Financial Innovation and Regulation in China

Ninth Symposium on Building the Financial System of the 21st Century China Development Reform Foundation Harvard Program on International Financial Systems Beijing, China, September 14-16, 2012 Topic 2: Financial Regulation and Financial Innovation Panel Remarks By Andrew Sheng 1 President Fung Global Institute I am very honoured to be invited by Lu Mai and Hal Scott to join for my first time, the US-China Symposium on Building the Financial System of the 21st century, a subject of a major research study of the Fung Global Institute. Some of you may be aware that Anthony Neoh (one of the founders of this Forum), Laura Cha and I are amongst the first people from outside China to be invited to work inside the Chinese bureaucracy. What we have learnt is that there is still considerable gap in understanding the complexities of China and explaining them to a non-Chinese audience. Winston Churchill famously said that the English people and the American people are divided by the same language. Similarly, those of us who speak Chinese find that understanding China is not easy unless you understand its history and complex culture, including the nuances in use of language and its syntax. As former Chairman of the Hong Kong Securities and Futures Commission, I relied very much on Harvard regulatory Professor Malcolm Sparrow’s maxim on the regulatory craft: “Pick Important Problems, Fix Them and Tell Everyone”. After working in China, I learnt that the Chinese approach to regulation is to use Chairman Mao’s dictum, “Identify the Principal Contradiction, Understand that Contradiction, and Deal with it.”

Why is global and national regulation in contradiction? We talk about global imbalances, but these imbalances are fundamentally major contradictions between benefits and risks. Our rapporteur has identified that there is need for a balance between financial regulation and financial innovation, between market efficiency versus market stability, between principles-based