ASSESSING THE GOVERNANCE OF THE INDEPENDENT REGULATORY AGENCIES IN CHINA

by Jiabin Hu

_________________________________________________________________

A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (PUBLIC ADMINISTRATION)

August 2009

Copyright 2009

Jiabin Hu

TABLE OF CONTENTS

LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER 1: INTRODUCTION CHAPTER 2: BACKGROUND: IRAS IN THE WORLD AND IN CHINA CHAPTER 3: THEORETICAL FOUNDATIONS CHAPTER 4: METHODOLOGY CHAPTER 5: FINDINGS: THE GOVERNANCE STATE OF CHINA IRAS CHAPTER 6: FINDINGS: CONSTRAINTS TO CHINA IRAS CHAPTER 7: CONCLUSIONS BIBLIOGRAPHY APPENDICES APPENDIX A: THE QUESTIONNAIRE APPENDIX B: INTERVIEW QUESTIONS APPENDIX C: PARTICIPANTS OF THE SURVEY AND INTERVIEW APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH QUESTION IN THE QUESTIONNAIRE APPENDIX E: SUB-VARIABLES CHINA IRAS SCORE RELATIVELY HIGH AND LOW

iii iv v 1 12 30 54 61 98 133 140 146 146 154 155 156 158

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LIST OF TABLES

Table 1.1: Independent regulatory agencies (IRAs) in China Table 2.1: Typical institutional features of IRAs in Europe Table 2.2: Organizational position of China IRAs Table 4.1: The composing variables and sub-variables of the questionnaire Table 5.1: China IRAs scores on independence Table 5.2: China IRAs scores on independence from the government Table 5.3: China IRAs and the laws Table 5.4: China IRAs scores on independence from the regulated industry Table 5.5: The revolving door in China Table 5.6: China IRAs scores on decision-making competency Table 5.7: Regulatory power possessed by China IRAs: the example of CBRC and SERC Table 5.8: China IRAs scores on accountability Table 5.9: China IRAs scores on the three assessment variables: Independence, decision-making competency, and accountability Table 6.1: Characteristics of industries with IRAs

8 15 17 55 63 63 65 71 73 79

80 86

95 122

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LIST OF FIGURES

Figure 5.1: Independence Index Figure 5.2: Decision-making Competency Index Figure 5.3: Accountability Index Figure 5.4: China IRAs scores on the three assessment variables: Independence, decision-making competency, and accountability Figure 5.5: The Governance Index of China IRAs

62 78 86

95 96

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ABSTRACT

Like other leading economies in the world, China is transitioning toward a regulatory state. Since the 1990s, a number of Independent Regulatory Agencies (IRAs) have been established in China, covering areas such as financial, electricity and airline industries. Research on China IRAs, however, is very limited and is still in the beginning stage. This dissertation aims to improve the understanding on China IRAs. Through conducting surveys and interviews with senior officials from the IRAs, outside consultants, and independent scholars, this dissertation not only presents a comprehensive view of the governance state of China IRAs, but identifies the major constraints to them when fulfilling their regulatory responsibilities. This dissertation concludes that while there are still many inadequacies, China IRAs have made substantial movement toward the global benchmark of the independent regulator in the development of Chinas regulatory state. The constraints identified in this research also provide important references for the future design of new IRA in China.

CHAPTER 1: INTRODUCTION

This Chapter begins with a discussion of how the leading economies in the world have been transitioning toward a regulatory state. In constructing the regulatory state and in the design of the regulatory system, the Independent Regulatory Agency model (IRA model) has emerged as a benchmark regulation model and has been widely adopted all over the world. China is not an exception to this global wave. In China, Independent Regulatory Agencies (IRAs) have been established in areas such as finance and network industries. But current research on China IRAs are still limited and at the introductory stage. This research expects to contribute to the understanding on China IRAs by taking a comprehensive assessment of their regulatory governance state and by identifying the major constraints to them.

1.1 An era of regulatory state Since the late 1970s, the relationship between the Chinese government and the market has undergone significant changes. The government has withdrawn from the comprehensive domination over the nations economy and has yielded gradually to market mechanism (Yu, 1997; Wang, 2003). The governments economic functions have also shifted from direct control to market supervision and regulation. A regulatory state is emerging in China. The concept regulatory state describes a model of relationship between the government and the market. In this model, the country adopts a market economy and 1

gives full play to market mechanism in resource allocation. At the same time, it acknowledges that the market is not flawless and market failure brought about by natural monopolies, externalities, and information asymmetries exists. Hence there is the need for the government to establish regulatory agencies to supervise and regulate the activities of market participants, and to prevent and correct market failure. Building a regulatory state has become the core element of governance reform in many countries (Majone, 1994; McGowan and Wallace, 1996; Sudo, 2003; Jordana and Levi-Faur, 2006; Bugaric, 2008), but different countries have taken different paths toward this goal. Among the worlds leading economies, the United States went from the laissez-faire capitalism to a regulatory state. Europe, led by the United Kingdom, transformed from the European welfare state toward regulatory state. Japan, and also South Korea, are turning from the developmental state to the regulatory state, while China is changing from a executive-totalitarian to the regulatory state (Du, 2002). Below, I will have a brief discussion about the course of evolution for the above countries. Since its founding the United States has been practicing the laissez-faire capitalism. This model advocates free competition, believes in the invisible hand of the market to adjust economic activities, and relies on independent court and private litigation to maintain orderly competition in the economy. It embraces the idea of the smallest government, the best government and the existence of government as a necessary evil. It is best to have as less state intervention in the economy as possible.

However, with the deepening of labor division and increasing transaction complexities driven by technical progress, the institutional arrangement of independent courts and private litigation can no longer guarantee to promote effective competition in the market (Glaeser & Shleifer, 2001). And the economic crisis of the 1930s broke the myth of the free market and revealed significant defects of free market. All these led people to rethink and redefine the relationship between the government and the market. It was recognized that the government should shoulder responsibilities in market operation (Posner, 1974). U.S. regulatory agencies came into being under this background. The establishment of the Interstate Commerce Commission by the Congress in 1887 for the supervision of the railway industry is considered as the starting point of the rise of the modern regulatory state in the United States. In President Roosevelts New Deal in the 1930s, the Congress developed a wide range of reform proposals and set up a number of new regulatory agencies such as the Securities and Exchange Commission, Federal Communication Commission, National Labor Relations Board. The government hoped to improve the environment and the efficiency of the market by creating professional regulatory entities that were composed of experts and functioned in accordance with democratic procedures. The emergence of these regulatory agencies turned the United States from the night-watchman state to the positive regulatory state. Since then, the role of regulatory agencies in the U.S. economy and society has been continuously enhanced. The scope of regulation has gradually expanded from economic to social realm. At the same time, understandings on regulation are also deepening. Especially 3

since the 1980s, the regulation philosophy has undergone a trend from regulation to deregulation, from deregulation to reregulation (Majone, 1990), and then from reregulation to the pursuit of better regulation and effective regulation (Stern 1997). European countries have always been regarded as typical welfare states. In the 1940s many European countries, represented by United Kingdom, implemented nationalization policies in industries like iron, steel, and coal, and in public utilities sectors such as water and gas. However, by late 1970s the low efficiency of state-owned enterprises had seriously constrained economic vitality. Thus, when Margaret Thatcher came into power, the United Kingdom launched the market-oriented reform centered on the privatization of state-owned enterprises. Drawing on the experiences of the United States and taking into consideration of the characteristics of the political system of the United Kingdom, the government set up a number of independent regulatory agencies one after another, like Office of Telecommunications (Oftel), Office of Gas Supply (Ofgas), and Office of Electricity Regulation (Ofer). A regulatory state began to emerge in the United Kingdom and then expanded to the entire European continent. Japan and South Korea represent another type of regulation mode. In Japan and South Koreas post-war economic development, the governments used to interfere with the enterprises business operations with the aim of promoting rapid economic growth. One of the most obvious distinctions of Japan and South Koreas system from that of Europe and the United States is that they did not rely on well-established and 4

complex legislations to constrain corporate behaviors and social orders. On the contrary, due to historical and cultural reasons, the governments did not maintain a certain distance from the enterprises. Rather, they had established a kind of directing-directed relationship with the enterprises and had formed

government-enterprise symbiosis. This state-oriented economic development model in Japan and South Korea is called the developmental state. Under the developmental state model, the government is also concerned with who the market actors are in specific industries, and one of its underlying goals is to enhance the international competitiveness of domestic firmsin other words, to create national champions (Pearson, 2005). This developmental state model accommodates with Japan and Koreas state-oriented economic growth model after the War. However, since the 1980s Japan experienced a long period of economic stagnancy and South Korea suffered from a huge shock in the Asia Financial Crisis in 1997. The punch on the economy has propelled the two countries to reflect on the relationship between the government, market and enterprises. Consequently, Japan started a comprehensive economic reform from the mid-1990s, so did South Korea in late 1990s. The aim of these reforms is to realize a transformation from the state-oriented economic growth model to a market-based growth model. Accompanying with the economic restructuring is a redefinition of the functions of the government and the establishment of regulatory system to accommodate with new economic development model. While bureaucratic

rigidity and continued anti-competition practices are still obstacles, a regulatory state is under construction in these Southeast Asia countries. The planned economy in China and in many other socialist countries before the 1980s belonged to the totalitarian government model. In this model, the government played the absolutely dominant role in the economy. It denied market functions and delegated the government to allocate resources through central planning. In China, the planned economy had resulted in very low efficiencies in production, leading to economic recession and extreme hardship of the peoples lives. In the late 1970s, with Deng, Xiaoping coming into power, China started to open its door to the world and initiated an economic reform with the aim of establishing a socialist market economy. The economic reform has produced enormous benefits to the Chinese economy. Chinas GDP grows at an average rate of 9.8 percent annually in the past three decades and economic development has also brought about continuous improvement of the peoples living standards. As the market mechanism gradually plays the dominant role in Chinese economy, the functions of the Chinese government have changed accordingly. By 2006, the functions of Chinese government were clearly defined as economic regulation, market supervision, social management and public serving. Building a fair, transparent, and modern regulatory system is regarded as an important guarantee for the development of the socialist market economy (Li, 2008). China is moving steadily towards a regulatory state.

1.2 The adoption of the Independent Regulatory Agency (IRA) model in China In constructing the regulatory state and in the design of the regulatory system, in both established markets and economics transitioning to a market based system, and in a wide range of domains, the Independent Regulatory Agency (IRA) model, or called the Independent Regulator model, has emerged as a benchmark and has become the most influential and most widely adopted regulation model (Pearson, 2005). In this models ideal form, the regulatory agency must maintain substantial autonomy from political organs such as the executive or legislature, and must be independent from business; that is, the regulatory agency must be separated from and impartial towards the firms it regulates, even state-owned firms. China is also the follower to the trend of establishing independent regulatory agencies (IRAs). As Pearson notes, in formulating its regulatory system, the Chinese government has been keenly aware of the international model that has become hegemonic in the past decade: the independent regulator model (2005: 297). The State Council, the executive arm of China, began to set up a number of IRAs in the government institutional reform of 1998 and 2003 respectively. Currently, China has established IRAs in finance and in a few network industries (see Table 1.1 in next page). The establishment of these IRAs is considered to have laid down the basis for building a regulatory state in China.

