Dameisha Forum/Forum Opinions/Improvement in Public Governance Structure: the Foundation of the Sound Development of China’s Capital Market
Improvement in Public Governance Structure: the Foundation of the Sound Development of China’s Capital Market
Author： Source： Date：2017-09-01
We know that China’s capital market is still a new market compared with others in developed countries. Yet being new does not necessarily mean it is less mature, as forms of market development varies and we could develop in a much better way by building on the achievements of others. However we need to see that there are still some issues to be solved.
I was asked to talk about the development of capital markets. I used to say that China’s economic performance was the best among the BRICS countries. But its capital market does not rank top. What I talked about was not the market value—the size of China’s economy is large enough. When it comes to other capital markets, Russia’s capital market, though less mature, adopts the similar management mechanism with China’s. And capital markets of other BRICS countries like India, South Africa and Brazil have developed much longer than that of China’s. For instance, India’s capital market has developed for over 100 years. Many people say India’s economic performance is not well. But check its capital market and those who run it. I think we could learn a lot from the rules and management.
Our market has its own advantages. What I would like to share today is a big issue for business—corporate governance. The foundation of such governance is the key, so what I will talk about is in fact the foundation for sound development of capital market. Sometimes you find that a decision at group level cannot be carried out when macro-conditions changed. Then the decision goes nowhere. The changes come from where you cannot control. Generally the corporate governance is related to private laws, that is the things decided by equal parties are not only the issues arising from the Corporate Law and Contract Law, but also the issues between equal parties like trust entities. These issues between individuals, and between individual and entities and between individual and government can be solved by contract. The company’s contract and articles of association are regarded as a kind of contract, and are used to handle the relationship between equal parties.
My view about equal parties is left open for discussion. However, some issues regarding public law including Criminal Law or the Constitution are barely negotiable. That is why I said a lot of cases in the Security Law do not make sense in the area of public law. It is about the entire governance structure. Our capital market developed for over 20 years, and has moved to a relatively mature stage. Many people think that Chinese investors are less mature, and I have a different opinion about the idea. An investor may be less mature if it plays only for three or five years, but what about 20 years? So it is an issue about common outlook. There is still a lot we could improve in governance system.
“Power List” and “Negative List”
Regarding improvement, I would like to share the followings: Market-led resource allocation, as stated in the 18th CPC National Congress and the third plenary session of the 18th CPC Central Committee; it is a vital issue. There are two lists: power list and negative list, which you have heard much about. What the government should do? The idea of “small government, big society” and another idea of “power in the cage” by President Xi mean the same—limited power of government. Why is it? The power list tells what to do. Those that are not included in the list are forbidden. Power is never endless. It is the issue the laws to handle. President Xi has denied the power without limitation. So please remember the government power is limited.
The other is negative list. It was mentioned in the third plenary session of the 18th CPC Central Committee. What power do you have, and what are allowed and not allowed in capital market. Such a list released by government states what are never allowed, like market manipulation, related-party transaction, etc. Those not on the list are allowable. It is the foundation of a law society. Not every single thing can be listed as allowable and not allowable, but Chinese are smart. Two thousand years ago the government of the Qin Dynasty already formulated the Law of Qin. We used to think China’s legal system started in the Tang Dynasty, during which the legislation system contains over 17 thousand articles. However, recent discovery revealed that the Tang’s law was made based on the Qin’s, which was published over two thousand years ago. However, over ten thousand articles of law did not solve all of our problems. Times are changing, and now we have internet that is a totally new thing ancient people could never imagine.
Things that are not included in the negative list are allowable, so is the same to the security market. Activities or product are permitted unless the government bans them. What if violations or incidents happen? The answer is legislation. To set up certain mechanism to specify that these things are no longer permitted. The premise is legal society. For instance, if I say that from now on a certain practice is not allowed, and what did before does not count, then it is the so called “Parent Article”. It is just like a family has had five children already before the family planning policy is introduced. The policy allows only two children per family, yet the first three children the family has cannot be killed, right? That is what I mean (laugh).
Digital management
Digital management shall be the right way for public governance. In his work, 1587: A Year of No Significance, Ray Huang compares the difference between western and Chinese management. Ray says that China is not adapted to and not willing to manage with numbers over the past two thousand years. Management was not done in a quantitative way. In modern China, the old management mode has shown its weaknesses, because it works only when employees are in small number. Now China has a huge population of over one billion, and the whole world of over seven billion. The population is still growing. Therefore the management needs more details and data for analysis. When we talk science-based approaches, we mean to do things with numbers and evidence.
Something happened in the market. Last year a bunch of theories came out, saying that our stock market was to be destroyed by somebody, or our market management system was less well operated, or one of the systems went wrong. Do we really know what happened? By far the reports released show that “the reason is unknown”, because there is no enough numbers or details.
Let us see what happened after the US stock market crisis. Over 400 reports were released within half a year, as departments and the Labor Union of the US required so. The Davison Report was released after the Hong Kong stock market crisis. It was quite famous. The job was done to find out what really happened. Rumors say that the Central Bank and the three commissions will be merged, and some says in the future there will be the PBOC and two commissions. As Lu Xun said, what are the solutions and which is the best? Best solution is made on proof and evidence. It will not come out unless we figured out what really happened before. Considering this, what we need is a modern management system quite different from that of thousands years ago.
