There is a need to build a more accurate and deeper understanding of capital. On April 29, the Political Bureau of the Communist Party of China (CPC) Central Committee held a group study session on how to regulate and guide capital development according to law. The theme — “according to law” — outlines the basic strategy for regulating and guiding capital development.
While presiding over the session, CPC General Secretary Xi Jinping said “Capital plays a pivotal role in distributing various production factors. It is also a vital driving force in increasing social productivity. Therefore, China should tap the full potential of capital to enhance social productivity. At the same time, we must be well aware that the profit-seeking nature of capital could bring immeasurable harm to China’s economic and social growth if capital is not properly regulated.” For this reason, we need to think about capital dialectically: While we acknowledge its positive role and strive to create conditions favorable to its growth, we should also control it to avoid systemic financial or fiscal crises. For China’s policymakers, it is a pressing task to improve rules critical to the market economy and, ultimately, rule the country according to law. Regulating capital is not only an economic issue but a political one as well. Yet more, it is an issue of the rule of law.
The session stressed that “it is crucial to learn from both the positive and negative aspects of regulatory practices in capital markets since the founding of the People’s Republic of China, and especially since the reform and opening up.” Chinese people’s perceptions of the role of capital have changed considerably after a long and arduous struggle. In the centrally planned economy, there was a complete denial of capital. As dominant ideologies permeated all aspects of society, people viewed capital as something “coming into the world with blood and dirt dripping from top to bottom out of every pore.” China has paid a heavy price for this. Since reform and opening up began, especially since the 14th National Congress of the CPC in 1992 where China’s goal of establishing a socialist market economy was put forward, China has broken through shackles of traditional concepts and gained a new understanding of the nature and role of capital. Meanwhile, capital — along with other factors of production such as labor, land and entrepreneurship — has played a vital role in China’s rapid economic growth, becoming an integral part of the market economy. For the market to play a decisive role in resource allocation, capital must not be considered a rival.
However, as China is trying to build a market economy and become a country ruled by law, there are still unregulated activities and irregularities. We have seen people neglecting the law and scandals in which power is traded for money, as well as companies playing people for suckers and misdeeds by major shareholders. This not only destroys investor confidence but also threatens the healthy development of capital. As a new form of capital, the platform economy has received increasing attention in recent years. With economies of scale and capital strength, large internet platforms have abused their dominant position in the market with monopolistic practices and unfair business competition, posing a threat to the market economy.
As a result, Chinese regulators have continued to strengthen the oversight of e-commerce platforms. Each major case has aroused strong reactions among the public and the capital market. Regulating capital markets is both necessary and essential. However, there is still room for improvement in the way the rule of law is used to regulate internet platforms. For example, what is the legal basis for issuing massive fines to big online platforms? Have the regulatory procedures been conducted fairly and reasonably? A common complaint is the lack of transparency. Only when regulators act openly, justly and fairly can the punishment be convincing. This can also indicate whether regulatory governance is on a healthy track.
It is important to note that the scope of government regulation should be limited to correcting “chaos.” There is no need to expand its scope; regulation and guidance should be just that, and not used as a tool to create overwhelming restrictions. Looking back over China’s modern history, we find that expanding the scope — which runs contrary to the government’s intention — is a habit hard to shake off. To better regulate capital and thus give full play to its positive role in economic growth, we first need to understand and respect it. The only way to assess effectiveness of regulatory actions is to see whether capital has developed in an orderly and healthy manner. This is the exact reason policymakers are stressing that China should cautiously introduce contractionary policies while maintaining policy stability and consistency.
The key to maintaining healthy development of capital is to stabilize expectations. The key to stabilizing expectations is to uphold the rule of law. The session also highlighted the role of the rule of law. It stressed that we need to improve the laws for capital development, creating a well-structured, consistent and complete framework of rules. We need to tighten oversight and law enforcement to crack down on monopolies and disorder in competition, such as the abuse of dominant market positions. The rule of law not only delineates the boundaries for capital but also creates space and expectations for it. Only by knowing the boundaries of what can and cannot be done can capital expand in an orderly manner. Helping form stable expectations on capital will require creating a strong legal business environment. If the release of a policy (or even the slightest change in wording) can trigger a huge drop in the capital market, it is evident that such an environment is yet to be created.
Strengthening capital regulation and guidance cannot be achieved without systematic opening up. As Chinese capital markets open up, China aims to attract more foreign investors. However, a more important task is to learn from the effective governance rules of other countries. Developed countries have been governing capital for centuries and Chinese regulators can learn a lot from their experience. In addition, there are many common challenges facing governments, with platform governance being the biggest from a global perspective. If we agree that the market economy is a common historic achievement where the social system is perceived to be irrelevant, then it is vital that we learn from the experiences of developed countries and their new endeavors, and establish international collaborations when needed.
Regulating and guiding capital development should not be the cause of plunges in capital markets; rather, it should be the cornerstone of stability. Similarly, capital governance should not become a means of macro-control to tighten up regulations when the economy is booming or vice versa. When setting up a traffic light we cannot manipulate it to always be red. This would be against the rule of law and the central government’s intentions. Regulating and guiding capital should be based on law, the prerequisite of which is the building of a law-abiding government.
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