Table 1.1: Independent regulatory agencies (IRAs) in China Independent Regulatory Agency China Securities Regulatory Commission (CSRC) China Insurance Regulatory Commission (CIRC) China Banking Regulatory Commission (CBRC) State Electricity Regulatory Commission (SERC) Civil Aviation Administration of China (CAAC) State Food and Drug Administration (SFDA) Year Established 1998 1998 2003 2002 2002 1998 Regulatory Area Securities Insurance Banking Electric power sector Civil aviation Food and Drug

Financial area

Network industries

1.3 Current research on China IRAs As Zhou notes, in China, the theoretical studies on regulation, including both the regulatory system and the regulatory agencies, fall far behind the practical institutional development and innovation (2006: 2). Current research on China IRAs have two characteristics. First, most of the works on IRAs are still introductory works. Second, these introductory works have discussed China IRAs mainly from a legal perspective and analyzed the legal basis of establishing IRAs in China. While systematic and comprehensive study on China IRAs is absent, comments, especially critiques to China IRAs are abundant. For example, CSRC is criticized for being unable to stop effectively the insider transactions in the securities market. Some even described the securities market in China as a gambling hell; the partial attitude of CIRC towards those big state-owned insurance companies has incurred increasing complaints from private and foreign capital insurance companies; 8

SERC in the first several years after its establishment was depicted as a vase as its regulations did not have enough hold/restrictions to those state-owned power enterprises in the electric power market; CAAC was criticized for not promoting full competition in the aviation industry, which forces the passengers to accept the poor services provided by the three major state-owned airlines. The public are especially angry as some IRAs have become hotbeds of corruption. Very serious corruption cases have been spotted in CSRC and SFDA in the past years, and this has further led to questioning on the broad powers enjoyed by some of the IRAs. There are a few works seeking the reasons behind for the unsatisfying performance of China IRAs and the regulated industries. The reasons identified focus on the imperfectness of China IRAs in institutional design. For instance, Hou and Wang (2006) argue the financial regulators in China do not have enough independence from the government. In electricity industry, Li (2004) observes the National Development and Reform Commission (NDRC) has infringed the regulatory power that should belong to SERC and has directly led to the lack of authority of the latter. In his analysis of the corruption of SFDA, Hao (2007) emphasizes the seriousness of the absence of accountability mechanism of SFDA. Overall, current research on China IRAs is still very limited. Existing research, basically, either are introductory studies, or comments and evaluations on the IRAs and the performance of the regulated industries. Introductory works and evaluations are far from enough to form a comprehensive understanding on the state of China IRAs. 9

1.4 What will this dissertation contribute? Regulatory governance is the institutional and legal design of the regulatory system and is the framework within which decisions are made (Brown, Stern, Tenenbaum, and Gencer, 2006). As Andres, Guasch, Diop, and Azumendi (2007) point out, the governance of regulatory agencies matters and has significant effects on sector performance. Though it has been more than 10 years since China established its first IRA, and since then the number of IRAs in China has increased and expanded to a wide range of domains, there is no comprehensive assessment on the governance state of Chinas IRAs yet. This dissertation is an effort to fill the gap. Specifically, this dissertation has two objectives:

Objective 1: To have a comprehensive assessment on the governance state of China IRAs. Objective 2: To identify the main (legal, institutional, economic, and cultural) factors that are negatively affecting the independence, decision-making competency, and accountability of China IRAs when performing their regulatory responsibilities.

By achieving Objective 1, I will have a general picture of China IRAs concerning their independence, decision-making competency, and accountability. On the basis of Objective 1, Objective 2 enables us to have an in-depth understanding of the major problems existing in China IRAs and points out a direction for future reform. The two objectives are complementary to each other. Joined together, by achieving 10

these two objectives, this dissertation intends to provide a comprehensive understanding of the state of China IRAs. This dissertation is organized as follows: Chapter 2 is an introduction of IRAs in different countries, the development and diffusion of this IRA model across the world, and how it takes root in China. Chapter 3 starts with a review on the different research that have engaged in assessing the governance of regulatory agencies across the world. Based on the literature review, I develop an assessment framework to assess the regulatory governance status of China IRAs. Research on constraints to regulatory agencies have also been discussed in this Chapter. Chapter 4 explains in detail the methodology. I used a semi-structured survey, which is composed of 36 questions, and in-depth interview respectively, to achieve the two objectives set up in Chapter 1. The findings are discussed in Chapter 5 and Chapter 6. Chapter 5 presents a detailed analysis of the governance state of China IRAs. Chapter 6 discusses the factors identified by the interviewees that are negatively affecting China IRAs when performing their regulatory responsibility. Finally, Chapter 7 summarizes this dissertation and discusses what we can do more in this research area.

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CHAPTER 2: BACKGROUND: IRAS IN THE WORLD AND IN CHINA

This chapter provides more background information on IRAs in the world and in China. I first review the IRAs in U.S, Europe and China, then discuss the reasons behind that have promoted the wide diffusion of this IRA model across the world. It indicates that basically, functional superiority, institutional imitation, and promotion by international organizations are the three most important elements that have contributed to this models adoption in worldwide. Following the course of China economic and administrative system reform since 1949, the final part of this chapter explores the emergence of IRAs in China.

2.1 Independent regulatory agencywho are they? While it is a concept that has been widely used, in practice, defining an independent regulatory agency is exceedingly difficult, given the diversity of agency types. Different countries have different legal doctrines and definitions (Thatcher, 2002). In this section, I will discuss how in United States, in Europe, and in China, scholars have been addressing this concept. United States is recognized as the origin place of IRA. Regulatory agencies in US are differentiated into two main types: the Dependent Regulatory Agency (DRA) and the Independent Regulatory Commission (IRC).1 The DRAs are agencies charged with regulating economic activity but housed within an existing cabinet department or

Lavrijssen (2004) calls the IRCs independent agencies.

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other executive structure (Reddick, 2003). Examples of DRAs include the Food and Drug Administration (FDA) under Department of Health and Human Services, and the Federal Aviation Administration (FAA) under the Department of Transport. An IRC is an agency outside the major executive departments that is charged with the regulation of important aspects of the economy. The Federal Communications Commission (FCC), for example, is an agency that regulates interstate and international radio, television, telephone, telegraph, and satellite communications, as well as licensing radio and television stations. The Securities and Exchange Commission (SEC) is an agency that regulates the sale of stocks and bonds as well as investment and holding companies. The US Congress has delegated authority, through statutory law, to these IRCs to control various business practices. Congress has attempted to insulate the IRCs from direct political pressure, especially from the President. These agencies are headed by boards of three to seven members who are appointed by the President with Senate approval. In contrast to cabinet members and the heads of other executive departments, the President cannot remove regulatory commissioners. Instead, they serve fixed, staggered terms ranging from three to fourteen years. As a result, a new President must usually wait several years before having much impact on the composition of the boards. Furthermore, the law generally requires that no more than a bare majority of board members be from the same political party.

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The European IRA model is regarded as an evolution from the US model.2 In Europe, Thatcher (2002) suggests the minimum requirements for an agency to be included as an IRA refer to the formal institutional position and comprise the following: the agency has its own powers and responsibilities under public law; it is organizationally separated from ministries; it is not managed by directly elected officials. In reality, delegation from elected officials to European IRAs has taken many institutional forms. The formal organizational position of agencies differs. Sometimes agencies are explicitly made independent in enacting legislation (for instance, in Italy); at other times, their institutional position is a unit subject to the supervision of a ministry and/or to its instructions (for instance, the Federal Cartel Office and the telecommunications regulator in Germany) or even a non-ministerial government department (the utility regulators in Britain). Thus, Thatcher admits that independent agencies include many bodies which are semi-independent from legislatures and governments (2002: 129). For IRAs in Europe, Thatcher has identified the following institutional features (See Table 2.1).

Stern (1997) mentioned that when comparing the utilities regulator between US and UK, some observers suggest that the independent regulatory model has not ever been transferred properly to the UK. They argue that UK regulation is a much inferior version of US regulation, imposing much greater risks on the regulated utilities through the lack of an equivalent formal legal framework on substance and process and, hence, is not genuinely independent in the way that US regulation is (p. 67).

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Table 2.1: Typical institutional features of IRAs in Europe Britain Until 2000, single person for utilities, commissions for others; moving towards multi-person France Germany Italy

Number of regulators

Multi-person

Multi-person

Multi-person

Nomination Power

Minister

Separate places for nominees of President, Prime Minister and heads of parliamentary houses Autorite administrative independence

Federal government, but sometimes on advice of legislature

Separate places for nominees of President and two houses of parliament

Organizational Status

Non-ministerial government department

Within scope of supervisory responsibility of a ministry

Independent authority

In China, Chinese scholars do not differentiate strictly between the concepts of regulatory agency and independent regulatory agency. A representative perspective suggests, independence should be the key characteristic of any regulatory agency, so except for some industry self-discipline organizations, regulatory agency is a synonym for independent regulatory agency (Ma, 2007). Ma (2007) defines regulatory agency as a government administrative institution that has certain independence, and based on legal authorization, has the authority of rule-making and quasi-judicial powers, and bears the responsibility of regulating the economic and social problems arising from the economic activities of market entities. Based on this definition, currently, IRAs in China refer to the following six institutions: 15

China Banking Regulatory Commission (CBRC) China Securities Regulatory Commission (CSRC) China Insurance Regulatory Commission (CIRC) State Electricity Regulatory Commission (SERC) Civil Aviation Administration of China (CAAC) State Food and Drug Administration (SFDA) In this dissertation, I will adopt the above definition and these six IRAs will also be the research targets of this dissertation. The organizational position of these regulatory agencies in Chinas bureaucratic system is showed in Table 2.2 (see next page). As we can see, all the IRAs are institutions under the State Council, which is the Executive arm in China. Of them, the three financial IRAs (CBRC, CSRC, and CIRA) and SERC are of Institutions directly under the State Council. CAAC and SFDA are of Administrations and Bureaus under the Ministries & Commissions, and respectively, CAAC is under the supervision of Ministry of Transport, SFDA is under the supervision of Ministry of Health. A comparison, while maybe not very appropriate, as there are so many differences in the political and bureaucratic system between China and the Western countries, indicates that the organizational position of CSRC, CIRC, CBRC and SERC are very similar to, though not exactly same with, that of IRCs in America and the IRAs in Britain. The organizational position of CAAC and SFDA is similar to that of DRA in U.S. and IRAs in Germany. 16

Table 2.2: Organizational position of China IRAs The State Council

Ministries and Commissions under the State Council:

National Development and Reform Commission (NDRC) Ministry of Transport Ministry of Health Ministry of Environmental Protection Peoples Bank of China
Special Organizations directly under the State Council:

State-owned Assets Supervision and Administration Commission (SASAC)

Organizations directly under the State Council:

General Administration of Customs State Administration of Taxation State Administration for Industry and Commerce Offices: Legislative Affairs Office of the State Council Research Office of the State Council .
Institutions directly under the State Council:

Chinese Academy of Sciences Chinese Academy of Social Sciences Chinese Academy of Engineering China Earthquake Administration China Banking Regulatory Commission (CBRC) China Securities Regulatory Commission (CSRC) China Insurance Regulatory Commission (CIRC) State Electricity Regulatory Commission (SERC) National Council for Social Security Fund National Natural Science Foundation
Administrations and Bureaus under the Ministries & Commissions:

State Administration of Foreign Exchange State Tobacco Monopoly Administration Civil Aviation Administration of China (CAAC) State Food and Drug Administration (SFDA) 17

2.2 The development and diffusion of the IRA model across the world & the reasons behind In this section, following the trajectory of the diffusion of the IRA model across the world, I will examine the reasons behind that have promoted this diffusion. IRAs have a long tradition in the United States, but in Europe they are a relatively recent institutional innovation. Represented by Britain, in Western Europe, the 1980s and 1990s saw sweeping reforms of regulation in the natural monopoly industries. The reforms focused on privatization and restructuring of these state monopoly industries to introduce competition. In the reform process, a key mechanism is the creation of IRAs (Gilardi et al., 2006). The IRA model came to have worldwide influences after its successful adoption and application in Western Europe. Since then, the IRAs have proliferated and spread across domains, and, as the taken-for-granted solution (Gilardi, 2005) for both the developed and developing countries, they have spread across the world. In emerging economies, both the number of IRAs and the frequency of their creation (i.e. the proximity in the timing of their creation) have increased since the early 1990s (Sosay and Zenginobuz, 2005). Why has the IRA model been adopted worldwideThere are three reasons that have been identified: functional, institutional imitation, and promotion by international organizations. From a functional perspective, Thatcher (2002) finds that elected officials are willing to delegate to IRAs with the expectation that IRAs will fulfill functions such as 18

overcoming information asymmetries, blame shifting, commitment, and dealing with complex technical issues. Gilardi (2002) views the gain of credibility as the major factor, suggesting an improved performance of a regulated sector as a result of an independent regulator. Oliveira, Machado, Novaes, and Ferreira (2005) summarize the works of these authors and suggest that IRA model is accepted and approved for the following benefits Expertise: IRAs would be closer to the regulated sector than the traditional bureaucratic agencies, could thus compile and analyze better the relevant information, and make swifter adjustment to changes in the environment. Furthermore, their more flexible organizational structure would create a more attractive working environment for sector experts. Credibility commitment: In its ideal form, IRAs are insulated from unnecessary political and electoral influences, which increase their commitment to a policy, and thus its credibility. They could adjust their regulatory policies in the long term and create a more stable and predictable regulatory environment. The decision process is also more open and transparent than that conducted by the ministries and is more sensitive to consumer interest. Efficiency: When delegating the burden of decision making to the IRAs, particularly in situations where the advantages and/or political costs of the process are unclear, the transaction costs that are associated with the time spent in debates and ideological discussions are reduced.

