economy, comparative, andempirical analysis methods to explore the status quo of informal financial legalregulation. And this thesis would analyze institutional motivation of private lendingdisputes large-scale increasing, illegal fund-raising means constantly innovating, andnon-financial enterprises lending in disguise constantly developing. Meanwhile, theauthor probes into legal regulation path of informal finance in China, throughanalyzing comparatively the practice of the foreign informal financial legal regulation.Based on the above idea, this research consists of five chapters.The first chapter is the theoretical foundation of this research, starting from theinformal financial connotation and denotation defined, through multidimensionalanalysis of the generation logic of informal finance and analysis of theoretical basis ofinformal financial legal regulation, to determine the theoretical foundation for thelater discussion of the legal regulation.The definition of the informal financial connotation is different, but the key ison whether or not subject to regulation, whether be included in the governmentfinancial regulatory system, in additional, a variety of financial organizations in thefinancial regulatory system and various informal financing activities are collectivelyreferred as informal finance. In other words, the informal finance means the generalterm for financial activities and financial organizations free from government’sfinancial constraints for capital, reserves and liquidity, deposit and lending interestrate restrictions, mandatory credit target, as well as audit reports. Based on thedefinition of the connotation, the informal finance distinguishes from privatefinancing and illegal finance. The specific informal financial activities include privatelending, corporate internal funds, non-financial enterprises lending (this article not infavor of their exclusion in the private lending beyond), financial activities carried outby the private banking house, RCAs and another intermediary organizations, and theP2P credit, as well as all kinds of illegal fund-raising behavior, the shadow banking act, and so on, as long as financial activities to meet the connotation of the informalfinance would be identified as informal financial areas.As for the generation of informal finance, the article proposes the generatedspecial environment of informal financial starting from the dual financial structureand government "paternalism" in contemporary China, and analyzes ourlong-standing policy of financial repression, while elaborating system motivation ofinformal financial generation. As the result of an induced institutional change, theinformal finance is a tripartite game between the local governments, the centralfinancial authorities and informal financial participants and financial systeminnovation. Finally, this part further analyzes the existence and development of theinformal finance through the transaction cost economics theory. The thesisemphasizes the generated logic mechanism of informal financial, while, the otherhand, demonstrating the social problems caused by the informal financial long-termcovert operations and financial vulnerability, which provide cornerstone for the legalregulation of the informal finance.According to Minsky’s theory of financial fragility, organizations or individualsthat couldn’t repay the debt, just continue to raise new debt to repay old debts, withthe increase of such informal financial body, informal finance will be in an unstablestate, prone to crisis, and there are the role of these factors in the occurrence ofWenzhou private lending storm. At the same time, asymmetric information,externalities and monopoly issues exist in the financial market, can be resolvedpreliminary through the intervention of the government authority, but it will inevitablyproduce some regulatory capture. Therefore how to control the intervention of thepublic authority within a certain boundary, that is, the informal financial regulatory becontrolled in the necessary range, moderate supervision.Financial legal system as an external system, whether it has a universal, whetherbe complementary with endogenous evolved rules, and whether supply of financiallegal system meets the needs of the community, the series of issues have also becomenecessary premise of the legal regulation of informal finance.The second chapter elaborates the status quo of informal financial legalregulation. After demonstrating the course of development of the informal financiallegal regulation by a brief discussion of the storm of Wenzhou private lending, thischapter in-depth analyses the status of informal financial legal regulation in order tofind the institutional reasons of the proliferation of private lending disputes and the continuous expansion of the scope of illegal fund-raising under the strength of such acontrol, to provide a legal system reasons for changing the informal financial "control" to " legal regulation" and also provide the basis of the legal system for theregulatory path of contract governance with moderate supervision.The financial legal system of a country is usually based on financial stability,safety considerations, starting from the prevailing socio-economic background, todetermine the specific financial legal system. So, since1949, legal attitude forinformal finance has changed, from the early days of advocate of private lending tothe absolute prohibition of private borrowing, and this change created the disappearedstate of the informal finance. It is impossible to achieve the goal of economic catch-upin terms of market mechanisms under the political and economic environment. So, theplanned economy system become the first choice of economic recovery, themandatory accumulation mechanism adapted to the social and economic developmentof the reality demand. However, after reform and opening up, the private sectordeveloped rapidly, the government’s control for informal finance loosed, so theinformal finance get unprecedented development. However, in the early1990sinvestment overheating phenomenon, and such as Shen Taifu, DengBin incident, alarge number of financial laws and regulations have issued in1993-1995period, uponthe happening of the Asian financial crisis in1997, contributed to a new round offinancial control policy. Therefore, during1990s, it has gradually formed theregulation mode of a administrative and criminal sanctions on illegal financing, allkinds of informal financial organizations also become illegal financial organizations.In2005, the relevant legal system began to loose, the Central government putsforward “36” clauses to develop the non-public sector, and at the same time, promotethe folk capital into the financial sector. And in2010, the new “36” clauses about thefolk capital were issued, it provided decisive legal basis for private capital into thefinancial sector, and informal financial control began to loose.The existing regulation informal financial legal norm is centered in the financialadministrative regulations, rules and