How capital markets are regulated in the United States and China

The capital markets play a critical role in allocating capital between savers and investors. It is through this function that society benefits by providing capital to new and innovative companies who require it. In exchange from money provided by capital providers these companies in turn share their profits with shareholders ultimately enhancing the overall wealth of society. Underpinning the performance of the capital markets are oversight committees which ensure the ethical integrity of market participants. These oversight committees attempt to ensure a level playing field that allows a free and fair exchange of information and trading activity. It is here were the public function derived from this activity differs from country to country. This gap is particularly apparent when comparing the United States with China. Although both services attempt to monitor and instill confidence in the functioning of the capital markets, they differ in their overall manner of enforcements. In addition, both countries differ in their overall foundation in oversight of the capital markets.

In the United States, the Securities and Exchange Commission regulates the activities of the capital markets. According to the company website, the mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The equivalent organization in China is referred to as the China Securities Regulatory Commission. Here the CSRC is a state-owned enterprise and is not as independent as the SEC as it relates to capital markets regulations. As of 2021, the SEC still retains its independence. This will be a critical differentiating factor between the two agencies as we shall soon see (Afterman, 2015).

To begin, the SEC was established in response to the massive corruption and fraud that occurred during the great depression and the subsequent stock market crash of 1929. Prior to this period a massive economic boom helped to increase the livelihood and wellbeing of American society. The industrial revolution ushered in a period of unprecedented economic growth. During this period prosperity, consumerism, overproduction, and debt all increased. This cycle created a period of overoptimism in which investors believed stock prices could not decline. As a result, speculation crept into the market causing people to invest for the prospects of getting wealthy quickly. This overoptimism ultimately created the greatest stock market crash in American history, resulting in millions of job losses, over 5,000 bank closures, increases in homelessness, and ultimately a great depression (Afterman, 2016).

CSRC, was created in respond to intense international criticism as it relates to the Chinese stock market. Here, minority and international investors have little if any protections. Originally, China’s stock market was segregated into A-share and B-share markets. Only domestic persons or corporations could deal in A-shares and only foreign persons, or corporations could deal in B-shares. In 2001 the law was changed to allow domestic entities, under certain conditions, to acquire B-shares. The B share market is relatively small and traditionally has not attracted companies with shares that are in high demand. By the early 2000’s china amended its rules to allow qualified institution investors or QFII to invest in the A shares. However, the rules were still very restrictive. By 2005, China has loosened some of its laws related to security law giving minority investors much more ability to pursue litigation, increasing the use of financial derivatives, and mandating the separation of securities and trading business by Chinese banks. Although these changes are welcome the CSRC is still not independent and is subject to state control (Green, 2003).

As it relates to enforcement, the SEC can bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings. This is in start contrast to the CSRC who is controlled by the state and therefore can bring political motivations into the overall oversight of the capital markets. This was demonstrated recently when China restricted the IPO of Alibaba’s financial arm called ANT. Here the CEO of Alibaba criticized the leaders of China for their oppressive oversight of Chinese markets. The government responded with retaliatory measures. These measures ultimately restricted the ability of ANT to issue shares to the capital market until the CEO coalesced to state demands. This control from China ultimately restricts freedom and the overall market system. It also undermines the capital markets and allows Chinese officials to undermine the integrity of these markets. This in stark contrast to the SEC which is fully independent and looks to genuinely monitor market behaviors.