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Agency as the scapegoat: Independence makes it possible for politicians to blame IRAs when unpopular decisions have to be taken. From the organizational behavior perspective, institutional imitation plays a very important role in the diffusion of the IRA model. Once an apparently successful agency model is identified, it will be rapidly copied in other domains. This is exactly the example of the Office of Telecommunications (Oftel), which was replicated in other utilities sectors in Britain. Through industry communication, or the introduction and promotion of regulation experiences, the successful regulatory model is further exported to other countries. For instance, in Europe, the EC Commission brought together national regulators and encouraged cross-national fertilization of ideas. This has significantly aided the spread of the IRA model (Thatcher, 2000). In domains such as utilities and telecommunications, the wide adoption of the IRA model has made it the taken for granted solution. Gilardi (2005) identifies that the likelihood of IRA creation significantly increases as the number of other existing IRAs is higher, which suggests the presence of an emulation process where the symbolic properties of IRAs are more important than the functions they perform (2005: 97). Institutional mimetism may also be driven by perceived necessity. Once the IRA model is approved as the best or the natural organizational forms in the international society, countries that seek to become members of that society are driven to imitate in order to enhance their credibility and competitiveness. This is the case as some Europe countries seek to join European Union (EU). 20

Both the functional and institutional imitation reasons discussed above have been reflected in Mariana Mota Prados observation of the creation of IRAs in Brazil. The author writes: There were at least three possible reasons for the Brazilian government to follow the international discourse (independent regulatory agencies) ... First, politicians are willing to improve the credibility of their policies and solve the problem of political uncertainty in order to guarantee the success of privatization reforms...Second, regulatory agencies have now been taken for granted as the appropriate form for regulation, and politicians are just following the trend without asking whether there are any concrete benefits in doing so. Third, there are network effects of implementing such institutions once a number of countries have implemented them. In this case, the path is followed because of positive feedback or increasing returns, which are only created if other countries are doing the same. It is not clear which of these three reasons, if any, prevailed in Brazil, but there is no reason to rule any of them out as plausible explanations to the creation of IRAs by the Cardoso administration (2007: 444-445).

Sosay and Zenginobuz (2005) contend that symbolic imitation and international coercion are the two most salient mechanisms in the diffusion of regulatory agencies in emerging economies. For example, as advocates of the IRA model, international organizations such as World Trade Organization (WTO), International Monetary Fund (IMF), World Bank (WB), Organization for Economic Cooperation and Development (OECD), and Asia-Pacific Economic Cooperation (APEC) have played a very active and influential role in the formulation and spread of this IRA model to the developing economies while helping them design their regulatory systems (Henisz et al., 2004). With the IRA model approved as the best or the natural organizational form in the international society, countries that seek to 21

become members of that society are driven to imitate in order to enhance their credibility and competitiveness. This is the case as some European countries seek to join the European Union (EU). However, some scholars interpret the international organizations advocating for IRA model as coercion, as establishing IRA sometimes is used as a precondition for receiving international support, e.g. when the Southeast Asia countries seek financial support from IMF after the 1997 financial turmoil.

2.3 How the IRAs take root in China? In this section, I will follow the course of Chinas economic development and administrative system reform to explore the emergence of IRAs in China and the trajectory towards a regulatory state. Since the establishment of New China in 1949, basically the economic development in China can be divided into three periods: from 1949 to 1978, from 1978 to 1993, and from 1993 to current. The primary focus will be on the third period. 1949-1978Full government control under the planned economy When the Peoples Republic of China was founded in 1949, the Chinese Communist Party, the ruling party in China, stayed at a primary stage in the understanding of socialism, believing that the planned economy based on a single public ownership represented the fundamental system of the socialist economy and was an important symbol of the superiority that socialism enjoys over capitalism. Therefore, China started to implement the socialism transformation from 1950, and by 1956 China had entered an era of planned economy with single public ownership. 22

A planned economy replacies the market mechanism with government planning, and hence denies market function. It is an economic system that the government manages the economy and allocates resources through plans. Under such a system, the government plays a wide range of roles; it is the owner, operator, manager, and distributor simultaneously. In this mode, free market transactions virtually do not exist in economic areas. Therefore, there is basically no theoretical or practical need to create regulatory agencies. 1978-1993: Economic reform Public ownership and the planned economy depressed economic vitality, caused economic recession and poverty in peoples lives, and also posed serious challenges to the traditional socialism economic theory. Facing the danger of collapse of the national economy, in 1978 China decided to start economic reform and open up its door to the world, and shift the countrys focus to modernization. In 1982, The 12th Chinese Communist Party Congress brought forward the theory of building socialism with Chinese characteristics, and established the principle of planned economy as the major force, market adjustment as a supplement. The Constitution of 1982 reflected such a significant change in economic policy, and the amendments to the Constitution in 1988 further established the legal status of private sector in the economy. The achievements of reform at this stage were obvious: the economy in China started to take off. Peoples living standard was improved greatly. And, the private sector has gradually grown into an important force in Chinese economy. 23

However, at this stage, there was no real separation of government from enterprises. Especially in the infrastructure sectors, the traditional vertically integrated monopolistic industrial structure and the government-enterprise-as-one-body

management system did not change at all. Industrial departments, or called line departments, are not only the owners and managers of state-owned enterprises, but also the regulators of the entire industry. Such a parent-child relationship between the industry departments and the state-owned enterprises makes it impossible for the departments to maintain a neutral stance and treat all market participants equally. New market entrants or non-state-owned enterprises are likely to be discriminated (Li, 2008). Against this background, it is still impossible for the independent, detached and fair regulatory agencies to emerge. From 1993 to the present: Toward a socialist market economy and the establishment of IRAs in various sectors From 1993 on, China started a new round of economic reform with the aim of establishing a socialist market economy in China. In the background of this reform, and through a series of restructuring of government institutions, IRAs emerged as important players in Chinas political arena. Next, I will give a brief introduction of this reform and the background information of the industries where IRAs were established. With the manifestation of the importance of market in economic development, in 1992, the 14th Chinese Communist Party Congress formally announced the objective

24

of Chinas economic reform is to build a socialist market economy, which later was reflected in the 1993 Constitution amendment. Socialist market economy is a combination of market economy and the socialist system of China (Jiang, 2006; Zhou & Ouyang, 2008; Duan, 2002; Liu, 2004). First, it has the basic attributes of market economy. It requires market participants must be independent and equal market entities; Market, not the government, should play the basic role in resource allocation. Second, socialist market economy has integrated the characteristics of the socialist system of China with market economy. It emphasizes the dominance of public ownership in the ownership system. And, the government should play an active role in the macro-regulation of the economy. Socialist market economy is an important theoretical innovation in Chinas economic reform. It provides theoretical support to Chinas adoption of market mechanism in its economic reform. A socialist market economy is a key component in Chinas efforts of constructing a socialism with Chinese characteristics. Establishing a socialist market economy entails changes of government functions. One of the most important changes is to redefine the once parent-child relationship between government and state-owned enterprises (SOEs). The parent-child relationship between government and SOEs must be changed. SOEs should be separated from the government and obtain independent market status, which is the pre-requirement of a socialist market economy (Zhou, 2006: 106). Also, the government should refrain from directly intervening in enterprises business operation. Instead, it should focus on regulating the macro economic operations. In other words, 25

the government should transform itself gradually into a regulation-oriented and service-oriented government. From 1993 on, the reform to separate SOEs from government, called zhengqi fenkai in Chinese, was carried out vigorously. Since then, the relationship between government and SOEs was broken down; SOEs in various industries have obtained independent market status. From direct government management in the planned economy to government regulation in the socialist market economy, China makes an important step forward in its economic reform. With the progress of separation between government and SOEs, many line departments/ministries once administering the industries were dismantled one by one and replaced by new regulatory agencies. The establishment of SERC and CAAC are typical cases of this kind. Next I will have a brief introduction of the industry background of these two China IRAs as how they are established. SERC. In 1997, as an effort of zhengqi fenkai in the electricity industry, the State Power Corporation (SPP) was established to replace the Electric Power Ministry. SPP was then the parent company of almost all major electricity generation and transmission corporations in China. In the next year, the Electric Power Ministry was formally removed. In 2002, based generally on geographical distribution, SPP was dismantled into 5 power generation corporations and 2 grid corporations. Following the dismantle of SPP, in the same year, SERC was established as the independent regulatory agency of electric power industry.