the judicial documents of the supreme people’scourt, its effect of low rates, even conflicting with other basic law. These provisionswhich restriction private lending within lending of the natural person, lendingbetween natural person and enterprise organization, eliminate lending betweennon-financial enterprise, and the interest rates of private lending be not protected bylaw more than four times, and at the same time, this lending be identified as the "usury" behavior through the people’s bank of China financial rules, while not theprovisions of the relevant legal liability, are not perfect, and promote the lowperformance of the informal financial control. This article reveals the present situationof the low performance of the existing legal regulations on informal finance and thestrict control through the normative analysis method, to provide logical basis fordiscussing private contract governance and appropriate regulatory path at the fourthchapter.The third chapter provides the comparative analysis base for the later argumentaround the informal financial legal regulation practice and experience on thedeveloped countries and the developing countries. This chapter is divided into twoparts, namely, the developed countries, such as the United States, Germany, Japan andother countries’ the informal financial development experience, especially discussingthe legal regulatory experience, with integration the implications for the informalfinancial development of China into the argument. Developing countries areSub-Saharan Africa countries’ microfinance institutions development experience,South Africa’ National Credit Law regulation practice and Asia Bangladesh GrameenBank’s successful development as an example, for the development of small financialinstitutions of China to provide the reference. Meanwhile, this part briefly describesthe South Africa the National Credit Law, to provide reference for the regulation ofprivate lender in China.Whether the United States, Japan as the developed countries, or the Africancountries of developing country, as well as China’s Taiwan, for informal financiallegal regulations, not only pay attention to the informal financial inherent contractgovernance model, considering the differentiated regulation, and aware furtherdevelopment of informal finance be inseparable from the rule of law.The fourth chapter focuses on reshaping the concept of informal financialregulation, argumentation of contract management and appropriate regulatory.Financial supervision has stressed safety, steady and effective ideas, however, inthe process of the informal financial legal regulation, too much emphasis on "control",creating neglect freedom and efficiency value, and even the loss of a fair. Thissituation does not conform to the real demand of informal financial regulation, and isunfavorable to the healthy standardization operation of informal finance. Therefore,it must reshape value, and objectively recognize the difference between informalfinance and formal financial regulation. Emphasizing efficiency concept: effective utilization of informal financial private contract governance mechanism; Free idea:giving citizens, enterprises for financing liberty, namely folk autonomy into full play;Fair value: setting up fair credit right idea; Safety value: need to moderate supervision;Finally realizing formal regulations and informal norm to bridge, the linkage betweeninformal finance and formal finance.Informal finance can exist for a long time and constantly develop, in additionthe multidimensional space of living, in the absence of effective legal protectionmechanism, its unique private governance mechanism plays an important role.However, whether the informal financial recessive guarantee mechanism, thereputation mechanism based on long-term cooperation and repeated game, or group ofloan joint and several liability (peer pressure), are based on social capital andreputation value as the foundation, its operation mechanism lies in traders reputationinformation transfer, and the bad reputation of punishment can be confidence. But themechanism be limited to a specific community range, could not cope with the scale ofoperation, for informal finance beyond blood, geopolitical, genetic relationship, thiskind of private governance mechanism utility weakening. At the same time, thecomplication of economic environment, the problem of the information asymmetry,transaction uncertainty problem will still beset the normal development of informalfinance, plus operating outside the legal system for a long time, being unable to getlegal protection, as well as the lack of effective control-risk mechanism. All of theseare unfavorable for the informal financial sustainable development and the interests ofinvestors, therefore, need third party legal governance mechanism to make up forthese management gap, and correct these failure fields of private governancemechanism.Legal governance mechanism makes up for private governance mechanism,which been control in a certain range, that is, the government public power’sintervention, must be have certain boundary. In other words, it needs to set the supplyand demand boundaries of informal financial regulation, to find a feasible equilibriumpoint between private governance and government regulation of informal financial.As for the selection of regulatory model, this thesis does not agree withimplementing the mode centering by self-discipline supervision association withgovernment supervision in the present China, but the mode centering by thegovernment supervision, emphasizing self-discipline supervision and informal normin the informal financial field. Through giving informal financial legal status on a certain degree, so as to provide legal basis for construction supervision system,otherwise market access, exit and trading activities supervision system would befrustrated.The fifth chapter discusses the judicial safeguarding roles of the judicialregulation for the development of informal finance. Especially in the current, if notchange the existing laws and regulations, for informal finance outside system isconcerned, and their own private governance mechanism be ineffective, or have beenobtained certain legal identity, when there are disputes, the judicial system is its finalsecurity. Meanwhile, the initiative of justice is the most feasible path in response tothe informal financial innovation. Informal financial judicial regulation not only helpsto realize the goal of the financial supervision, solve the informal financial dispute,also can make up for the existing law system of careless and hysteresis quality and thephenomenon of supervision-lack. But, completely dependent on judicial regulation isnot the necessary road of legal regulation. Informal financial sunshine development,not only need to respect its inherent characteristics, need more legislation give itslegal identity, and need to administrative supervision department timely convoy, thelast safeguarding of judicial departments, namely the all-round regulation system.