Professional management
The last is HR system. It is a key as well. We have to recognize that the intelligence, learning capability, diligence and time for sleep are limited. We need to handle issues in a professional way. A lot of issues can be easily coped with once professional modes and personnel are in place.
Thank you！
Gao, Xiqing is the Former General Manager of China Investment Corporation
Speech delivered at the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
I was asked to talk about the development of capital markets. I used to say that China’s economic performance was the best among the BRICS countries. But its capital market does not rank top. What I talked about was not the market value—the size of China’s economy is large enough. When it comes to other capital markets, Russia’s capital market, though less mature, adopts the similar management mechanism with China’s. And capital markets of other BRICS countries like India, South Africa and Brazil have developed much longer than that of China’s. For instance, India’s capital market has developed for over 100 years. Many people say India’s economic performance is not well. But check its capital market and those who run it. I think we could learn a lot from the rules and management.
Our market has its own advantages. What I would like to share today is a big issue for business—corporate governance. The foundation of such governance is the key, so what I will talk about is in fact the foundation for sound development of capital market. Sometimes you find that a decision at group level cannot be carried out when macro-conditions changed. Then the decision goes nowhere. The changes come from where you cannot control. Generally the corporate governance is related to private laws, that is the things decided by equal parties are not only the issues arising from the Corporate Law and Contract Law, but also the issues between equal parties like trust entities. These issues between individuals, and between individual and entities and between individual and government can be solved by contract. The company’s contract and articles of association are regarded as a kind of contract, and are used to handle the relationship between equal parties.
My view about equal parties is left open for discussion. However, some issues regarding public law including Criminal Law or the Constitution are barely negotiable. That is why I said a lot of cases in the Security Law do not make sense in the area of public law. It is about the entire governance structure. Our capital market developed for over 20 years, and has moved to a relatively mature stage. Many people think that Chinese investors are less mature, and I have a different opinion about the idea. An investor may be less mature if it plays only for three or five years, but what about 20 years? So it is an issue about common outlook. There is still a lot we could improve in governance system.
“Power List” and “Negative List”
Regarding improvement, I would like to share the followings: Market-led resource allocation, as stated in the 18th CPC National Congress and the third plenary session of the 18th CPC Central Committee; it is a vital issue. There are two lists: power list and negative list, which you have heard much about. What the government should do? The idea of “small government, big society” and another idea of “power in the cage” by President Xi mean the same—limited power of government. Why is it? The power list tells what to do. Those that are not included in the list are forbidden. Power is never endless. It is the issue the laws to handle. President Xi has denied the power without limitation. So please remember the government power is limited.
The other is negative list. It was mentioned in the third plenary session of the 18th CPC Central Committee. What power do you have, and what are allowed and not allowed in capital market. Such a list released by government states what are never allowed, like market manipulation, related-party transaction, etc. Those not on the list are allowable. It is the foundation of a law society. Not every single thing can be listed as allowable and not allowable, but Chinese are smart. Two thousand years ago the government of the Qin Dynasty already formulated the Law of Qin. We used to think China’s legal system started in the Tang Dynasty, during which the legislation system contains over 17 thousand articles. However, recent discovery revealed that the Tang’s law was made based on the Qin’s, which was published over two thousand years ago. However, over ten thousand articles of law did not solve all of our problems. Times are changing, and now we have internet that is a totally new thing ancient people could never imagine.
Things that are not included in the negative list are allowable, so is the same to the security market. Activities or product are permitted unless the government bans them. What if violations or incidents happen? The answer is legislation. To set up certain mechanism to specify that these things are no longer permitted. The premise is legal society. For instance, if I say that from now on a certain practice is not allowed, and what did before does not count, then it is the so called “Parent Article”. It is just like a family has had five children already before the family planning policy is introduced. The policy allows only two children per family, yet the first three children the family has cannot be killed, right? That is what I mean (laugh).
Digital management
Digital management shall be the right way for public governance. In his work, 1587: A Year of No Significance, Ray Huang compares the difference between western and Chinese management. Ray says that China is not adapted to and not willing to manage with numbers over the past two thousand years. Management was not done in a quantitative way. In modern China, the old management mode has shown its weaknesses, because it works only when employees are in small number. Now China has a huge population of over one billion, and the whole world of over seven billion. The population is still growing. Therefore the management needs more details and data for analysis. When we talk science-based approaches, we mean to do things with numbers and evidence.
Something happened in the market. Last year a bunch of theories came out, saying that our stock market was to be destroyed by somebody, or our market management system was less well operated, or one of the systems went wrong. Do we really know what happened? By far the reports released show that “the reason is unknown”, because there is no enough numbers or details.
Let us see what happened after the US stock market crisis. Over 400 reports were released within half a year, as departments and the Labor Union of the US required so. The Davison Report was released after the Hong Kong stock market crisis. It was quite famous. The job was done to find out what really happened. Rumors say that the Central Bank and the three commissions will be merged, and some says in the future there will be the PBOC and two commissions. As Lu Xun said, what are the solutions and which is the best? Best solution is made on proof and evidence. It will not come out unless we figured out what really happened before. Considering this, what we need is a modern management system quite different from that of thousands years ago.
Professional management
The last is HR system. It is a key as well. We have to recognize that the intelligence, learning capability, diligence and time for sleep are limited. We need to handle issues in a professional way. A lot of issues can be easily coped with once professional modes and personnel are in place.
Thank you！
Gao, Xiqing is the Former General Manager of China Investment Corporation
Speech delivered at the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