26

CAAC. Before the zhengqi fenkai reform, not only was CAAC the government administration department of all airlines and airports in China, but it directly involved itself in their operations. The zhengqi fenkai in civil aviation industry was completed in 2002. Since then, airlines and airports no longer belong to CAAC. Rather, they are now market participants with independent market status. Through this reform, CAAC has turned itself from industry administrator to industry regulator. Accompanying the deepening of the reform in the real economy, China was also moving toward constructing a sounder financial system. The establishment of the three financial IRAs was a result of this construction. In China, the regulatory responsibilities on the securities market, on the insurance market, and on commercial banks once were all assumed by the Peoples Bank of China (PBC), the central bank in China. The establishment of the three financial IRAs was essentially a process as how PBC redefined its functions to meet with the changing economic and financial environment. I will briefly summarize the establishment of the three financials IRAs one by one. CSRC. In 1990, when the first stock exchange in China, Shanghai Stock Exchange, started operations, PBC was then the governments administration department of Chinas securities market. Two years later, CSRC was established and took over the administration responsibility on securities market from PBC. But CSRCs position as an independent regulatory agency in the securities industry was not formally established until in the government institutional reform in 1998, when it merged with the Securities Commission under the State Council. 27

CIRC. PBC assumed the administration responsibility of the insurance industry from as early as 1979. In 1985, the Regulations on Insurance Enterprises promulgated by the State Council stipulated that PBC was the state administration institution on insurance industry. In 1995, PBC founded an Insurance Department

focusing on the administration and regulation of the insurance industry. The Insurance Department was separated away from PBC in 1998, and based on this Insurance Department, CIRC was established as the independent regulator of Chinas insurance industry. CBRC. Before the establishment of CBRC in 2003, PBC was responsible for both formulating the monetary policy and supervising the commercial banks in China. This had caused a potential interest conflict: when formulating monetary policy, e.g. lowering or increasing the interest rate, PBC might put the interests of the commercial banks ahead of the needs of the development of the national economy. Out of this consideration, CBRC took over the banking supervision responsibility from PBC. With the supervision and regulation from an independent regulator, banks in China are also expected to improve their management standards. From the very beginning, the financial IRAs in China were constructed to a relatively high benchmark. The 1997 Asia Financial Crisis was a watershed in the development of Chinas financial industry. China was not severely impacted by that crisis. This was not because it had a better financial regulatory system compared to its counterparts in other Southeast Asia countries, rather, it was because the financial system in China in that time was relatively closed and not subject to as much global 28

influences as other countries. The 1997 crisis aroused the awareness of the importance of the supervision and regulation of the financial sector. In the setup of the three financial IRAs in the following several years, China had borrowed largely from the successful Western regulatory experiences. The establishment of SFDA is another story. Before the establishment of SFDA, there were struggles between the Ministry of Health and State Drug Administration Bureau (SDAB) for the supervision authority of drug licensing and manufacturing. The struggles had caused much hassle and unnecessary burdens to pharmaceutical enterprises. The foundation of SFDA in 1998 on the basis of SDAB was aimed at ending this tug-of-war. With the U.S Food and Drug Administration (FDA) served as the benchmark, the establishment of SFDA had highlighted the importance of independent drug supervision. Since then, SFDA has been charged with the responsibilities of drug licensing and manufacturing. To summarize, since 1993, with the deepening of economic reform, IRA has emerged as an important institutional arrangement in Chinas administration system. China has engaged itself in constructing a regulatory state.

29

CHAPTER 3: THEORETICAL FOUNDATIONS

This chapter includes three sections. Section 3.1 reviews the different research efforts engaging in assessing the governance of regulatory agencies across the world. Based on the literature review, in Section 3.2 I develop an assessment framework to assess the regulatory governance of China IRAs. The assessment framework is composed of three key assessment variables: independence, decision-making competency, and accountability. Institutional devices to ensure independence, decision-making competency, and accountability are also discussed. Section 3.3 engages to answer three questions: the sources of constraints on IRAs, the constraints that have been identified in previous research, and their implications for identifying constraints on China IRAs.

3.1

How the governance of IRAs has been assessed This section reviews the different efforts to assess the governance of

regulatory agencies across the world. Generally, two groups of research can be identified. The first group focuses on a specific variable: the independence/autonomy, including either the formal independence, or the de facto independence, or both. The second group makes more comprehensive assessment on regulatory governance. This group of research have included not only independence, but takes into consideration other variables such as decision-making competency, transparency, public participation, and accountability. I will briefly summarize the representative works in both groups. 30

3.1.1

Research focusing on independence In his seminal work, Gilardi (2002) develops an independence index to

measure agency independence. The index is focused on formal independence, and is divided into five main dimensions, namely the agency head status, the management board members status, the general frame of the relationships with the government and the parliament, financial and organizational autonomy, and the extent of delegated regulatory competencies. Each dimension is composed of several indicators and each indicator is numerically coded on a scale from 0 (lowest level of independence) to 1 (highest level of independence). Scores between 0 and 1 are assigned to answers to indicate the degree of independence. For example, under the dimension of agency head status, the indicator who appoints the agency head will receive a score of 1 if the answer is the management board members. For answers such as a complex mix of the executive and the legislature, the legislature, the executive collectively, and one or two ministers, the corresponding scores are 0.75, 0.50, 0.25 and 0. The independence index is finally constructed based on the aggregated result of these individual indicators. Through data collected from 33 regulators, this paper reveals that the economic nature of regulation is a strong determinant of agency independence. Starting with the work of Gilardi, Johannsen (2003) measures the formal independence of the members of the Council of European Energy Regulators (CEER). The CEER is a self-grown organization of 16 National IRAs in the fields of electricity and/or natural gas. Johannsen assesses the independence of these IRAs with four dimensions: a) independence from government, b) independence from stakeholders, c) 31

competencies and independent decision-making, and d) organizational autonomy. The emphasis is put on independence in formal, legal/organizational terms rather than in behavioral terms. Thus the paper does not examine regulatory processes and practices. Using information collected through surveys, Johannsen finds the regulatory authorities are sharing a range of defining features which holds a high signal value. However, the regulators show more variation when it comes to questions like the independence from stakeholders and actual competencies. Johannsen raises the concern that the regulatory power of independent authorities can be very weak in cases when the main emphasis has been on creating independent bodies rather than independent regulation. Thus, the establishment of regulators who are independent in name has not necessarily led to independent regulation in actual fact. Oliveira et al. (2005) discuss the importance of independence, and have proposed an independence indicator that would allow a comparison of the degree of independence of regulatory agencies among different jurisdictions. The independence indicator is constructed on a survey which focuses on the following eight dimensions: whether the appointment of the agency head occurs with participation of the Legislature, whether there is minimal technical background requirement for the executive to occupy the office, how long is the term of office of the main executives, whether the regulatory agency has budgetary autonomy, whether or not the decisions of the regulatory agency are collective, whether appeal of an agencys decisions is restricted to the judiciary, what is the degree of transparency of the decisions of the regulatory agency, and whether the regulator is submitted to a period of quarantine 32

upon leaving the position in the agency. Each dimension has been assigned a binary score of 0 (has no independence) and 1 (has independence). Consequently, the independence indicator ranges from 0 to 8. The survey was conducted with the 86 International Competition Network (ICN) member countries. The authors finally obtained answers from 29 countries with a total of 117 regulatory agencies. The survey reveals that of the total of 13 sectors, securities, electricity, telecommunications, and gas are the sectors that rank high in the independence index, while the scores of water and aviation is of the lowest. The independence index by country reveals Serbia, France, Latvia, Italy, and Portugal are the countries with highest scores. As the authors suggest, the preliminary evidence from the survey shows that there is not a positive association between development levels and independence of regulatory agencies. The inadequacy of this survey is that the independence indicator captures only formal independence. The extent to which the regulatory authority is independent in practice is not directly reflected in the independence indicator. Maggetti (2006) develops a framework to conceptualize and assess the de facto independence of IRAs through two distinct dimensions: the relationship between the agency and the political decision-makers and the relationship between the agency and the regulatees. Starting from the hypothesis that formal independence alone cannot explain the variation of de facto independence, the author have investigated some other theoretical explanations, in terms of: life cycle of agencies, path dependence, varieties

33

of capitalism and intermediary agencies. The related hypotheses are tested with a cross-national comparison between eight West European IRAs. Sezen (2007) examines the autonomy of IRAs in Turkey. The author assesses the extent to which the formal autonomy is really put in practice and how it is perceived by board members of the IRAs. Using a survey comprising interviews and a questionnaire applied to the same, the author finds that although formal autonomy is satisfactorily laid down by law, institutional autonomy has been restricted in practice. To summarize, the independence of regulatory agencies, including both formal (independence in design) and informal (independence in practice), has been assessed worldwide as a key dimension of regulatory governance. Generally, the different frameworks that have been adopted to assess the independence focus on two dimensions: independence from the government and independence from the regulated industry. These two dimensions can be further decomposed into indicators such as agency head status, financial autonomy, etc. Findings from the previous research are highly constructive in the development of an assessment framework that could be applied to assess the independence of China IRAs.

3.1.2 Comprehensive assessment on regulatory governance of IRAs In their seminal work, Stern and Holder (1999) develop an appraisal framework to assess the governance structure of twelve infrastructure industries across six developing Asian economies. The appraisal criteria is composed of two sets of variables: formal, including clarity of roles and objectives, autonomy, and 34

accountability, and informal, including participation, transparency, and predictability. The authors develop a questionnaire to collect the information. The results reveal that the overall performance on these attributes are not optimistic; the performance on predictability and transparency are particularly worrying. By adopting almost the same criteria as Stern and Holder, Gutierrez (2003) constructs a regulatory framework index to assess the evolution of regulatory governance in the Latin America Telecommunications sector. To operationalize the index, factors related to these criteria are analyzed, such as the legal status of the regulatory body, independent funding for the regulatory body, constraints on executive power to freely remove regulators, the ability of the regulatory body to set tariff and enforce norms, etc. The index shows that most countries embraced strong regulatory reforms along the lines recommended by experts and practitioners. Correa, Pereira, Mueller, and Melo (2006) provide a comprehensive assessment of the state of regulatory governance in infrastructure industries in Brazil. The authors identifies four key components of regulatory governance, namely, autonomy (political and financial), procedures for decision making, decision tools (legal means to collect information, appropriate budget to manage and process this information, qualified personnel and regulatory tools), and accountability. With a survey, 21 regulatory agencies in Brazil are assessed in terms of each of these components. The agencies regulatory governance is measured through three related indexes. The first index, the Regulatory Governance Index, is the base-line indicator and represents the most comprehensive dataset of all the indexes. The second 35

index, the Parsimonious Index, captures those variables of the survey that are less subjective. The third index, the Facto Index, is related to actual practices of regulatory agencies. The report finds that independence and accountability are more developed than regulatory means and instruments (particularly qualified personnel and regulatory tools) and decision-making procedures (particularly with respect to those mechanisms that can guarantee consistency of decisions and reduce arbitrariness). The existence of formal attributes does not always translate into effective governance (even though the data suggest that agencies improve over time). It also finds that while the level of regulatory governance is relatively similar among the 21 Brazilian regulators, there is a clear difference between federal and state regulatory agencies. Brown et al. (2006) from the World Bank develop a handbook for evaluating infrastructure regulatory system. The handbook presents options for three levels of evaluation (short, mid-level, and in-depth) and provides detailed guidance and supporting materials (questionnaires, interview questions, and terms of reference) for each of them. The authors suggest that any evaluation must examine two basic dimensions of any regulatory system: regulatory governance and regulatory substance. Regulatory governance refers to the institutional and legal design of the regulatory system and the framework within which decisions are made. Regulatory governance is the how of regulation. Regulatory substance is the content of regulation. It is the actual decisions made by the specified regulatory entity or other entities within the government, along with the rationale for the decisions. Regulatory substance is the what of regulation. Evaluations require benchmarks. Using the independent 36

regulator model as the benchmark of analysis, the authors select ten principles that should be followed in order to create an IRA. The principles are: independence, accountability, transparency and public participation, predictability,3 clarity of the roles of the regulatory agency, completeness in information providing and clarity in rules, proportionality,4 requisite powers, appropriate institutional characteristics,5 and integrity. With a benchmarking analysis, Andres et al. (2007) assess the governance of electricity regulatory agencies in the Latin American and Caribbean region (LAC region). The regulatory governance of these independent agencies is defined and assessed according to four variables of their design and functioning: autonomy, transparency, accountability, and regulatory tools, including not only formal aspects of regulation but also indicators related to actual implementation. Based on data collected through a survey, the authors create a main aggregated index (Electricity Regulatory Governance Index) and separate indexes for the four different aspects of governance. Three levels of analysis are conducted. The first level of analysis considers the overall performance of electricity regulatory agencies governance and their standing in each of the four variables (autonomy,
3 Predictability requires the regulatory system should provide reasonable, although not absolute, certainty as to the principles and rules that will be followed within the overall regulatory framework (Brown et al., 2006: 60). 4 Proportionality suggests regulatory intervention in the sector should be proportionate to the challenges the regulators are addressing (Brown et al., 2006: 61). 5 Appropriate institutional characteristics include: Competitive compensation and education or training opportunities; a reliable, adequate, and independent source of revenue and adequate budgets; the ability to retain outside consultants when needed; commissioners who are appropriately insulated from short-term political repercussions; collective regulatory decision-making (Brown et al., 2006).

37

transparency, accountability, and regulatory tools). The second level of analysis focuses on the formal and informal aspects of regulatory agencies. Finally, the third level of analysis considers the standing of regulatory agencies on each of the variables and their scores on the different elements that compose those categories. The authors conclude that regulatory agencies in the LAC region were originally created to isolate regulatory decisions from political intervention and this has been reflected in their governance design. Nevertheless, the region has experienced difficulties in the implementation of the safeguards to guarantee the autonomous management of agencies. Regulatory agencies of the region do not show a positive performance on improving its transparency and overall institutional quality. The role of independent agencies beyond regulatory responsibilities was poorly defined and understood. Finally, the implementation of the independent agency model is context dependent. The authors point out that the independent regulator model is an Anglo-Saxon institution which is, in principle, strange to most LAC legal and institutional regimes. The latter, which adopted the rigid and formalistic French administrative system, had to redefine the delegation of administrative powers to more independent and powerful regulatory agencies (Andres et al., 2007: 40) . To summarize, these previous works explain how the governance states of regulatory agencies have been assessed in different sectors and in different countries. Research on the regulatory governance of IRAs has evolved and changed. Despite the original focus on independence, a growing body of literature has been using more comprehensive approaches to address institutional design (Andres et al., 2007: 8). 38

Recent literature, represented by the works of Correa et al. (2006), Brown et al. (2006), and Andres et al. (2007), has approached the assessment of independent regulatory agencies through the classic lens of independence/autonomy, transparency, and accountability, but include a wide array of indicators within these variables as well as innovative tools to understand and assess their functioning (Andres et al., 2007: 8). In the next section, drawing on the previous research, I will start to develop an appropriate assessment framework to assess the regulatory governance of China IRAs.

3.2 A framework for assessing the regulatory governance of China IRAs Independence/autonomy has always been considered as one of the key assessing variables, if not the only, of an IRAs regulatory governance. In designing the assessment framework of this dissertation, the first group of studies have provided valuable experiences on how to assess the independence of the IRA, including both formal and de facto. Literature review reveals that independence from the government and independence from the regulated firms are the two main aspects of independence. Major indicators, or factors affecting independence include legal status, agency head status, financial sources, and relationship with the government and the legislature. As this dissertation aims to have a comprehensive assessment on the governance state of China IRAs, an analysis on independence/autonomy itself will not be enough. So, I turn my sight to the second group of studies. However, there is no general agreement on the key assessing variables of regulatory governance. In addition to independence/autonomy, accountability is the only assessing variable shared by all 39

the

comprehensive

assessment

frameworks.

Factors

identified

as

affecting

accountability include mainly the appeal mechanisms for the regulated firms, the oversight and audit on the IRA, etc. Except independence and accountability, Correa et al. (2006) have included procedures for decision making and decision tools, while Andres et al. (2007) have included transparency and regulatory tools as the assessing variables of regulatory governance. In works such as Stern and Holder (1999) and Gutierrez (2003), and in the work of Brown et al. (2006), variables also include clarity of roles, public participation, and predictability. In this dissertation, by integrating the research of Correa et al. (2006) on decision tools and Andres et al. (2007) on regulatory tools, I suggest that an IRA should have the decision-making competency; that is, the IRA should have the power to regulate, the capability to regulate, and the tools to regulate. Furthermore, transparency and public participation can be regarded as means to increase accountability. To summarize, I propose that an IRA should be an agency that enjoys significant independence, has adequate decision-making competency, and can be held accountable. Independence, decision-making competencies, and accountability, therefore, are the three assessing variables of the regulatory governance of China IRAs, and they have composed the assessment framework of this dissertation. Next I will elaborate these three variables one by one.

40

3.2.1 Independence As the key characteristic of an IRA, independence has two dimensions: independence from the government and independence from the regulated industry. Independence from the government represents the level of independence of the IRA from government authorities and from the legislature. As the IRAs are part of the state apparatus, even if they are granted formal institutional independence, political authorities can influence the regulators in numerous ways, e.g. by cutting their budgets or dismissing unpopular regulators (Larsen, Pedersen, Sorensen, and Olsen, 2005). Institutional devices to keep independence from the government include, but are not limited to: a. b. Regulatory authority authorized by law. The preference for Committee-in-charge system rather than Principal-in-charge system. Adopting Committee-in-charge system to maintain the independence of regulatory agencies has become the consensus of countries around the world. In Britain, for example, in early stage of privatization, the majority of regulatory agencies (such as the Offices of Telecommunications, Gas Supply, Electricity Regulation, and Water) have adopted Principal-in-charge system. In practice, such a system was widely criticized because of the lack of regulatory policy consistency brought about by different personal regulatory styles (Prosser, 1997). Then the Office of Gas and Electricity Market (Ofgem) of 2000, the Financial Supervisory Authority (FSA) of 2002, and the Office of Communications (Ofcom) of 2003 all adopted the Committee-in-charge system. A survey in 2005 shows that 41

more than two thirds of the 97 regulatory agencies (covering three areas: telecommunications, finance and energy regulation) in 30 member states have adopted the Committee-in-charge system, with financial regulatory agencies occupying the biggest proportion (Jacobzone, 2005). c. Irrevocable appointments of regulators for fixed terms of office, and should be removed only for good cause as defined in the law (that is, proven, nontrivial legal and ethical misbehavior or nonperformance of their duties); requiring of professionalism when appointing the regulator. d. Financial independence and management independence: organizations gain autonomy when they have maximum control of the input of resources on which they are dependent (Pfeffer and Salancik, 1978). A stable source of funding that are not subject to impounding or appropriation for other purposes, and the authority to control appointment, allocation, promotion, dismissal and salary policies in relation to the regulatory authoritys staff are important resources to keep IRA independent. e. Only court can overturn the IRAs decision where it has exclusive competency. Independence from the regulated industry is emphasized as the independence of an IRA might be affected in the following situations: the regulators independence might be compromised by the regulators private interest in the regulated industry, e.g. when the regulator holds stocks of the regulated industry. Or, the regulated parties may capture the regulators, e.g. by holding up the prospect of well-paid jobs if the regulators are sympathetic to the views of the industry. It is very common for the 42

regulators to be captured. For example, even in Britain, a news report in March 2008 revealed that the expenditure of IRAs in Britain soared over the past 5 years. In the same period, prices of water, electricity, gas and other utilities increased year after year and have contributed to the soaring inflation. British cabinet officials were concerned that these IRAs might have banded together with the regulated institutions and formed regulation interest groups. The National Consumer Association launched a formal investigation on these IRAs in early March 2008. The traditional institutional design to insulate influences from the regulated industry include special prerequisites for appointing IRA leaders, for example, the application of conflict-of-interest clauses. The appointed IRA leaders are not allowed to have stock shares of the regulated industries, and there are the quarantine provisions for agency heads or former board members of the regulatory agencies (Correa et al., 2006). In this dissertation, I suggest that, to insulate influences from the regulated industry to the regulators, we also need to take into consideration another situation; that is, the regulators may take the initiative, in order to benefit the regulated industry, to actively intervene in the operations of the regulated firms. This is a highly possible situation in the special context of China. Some regulatory agencies, for example, the CAAC, have been transitioned from an industry administrator in the planned economy time, to an independent regulator in the market economy time. In the planned economy time, government intervention to the enterprise is deemed as natural and necessary. Yest there are reasons to worry about the lagged effects of this role transition, that is, 43

the IRAs may still directly involve themselves in the running of the firms in the regulated industry. To summarize, independence from the regulated industry include the following two elements: a. Mechanisms such as conflict-of-interests clause to insulate influences from the regulated industry to the independent regulator. b. Mechanisms to prevent the IRA from engaging in unnecessary interventions in the normal business operation of the regulated industry.

3.2.2 Decision-making competencies Decision-making competencies include three dimensions: a. The IRA should have the necessary power to regulate.6 The literature has stressed the distinction between regulatory agencies that are truly regulatory and possess actual decision-making powers and agencies that are merely consultative (Larsen et al., 2005). This dissertation agrees that IRAs must hold some exclusive decision-making powers, e.g. the power to issue licenses, to lay down rules, to issue warnings and impose fines, to function as a board of complaints and settle disputes between the regulated parties, etc. b. The IRA should have the capability to regulate. This entails the need for qualified personnel. Qualified personnel reduce the risk of ineffective regulation (Smith 1997; Noll 2001). The existence of motivation mechanism such as payment

Correa et al. (2006) refer this as legal means.

44

motivation and achievement motivation will help maintain and attract talented staff. c. Information is the most valuable resource in the regulation process. The regulated firms, however, have little incentive to reveal what they know to the regulator (Guasch and Spiller, 1999). The industry may even manipulate the regulator due to the asymmetric access to information. Whether or not the IRA has effective information collecting and processing mechanism is directly related to its regulation effectiveness.

3.2.3 Accountability As the IRAs are delegated the power to regulate independently, a balance problem arises: independence must be effective so as to improve the credibility of the agency and increase the effectiveness of the regulated industries; however, IRAs should not be uncontrollable self-government organizations (Maggetti, 2006). IRAs need to be held accountable for their actions. Independence needs to be reconciled with checks and balances to ensure that the regulator is accountable for its actions. Otherwise, IRAs may stray from their mandate, engage in corruption, or simply become inefficient (Smith, 1997). Followed are some of the mechanisms to ensure IRA accountability: a. Oversight, performance reviews, and audits: IRAs should be subject to oversight and periodic performance reviews, and have audit obligations. b. Effective institutional arrangements for parties to appeal the regulators decision 45

when they believe their interests have been harmed by IRA decisions that have been made against the requirements in the law, either in terms of process or substance. Correa et al. (2006) suggest that appeals should normally be made on the grounds of procedure (not statutory or evidentiary grounds) and should involve only the IRA and the relevant judicial institutions (not the executive branch). c. Public participation and transparency. The entire regulatory process must be fair and impartial and open to public participation (Brown et al., 2006). Debates and open discussion involving all relevant parties are encouraged (Stern, 1997). The decision-making process should be transparent. The arrangements and agendas of meetings and hearings should be available to the public in advance. The IRAs should take the initiative to publish decisions and performance reviews, e.g. in the form of annual report. Also, the regulatory system should provide reasonable, although not absolute, certainty as to the principles and rules that will be followed within the overall regulatory framework. In sum, the three variables, independence, decision making competency, and accountability will be applied in the context of China and are used to assess the regulatory governance of China IRAs.

3.3

Identifying the main factors negatively affecting the independence, decision-making competency, and accountability of China IRAs Regulatory governance matters and is an important determinant of the

effectiveness of an IRA. To improve the understanding on China IRAs and their 46

effectiveness, we need to further identify those factors that are negatively affecting their regulatory governancespecifically, the independence, decision-making

competency, and accountability. In the context of this dissertation, these factors are also referred to as constraints on organizational effectiveness. In this section I will answer three questions: What are the sources of these constraints? What are the constraints that have been identified in previous research? And, what are the constraints on China IRAs?

3.3.1 Sources of constraints From a political economy perspective, Moe (1991) provides a valuable way to understand the sources of constraints on organizational effectiveness. Moe suggests the design of political organizations is not oriented toward effectiveness. The ineffectiveness of political organization derives from its design, which is the result of struggle and compromise among people who want to exercise public authority. Moe argues that, in terms of organizational effectiveness, there is an important difference between economic and political organization. Economic organizations are structures of mutual advantage. In a given world of voluntary exchange and guaranteed property rights, economic organizations are effective to the extent that they mitigate collective action problems and facilitate gains from trade. In contrast with economic organizations, the design of political organizations is not oriented toward effectiveness. Moe views the design of public organizations as the result of struggle among people with very different interests and who want to exercise public authority. The winners of 47

the struggle do care about effectiveness as they want organizational structures that endow their agencies with the capacity to do their mandated jobs and do them well. But as Moe points out, the winners must also saddle their agencies with protective structuresstructures that guard against political uncertainty (due to opposing social groups) and their fear of state (due to autonomy of public officials)and these structures, which they very willingly adopt, tend to hobble and undermine agency performance (1991: 126). In addition to all this, the winners must often compromise with the losers in the politics of structural choice if they are to get anything at alland the losers will inject structures fully intended to promote disability and failure. Moe concludes that from the standpoint of effective performance, political organizations are structural nightmares that seem to deny all principles of reasoned judgement (1991: 126). Moes theory of political organization explains the sources of ineffectiveness of political organizations. Constraints on the effectiveness of political organizations derive from organizational design, which is the result of struggle and compromise among people who want to exercise public authority. In theory, in the design of a political organization, the different aspects concerned, e.g. why set up this organization, what is the responsibility to authorize and the scope of jurisdiction, how to define its relationship with other institutions, what are the resources available, etc., all may involve struggle and compromise, and, all can be potential constraints on this organizations effectiveness. Next I will explore those constraints on regulatory agencies that have been discussed in previous research. 48

3.3.2 Constraints on IRAs that have been discussed in previous research A representative research on constraints on regulatory agencies is from CUTS (Consumer Unity & Trust Society) Centre for Competition, Investment & Economic Regulation (C-CIER). From a political economy perspective, and focusing on regulatory agencies in developing countries, C-CIERs research (2007; 2008) provide a comprehensive summary of the possible constraints on their effectiveness. These constraints include: a. Lack of political will: Political will to create a strong regulatory agency from the outset is crucial for future success, as a strong regulator will be able to balance the demands of various interest groups, among other challenges (C-CIER, 2007: 5). Unfortunately, in most developing countries, the politicians in power may try to further their interests by creating a weak regulatory institution over which they can continue to exert control. b. Lack of competitive neutrality: Competitive neutrality is about adopting policies which establish a level playing field in areas where public sector competes with the private sector. In practice, it is difficult to expect the regulator to ensure competitive neutrality in sectors where government or its agencies retain control or insist upon retaining control. Private sector investors would be put at a relative disadvantage, if not excluded from the industry, when they come to competing with the state-owned incumbents. 7 In addition, governments might be induced to engage in creating national champions. In such scenario, the regulator is even
7

Reverse competitive neutrality where private sector is in a relatively advantageous position as against public sector enterprises is also possible. The airline industry in India is a typical case of this kind (C-CIER, 2007).

49

vulnerable to political intervention and can hardly maintain a neutral position in industry regulation. c. The multiple roles of the regulatory agency: Developing countries are usually characterized by extensive government involvement in the economy. The government may rely on the regulatory agency to pursue socio-economic and political objectives which are in conflict with the regulators responsibility. In addition, a regulator may have to consider public interest in its decision making process. The inherent conflict between the objectives of economic efficiency and public interest often leads to situations of trade-off, which are politically quite sensitive. d. Competition for regulation jurisdiction: The boundaries between the roles of different government institutions, i.e. between the competition regulation agency and the sector regulatory agency, are often not well defined, which might lead to conflict. e. Interference from other government authorities: Intervention from the Ministries are the most frequent. The standard institutional arrangement is to leave the development of policy framework in the hands of Ministry, whilst implementation becomes the function of the regulatory agency. The relationship between Ministry and regulator should thus be mutually supportive, as the two are guided by a common vision. However, because of the socio-political-economy triggers, government departments have a tendency to intervene in operational aspects of regulation in the name of issuing policy directives (C-CIER, 2007: 13). 50

f. Regulatory capture: Industry regulators are susceptible to regulatory capture. Regulatory capture is most likely when staff remain in their positions for a long time and mingle with the same big business officials. g. Resource constraint: The resource constraint for regulatory agencies in developing countries entails a combination of a relatively small staff, lack of requisite technical skills and limited finances (C-CIER, 2008: 2). Together, these constraints place severe strains on the agencys ability to respond quickly and readily to issues presented to it. h. Capacity constraints: In many developing countries, regulation is still a new concept. Officials need to learn what the new regime means and what it takes to have a well functioning regulator. Recruitment of professional and technical staff is a particular challenge. i. Inadequate regulatory power and regulatory measure: In some countries, the law has not provided the regulator with powers to impose fines and the power to summon witnesses and call for submission of information. In such cases, regulator has to take the guilty firms to court before fines and other penalties are imposed. While this may appear to provide for due process and accountability, it is observed that this has an adverse effect by limiting speedy resolution and enforcement decision (C-CIER, 2007: 12). j. Ineffective political accountability: In general, regulatory bodies are required to submit their annual reports and/or audited accounts to the legislature. Legislative oversight over regulators performance, however, does not seem to be effective, as 51

annual reports submitted by regulator are not always discussed with any seriousness. Regulators actions are questioned only when there is an impending crisis or a serious debate in a country.

3.3.3 Identifying the constraints on China IRAs C-CIER provides a comprehensive summary of possible constraints on regulatory agencies in developing countries. But constraints faced by regulatory agencies in different countrieseven regulatory agencies in the same countryvary, as there are no two regulatory agencies that operate in the same political and economic environments. Then what are the constraints on China IRAs? Currently, systematic research in this area is deficient. Of the few work that has touched this area, Pearson makes significant contributions. Pearson (2005) gives an excellent analysis of the regulatory agencies in the strategic industries in China. She argues there are two important constraints on the emergence of truly independent regulators in China: the institutional context and the normative preferences of the leadership. Institutionally, the continued influence of ministries and comprehensive commissions, insufficient status, and the fragmentation of the regulatory mandate limit the effective authority of the regulators. Normatively, Chinas leadership insists on state control of key economic sectors and prefers orderly competition among a small number of dominant SOEs in the market. The end goal of this preference is to protect the party-states considerable financial and social interests in these key industries (1995: 298). In short, the states interest in 52

continuing to enhance its control over crucial assets significantly reduces the possibility of regulatory independence. Pearsons analysis points out the constraints on the independence of China IRAs under current political economic environment. This dissertation focuses not only on independence, but on decision-making competency and accountability. Through collecting first-hand data with insiders of China IRAswhich is absent in previous researchthis dissertation expects to have a more comprehensive and objective understanding of the constraints that China IRAs encounter in their practical operations. In addition, as there are variances in the political-institutional context in which the IRAs operate, naturally there will be variances in the constraints faced by different IRAs. Through this research, I also expect to have a better understanding on the difference in constraints encountered by different China IRAs.

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CHAPTER 4: METHODOLOGY

In this chapter, I discuss the methodology adopted in this dissertation to assess the regulatory governance and to identify the major constraints to China IRAs.

4.1 Research method: survey and interview Consider again the two objectives of this dissertation. Objective 1: To assess the governance state of China IRAs based on three key assessment variables: independence, decision-making competency, and accountability. Objective 2: To identify the major (legal, political, institutional and economic) factors that have negatively affected China IRAs when performing their regulatory responsibilities. The research method adopted in this dissertation includes a semi-structured survey and in-depth interviews. Questionnaire is used to assess the governance state (Objective 1), while interview is for achieving Objective 2. The in-depth interview was conducted after the survey.

4.2 Designing the questionnaire and the interview questions The questionnaire used in the survey was designed based on the assessment framework laid down in Chapter 3 and is organized around the three variables: independence, decision-making competency, and accountability. Each variable is 54

composed of a series of sub-variables, and each sub-variable is addressed by one or several questions (See Table 4.1). Appendix A clarifies the operationalization of these (sub)variables. There are a total 36 questions. Questions in the questionnaire have covered not only the formal (institutional design) aspects, but also involved the evaluation on the actual practices of China IRAs. Table 4.1: The composing variables and sub-variables of the questionnaire Variables Sub-variables The law Agency head Financial Interference from other government authorities Independence Note 1: The 4 sub-variables above reflect independence from the government. Influences from the regulated industry to the IRA Intervention of the IRA in the regulated industry Note 2: The 2 sub-variables above reflect independence from the regulated industry. Decision-making Competency Regulatory power and regulatory measures Human resources Information collection mechanism Formal Institutional mechanisms to hold IRA accountable Supervision from the media External auditing and performance review Norms of ethics Mechanism for regulated entities to challenge the IRA decision Public participation Transparency

Accountability

55

The interview questions were very direct. The interviewees were asked directly, from his/her perspective, what are the main factors that have affected the independence, decision-making competency, and accountability of the IRAs. Appendix B is a list of the interview questions.

4.3 Participants The surveyees and interviewees were the same group of people. Both the survey and interview were conducted with independent scholars, outside consultants to these IRAs (usually from the industry association), and senior officials from these China IRAs. The arrangement was as follows: each IRA was assessed by five respondents. Generally, of the five, there were two independent scholars who have done research on this IRA and the regulated industry of this IRA, one outside consultant to the IRA, and two senior officials from this IRA. Each surveyee was also interviewed. For those who completed a survey for more than one IRA, a general interviewthat is, an interview not focusing on one specific IRAwas conducted. Why did I include independent scholars, outside consultants to these IRAs, and senior officials as participants of this research? Most previous works assessing the governance of regulatory agencies are conducted through surveys with officials from the regulatory agencies. This, however, as Brown et al. (2006) suggest, has posed a possible problem: are the evaluations impartial? There are worries that these officials are not likely to produce candid assessments that would be detrimental to the 56

reputation of the regulatory agency. Consequently, Brown et al. suggest that it would be better for the survey to include respondents from outside the regulatory agency. In this dissertation, I took the suggestion from Brown et al and included independent scholars and outside consultants in the research. But I also included senior officials of the IRAs. Information from senior officials of the IRAs is highly valued as I believe they are the persons who know most well the inside of the IRAs. To minimize any possible partial attitudes or prejudice, I clarified with each respondent that this is not politically sensitive research. I also signed a paper with each of them, declaring that data collected from the questionnaires and interviews are for the use of this research only. How did I contact the respondents? For those independent scholars and outside consultants, I usually approached them with an email self-introduction and a brief introduction of the purpose of the research. I encountered almost no refusal as long as their time arrangement has no problem. The contact with senior officials in the IRAs was a little bit more difficult. In most cases, with the help of the independent scholars, outside consultants, my friends working inside the IRAs and in the media, I could get in touch with these IRA officials. Later some IRA officials who had agreed to take the survey and interview also offered a hand and referred me to other IRA officials. With efforts, I finally get all the survey and interview permissions needed. It is proved again that in China, to approach these senior level officials, introduction from friends, which usually is based on personal relationship, is a more reliable way than other methods, i.e. direct contact with the officials office. 57

A total of 22 persons were arranged/scheduled. Of these, there is one scholar who answered a survey for each of the six IRAs, one scholar who completed survey for each of the three financial IRAs, and one scholar who conducted the survey for both SERC and CAAC. A general interview was conducted with these three scholars. All together, in total I conducted 30 surveys (five for each IRA) and 22 interviews (see Appendix C for details).

4.4 The fieldwork Before the formal fieldwork, the questionnaire and interview questions were pretested with one official from SERC, one outside consultant to SERC, and two independent scholars. The pretest proved to be very helpful. It helped me to make the questions more precise and well targeted, and to take into consideration of many factors with Chinese characteristics. Revisions were made based on the feedback from the pretest. The formal fieldwork was conducted in November 2008. Most of the surveys and interviews were conducted in Beijing, with a few in Shanghai, China. In the formal fieldwork, I provided on site administration/assistance when conducting the survey. When the respondent was unclear about the question, or had any doubts, immediate assistance was offered. Survey with on site administration has obvious advantage. Most of the surveys conducted in previous governance assessment research are self-completed, that is, the questionnaires are mailed, faxed, or emailed to the regulators. Self-completed questionnaires can provide important information about 58

the formal structure of the regulatory system, however, as Brown et al. (2007) point out, they are of little or no value for evaluating the actual operation of the regulatory agency. In cases where the questionnaire is very long, e.g. more than 100 questions, it is unrealistic to expect people to spend several hours or even more to complete it with sincere devotion. In the interview, I recorded the interview when it was approved by the interviewees. However, few of them agreed to this. While this had caused some inconvenience, i.e. extra paperwork, it was expected that without recording, the interviewees could give more candid comments. Data collected through the fieldwork was complemented with information from public sources, including publications of the IRAs, IRA website, and news media.

4.5 Data analysis Data collected from the survey was used to compose a series of indexes, including three indexes related to each of the assessment variablesthe Independence Index, the Decision-making Competency Index, and the Accountability Indexand an index reflecting the overall governance state of these China IRAs: The Governance Index of China IRAs (see Chapter 5 for the calculation of these indexes). These indexes present the overall governance state of the six China IRAs and their performance in terms of each of the assessment variables. By constructing these indexes, it also becomes possible to compare among these IRAs. 59

Data analysis of the interview results was conducted in the following way. First, at the end of each interview, I summarized and reiterated the factors identified by the interviewee to ensure that I had the right interpretation. Second, all the factors that had been identified by different interviewees as main constraints to independence were grouped together, as were the factors affecting decision-making competency and accountability. The grouping process revealed that there was a high degree of consensus among the interviewees on the constraints to China IRAs. Finally I summarized these factors identified by the interviewees and presented them in the findings.

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CHAPTER 5: FINDINGS: THE GOVERNANCE STATE OF CHINA IRAS

In Section 5.1, this Chapter introduces the series of indexes adopted to measure the governance state of China IRAs and how they were calculated. Sections 5.2 through 5.4 analyze in detail the survey results on independence, decision-making competency, and accountability. Section 5.5 summarizes the findings from the survey and comments on the overall governance state of China IRAs.

5.1 The indexes The governance state of China IRAs is quantified and measured with a series of indexes, including three indexes related to each of the governance variablesthe Independence Index, the Decision-making Competency Index, and the Accountability Indexand an index reflecting the overall governance state of these China IRAs: The Governance Index of China IRAs. All the indexes are composed based on data collected from the survey. By constructing these indexes, it also becomes possible to draw comparisons among these IRAs. The calculation of the index is as follows. First, based on his/her judgement, the surveyee assigned a score to each of the 36 questions in the questionnaire. The score received ranges from 0 to 1 (the higher the score, the better the governance state). Each question received five scores as each IRA was assessed by five respondents. The final score for each question, then, was the average of these five scores (see Appendix D). Second, as each question has the same weight, for each IRA, the average score of 61

the twenty questions covering the variable of independence was the IRAs score on the Independence Index; the average score of the six questions covering the variable of decision-making competency was the IRAs score on the Decision-making Competency Index; the average score of the ten questions covering the variable of accountability was the IRAs score in Accountability Index. Third, for each IRA, the average score of the complete set of 36 questions was its final score on The Governance Index of China IRAs.

5.2 Independence Figure 5.1 is the Independence Index. Independence is a reflection of the two aspects of Independence from the government and Independence from the regulated industry. The scores of each IRA on these two aspects are listed in Table 5.1 (see next page). Figure 5.1: Independence Index
I ndependence I ndex 1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0 C C SR CR I C C C BR SER C C AAC SFD A

I ndependence I ndependence f r om t he gover nm ent I ndependence f r om t he r egul at ed i ndust r y

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Table 5.1: China IRAs scores on independence Independence CSRC CIRC CBRC SERC CAAC SFDA Average 0.67 0.68 0.73 0.65 0.54 0.57 0.64 Independence from the government 0.75 0.76 0.77 0.64 0.56 0.59 0.68 Independence from the regulated industry 0.50 0.49 0.66 0.68 0.49 0.51 0.56

From Figure 5.1 and Table 5.1 we see the independence index of China IRAs ranges from 0.54 to 0.73, with an average score of 0.64. With the exception of SERC, the scores other IRAs received in independence from the government are higher than independence from the regulated industry. Next I will analyze these two aspects respectively. 5.2.1 Independence from the government Independence from the government is composed of the following four sub-variables: the law, agency head, financial, and interference from other government authorities. The score each sub-variable received is listed in Table 5.2. Table 5.2: China IRAs scores on independence from the government Independence from the government CSRC CIRC CBRC SERC CAAC SFDA 0.75 0.76 0.77 0.64 0.56 0.59 Sub-variable The law 0.50 0.50 0.50 0.25 0 0.5 Agency Financial head 0.82 1 0.82 1 0.82 1 0.78 0.97 0.72 0.67 0.72 0.67 Interference from other government authorities 0.80 0.83 0.88 0.57 0.73 0.57 63

The analysis on each sub-variable is as follows: Sub-variable: the law As we can see, China IRAs score very low in the sub-variable of the law. In different from their foreign counterparts where the IRAs are established by law, in China the IRAs are established based on the San-ding Program of the State Council. San-ding means three fixes (Brodsgaard, 2002). San-ding Program specifies that except Ministries and Commissions, other institutions under the State Council can be established when their functions, internal organizational structure, and personnel arrangement have been stipulated (fixed) and approved by the State Council.

Law is passed by the National Peoples Congress (NPC, the Legislature in China), or decree from the State Council, usually after a few years of the IRAs establishment, to formally confirm the IRA the regulatory authority. After the laws are enacted, they can also be revised to adjust to the rapidly changing environment. By year 2008, the regulatory authorities of most of the IRAs had been formally authorized either by law or by decree. For example, in the case of CIRC, its regulatory authority was formally confirmed in the most recent revision (in 2008) to the 1995 The Insurance Law of the Peoples Republic of China. In this newly revised law, after being in place for 10 years, CIRC is specified for the first time as the regulatory authority of insurance industry. In the case of SERC, currently, the regulatory authority of SERC stems from the Ordinances on Electricity Regulation, which is a decree

64

approved by the State Council in year 2005.8 The only exception is CAAC. The regulatory authority of CAAC is expected to be specified in the coming 2009 revision to the 1996 Civil Aviation Law of the Peoples Republic of China. The 1996 law is criticized for lagging far behind the time.9 The following Table 5.3 is a summary of the IRAs and the laws. Table 5.3: China IRAs and the laws IRA and the year established CSRC, 1998 Regulatory authority formally confirmed 1998 law

Law/Decree and the year enacted The Securities Law of the Peoples Republic of China, 1998 The Insurance Law of the Peoples Republic of China, 1995 Banking Supervision Law of the Peoples Republic of China, 2004 Ordinance on Electricity Regulation, 2005 Civil Aviation Law of the Peoples Republic of China, 1996 Drug Administration Law of the Peoples Republic of China, 2001

Notes Revised in 2005 by the National Peoples Congress Revised respectively in 2002 and 2008 by the National Peoples Congress

CIRC, 1998

2008 revision

CBRC, 2003

2004 law Enacted in 2005 with the approval of the State Council Revision expected in 2009

SERC, 2002

2005 decree

CAAC, 2002

2009 revision

SFDA, 1998

2001 law

But the ultimate objective of SERC is to have its regulatory authority confirmed through the revision of the 1995 Electricity Law. While the revision of the 1995 Electricity Law has been on the agenda for a few years, the progress by this time is not optimistic yet. For example, as one respondent of this research commented, the 1996 law was produced in the time when there was no separation between the government and state-owned enterprises in civil aviation. Now this law no longer conforms to the market economy.

65

The way of establishing IRAs through San-ding Program has been criticized by Chinese scholars as lacking sufficient legal basis, as San-ding Program in essence is only an internal document of the State Council (Huang, 2006; Zhou, 2007). Since it is not a law, it lacks the power to establish the IRAs and to authorize them as the regulatory authority. While laws/decrees have been passed later to formally confirm the IRA regulatory authority, prior to the adoption of the law, the IRAs are actually operating without legal references. In the interview, lack of legal basis and the lagging legislation are further identified as major obstacles to the independence of China IRAs. I will return to this in more detail in the section of Factors affecting the independence of China IRAs in Chapter 6. Sub-variable: agency head On the managing type of the agency, in name the three financial IRAs and SERC are implementing the Committee-in-charge system, and CAAC and SFDA are implementing the Principal-in-charge system. However, as one of the respondents commented, in China the Committee-in-charge system only has the name, but does not entail any real meaning. In essence, all the three financial IRAs and SERC are still adopting Principal-in-charge system.10 For agency head, it is the State Council that has the authority to appoint and dismiss. No approval from the National Peoples Congress is needed on the appointment and dismissal of the heads of the IRAs. For all the IRAs, the head is appointed for a fixed five-year term and can be re-appointed.
10

The only exception is the Share Insurance Review Committee (SIRC) under CSRC. SIRC under CSRC is considered as adopting the Committee-in-charge system. But for CSRC as a whole, it is still implementing the Principal-in-charge system.

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In name agency head can be dismissed only for misconducts, breaching the duty or committing a crime. In reality, agency head who promotes industry policies that are not consented by higher level authority might be transferred away from his/her position. For instance, in December 2007 Li, Jiaxiang replaced Yang, Yuanyuan as the Director General of CAAC. Yang was transferred to the position of Vice Director General of State Administration of Work Safety. This relocating of Yang was reckoned as a demotion in nature. Li and Yang held different perspectives on the development of Chinas civil aviation industry. Yang promoted competition. When in office, Yang lowered the threshold for both foreign and domestic investment in aviation industry. In different from Yang, Li believed the opening up of Chinas civil aviation market was a bit premature. In a speech in 2006, Li said that the major airline companies in China are unable to compete with the international competitors at this time. Inappropriate opening up of the market will only crush Chinas airlines. Lis appointment reflected the consent from the higher level authority on his industry development policy. Generally, technical background (professionalism) is required for the appointment. But there is exception. In the case of SERC, this technical requirement yielded to the requirement for regulatory competence and capabilities, and, to the consideration of strengthening the institutions position in the bureaucratic system. When naming the first chairman of SERC in year 2002, the consideration at that time was the candidate must be neutral and is independent from the interests of the powerful electric sector stakeholders. Whether or not he is an expert of the electric sector is not most important, rather, he must be an exponent of modern regulation, 67

said a respondent. The final appointment of Chai, Songyue reflected this point. Chai was the governor of Zhejiang province before his appointment. Chais successor, You, Quan, was transferred from the position of Vice Secretary of the State Council to assume as the second Chairman of SERC. Yous appointment was regarded as a way to strengthen the power of SERC, as You was transferred from such a powerful position. Yous successor, Wang, Xudong, was appointed for his strong background in regulation. Before his assuming as SERC Chairman, Wang was a vice Minister of Ministry of Industry and Information Technology (MIIT). When in MIIT, Wang was highly commended for his achievements in regulating the telecommunications industry. The three financial IRAs and SERC all have the power to determine their internal organizational structure and make personnel appointments. Feedback from respondents on CAAC and SFDA indicated that after being relocated from Organizations directly under the State Council to Institutions under the supervision of the Ministries11 in the government institution reform of 2008, the power CAAC and SFDA enjoyed previously over their internal issues might be affected by the Ministries. However, as there is only half year since this institutional restructuring, it still takes time to observe the way and the extent of the possible influences. Sub-variable: financial The three financial IRAs and SERC are financed through leviescalled regulation fees in Chinafrom the regulated industry. None of these IRAs started
11

Respectively, CAAC under the supervision of Ministry of Transport and SFDA under the supervision of Ministry of Health.

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collecting regulation fees from the date they were founded, e.g. SERC did not start until 2004. Before that, these IRAs were funded through government budget. Setting the criteria of fee collection is a negotiation process between the IRA and two other government departments: the Ministry of Finance (MOF) and the National Development and Reform Commission (NDRC). The usual process is, the IRA files an official document with MOF and NDRC, proposing the fee level intended to collect. MOF and NDRC review the application and grant approval once they deem it is in line with rules and regulations. Criteria could be reset every three years, which also subject to approvals by MOF and NDRC. In early 2008 CBRC adjusted (lowered) fees charged on the regulated banks, based on the fact that fees collected earlier were too high and had exerted substantial burden on the regulated sector. Out of the same consideration, in January 2006 CIRC lowered the regulation fees charged on insurance companies. In principle, the regulation fees collected should be transferred first to the Ministry of Finance. Then based on their budgets, the MOF will allocate the fees back to the IRAs. While the IRAs cannot spend the regulation fees at their will, generally, the respondents agree the current financial support to the operation of the IRAs is stable and supportive. CAAC and SFDA are different from the three financial IRAs and SERC in that they are financed 100% through government budget. Compared with funding by collecting regulation fees, government budget is considered as a less stable source of funding as budget control might be exerted by the government as a way to intervene in 69

the IRA, and therefore negatively affect its independence. But the survey of this research revealed that budget control was not considered by the respondents as a problem. Both CAAC and SFDAs budgets increased in each of the past three years. There are still motives for China IRAs to increase their budgets or the level of regulation fee collection so that they can retain and attract talented staff (see the following analysis on the sub-variable of human resources). But on independence, the current financing mechanism has not been regarded by the respondents as a negative factor affecting the independence of China IRAs. Sub-variable: interference from other government authorities While in name all the IRAs are the sole regulatory authority over their respective regulated industries, in practice, in Chinas political and economic environment, interference from other government authorities on the practices of the IRAs are inevitable. The respondents identified the following sources of possible interference: the State Council, the central bank, the Ministries, the newly established anti-monopoly agencies, the local government, and the Communist Party. At the same time, the practices of the IRAs also heavily rely on cooperation from other government authoritiesmainly from the two comprehensive commissions: the National Development and Reform Commission (NDRC) and the State-owned Assets Supervision and Administration Commission (SASAC). The cooperation reliance stems from the diffusion of the regulation responsibility and is a kind of regulation power sharing. But such power sharing is not out of checks and balances of power but rather is essentially a competition for the regulatory authority. Therefore, 70

from the IRAs point of view, such cooperation is against their own will and is an infringement to the regulatory authority which should completely belong to them. Hence it could also be interpreted as another form of interference to the IRAs regulation. In the interviews, the over-reliance on cooperation from other departments to exercise regulation and the interference from other governmental authorities are also identified as important impediments to the independence of China IRAs. I will have more detailed discussion on this in the section of Factors affecting the independence of China IRAs in Chapter 6. 5.2.2 Independence from the regulated industry Independence from the regulated industry can be further decomposed to two sub-variables: influences from the regulated industry to the IRA and intervention of the IRA in the regulated industry (see Table 5.4). As we can see, SFDA scores only 0.38 in Influences from the regulated industry to the IRA while CIRC and CAAC score even lower (0.13 only) in Intervention of the IRA in the regulated industry. Table 5.4: China IRAs scores on independence from the regulated industry Independence from the regulated industry CSRC CIRC CBRC SERC CAAC SFDA 0.50 0.49 0.66 0.68 0.49 0.51 Sub-variable Influences from the regulated industry to the IRA 0.50 0.68 0.68 0.69 0.68 0.38 Intervention of the IRA in the regulated industry 0.50 0.13 0.63 0.68 0.13 0.78 71

Sub-variable: influences from the regulated industry to the IRA When in office, none of the IRAs allow their officials to hold a position in the regulated industry. But the movement of personnel between the IRA and the regulated industry is very common. To a certain extent, this movement can reflect the relationship between them. We need to differentiate the personnel flow among senior officials from that of middle and low level officials. For senior officials, the two-way flow (the revolving door) between the IRA and the regulated industry prevails: senior officials may move from the IRAs to the state-owned enterprises (SOEs) in the regulated industry, or from the regulated SOEs back to the IRAs. Inter-agency and cross-industry mobility are also common (see Table 5.5 in next page). But unlike that in the West, in China, this movement of high-level officials is not determined by individual wish. Rather, every single transfer is out of government appointment and is a change of his/her political status, either promotion, parallel transfer, or demotion in the bureaucratic system.12 The respondents agreed that, because of the existence of the revolving door, influences from the regulated industry are inevitable, which have undermined the independence of regulation and posed an image of a cozy regulator-regulated relationship.

12

In China, the top management positions of the most important SOEs (in China, they are called SOEs of the central government; in total, there are about 169 such SOEs), like those high-level posts in the government, are appointed by the State Council as well. It can be said that working in these SOEs is another way of serving in the government.

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Table 5.5: The revolving door in China In 2002, Liu, Mingkang was appointed as the Chairman of the newly founded CBRC. Before that, Liu was the President of Bank of China, one of the four major State-owned commercial banks. In June 2007, Vice Chairman of CBRC Tang, Shuangning began to serve as Chairman of China Everbright Bank. In 1997, President of Agricultural Bank of China (ABC) Yang, Mingsheng was transferred to the CIRC to serve as Vice Chairman. ABC is one of the four major State-owned commercial banks. In 2005, Vice Chairman Li, Kemu of CIRC began to serve as the General Manager in China Reinsurance Group. In the end of 2007, Li, Jiaxiang was appointed Director General of the CAAC. Before that, Li was the Chairman of Air China. Air China is a state-owned airline and is one of the three major airlines in China.

CBRC

CIRC

CAAC

High-level officials in the regulatory agency also might be captured by the regulated firms and work in their interests. In the past few years, very serious corruption cases have occurred in SERC and SFDA. In early 2008, Wang, Yi, the former Vice Chairman of CSRC, was arrested. From 1995 to 1999, Wang was in charge of issuing shares, overseeing funds, and other important regulatory responsibilities in CSRC. After that he was transferred to serve as Vice President of China Development Bank. Wang was arrested because he used his connection with CSRC to arrange for some unqualified companies to be listed in the Chinese stock market. The corruption case in the SFDA is even more astonishing. In 2007, Zheng, Xiaoyu, who has been the Director General ever since the establishment of SFDA in 1998, was sentenced to death with the accusation of taking bribes and dereliction of duty. Zheng was accused of taking bribes up to RMB6.49 million from pharmaceutical 73

companies in exchange for drug and medical appliance licenses.13 Together with Zheng, at least five senior officials in SFDA were dismissed and prosecuted for criminal liability. While the flow of high-level officials between the IRAs and the regulated industries are of government appointments, for the majority of mid-level officials and general staff, such flow is just a free personal choice. This flow is basically one-way; that is, from the IRA to the regulated industry. Currently, there is no conflict-of-interest clause (e.g. quarantine period) applied to officials leaving the IRAs. When the regulated industry is hot, regulators may choose to join the business world. For example, since 2006 as the securities market is so hot, a considerable number of mid-level officials of CSRC chose to join the fund companies or securities companies. Many top positions in these financial institutions are occupied by people previously serving in CSRC or its subsidiaries. They are popular because of their good connections with CSRC and their capability to better grasp the governments intention and obtain sensitive information at earlier time (Sina Finance News, 2008). Sub-variable: intervention of the IRA in the regulated industry Of the IRAs, CSRC, CIRC, and CAAC score very low in Intervention of the IRA in the regulated industry. In this part I will go into more details on the situation of CSRC and CAAC.

13

According to the pharmaceutical companies, there is a difference between current and long-term bribes. Current refers to cash or shopping cards. By long-term it means the company invites the officials family members or relatives to hold shares in the company.

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As the most powerful organization in the securities market, CSRC has long been criticized for its overcharged regulatory responsibility. For example, a report14 released by ShenZhen Stock Exchange pointed out that the expansion of regulatory content and regulator power of CSRC has gone beyond the scope and level that a regulator should have possessed. This not only fails to fix possible flaws of the market, but prevents the market from bringing its normal functions into full play (2008: 34). One of the most important criticisms of CSRC is on its power of share issuance auditing. Unlike other countries, in China it is the Share Issuance Review Committee under CSRC, not the Stock Exchange, that determines which company is to be listed in the stock market. This has led to three results. First, reviewing and determining who can be listed deviates from CSRCs role as an independent regulatory agency, and directly involves this IRA in the market. Second, the opportunity to be listed has become China's scarcest resource. Only those who have a special relationship with the government can obtain such an opportunity. Those who dont would have to buy such relationship, hence giving rise to corruption. The corruption case of Wang, Yi mentioned previously is a typical one of this kind. Third, the Stock Exchanges that lack this review and audit power feel very constrained. With further opening up of Chinas stock market, Chinas Stock Exchanges are facing fierce global competition as foreign Stock Exchanges are striving to attract quality Chinese firms to be listed. To compete with their foreign competitors, Chinese Stock Exchanges are eager to have the power of stock issuance review and audit in hand.

14

Report on the Violation of Laws and Regulations in the Main-board Stock Market in 2007

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In addition, currently, the two Chinese Stock Exchanges (the Shanghai Stock Exchange and the Shenzhen Stock Exchange) and the Futures Exchanges are all institutions directly under the management of CSRC. Although these institutions are not-for-profit, they are still stakeholders of the securities market and should be the regulated entity of CSRC. Placing these Exchanges directly under CSRCs management has actually undermined the neutrality of CSRC. The other IRA that is deemed to have possessed too much power and intervened too much in the industry is the CAAC. CAAC is described as the mother-in-law15 of Chinas civil aviation industry. In China, CAACs regulation has covered almost every aspect of an airline, e.g. from company set-up to the purchase of airplanes,16 from the opening of routes to merges and acquisitions in the industry, all need the approval from CAAC. Before October 2008, under the name of preventing vicious competition, CAAC was even responsible for setting the commission fee level the airline companies can pay to airticket agents. The private airlines expect that CAAC can redefine its regulatory responsibilities, said an outside consultant, regulation on the industry is necessary, but could CAAC leave more room to the airlines? With so many regulations and restrictions, how can the airlines run independently? Let alone to compete with international rivals.

15

Mother-in-law, or popo in Chinese, is often portrayed in Chinese drama and stories as someone in the family that is over-bearing and very demanding, especially to the daughter-in-law. In 2007, CAAC even stipulated that before 2010, private airlines cannot own more than ten airplanes.

16

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The active involvement of the IRA on the regulated industry is also partly decided/influenced by the industry policy of this country. Currently in China, finance, electric power and civil aviation all are defined as strategically important industries that are considered as vital to national well-being and the peoples livelihood, and hence the state owned capital must be in the controlling position. In the interview, the state monopoly required by the state industry policy is identified as one of the main factors that have influenced the independence of the IRAs. I will come back to this in Chapter 6 in the section of Factors affecting the independence of China IRAs. To summarize, on Independence, the survey reveals that: a. While much progress has been made, i.e., in terms of financial support, the average score of China IRAs in independence is not high. The establishment of the IRAs based on San-ding Program has been challenged for lacking legal basis, which has seriously affected its independence from the government. The

principal-in-charge system is prevailing; agency heads might be relocated for holding a different industry policy with the higher level authority. Besides, when conducting some of their responsibilities, the IRAs have to over-rely on the cooperation from other government authorities. Interference from other government authorities on the IRAs, i.e. by removing the head of the IRA, is also common. b. The IRAs have not kept enough independence from the regulated industry either. Because of the existence of a revolving door, influences from the regulated industry to the IRA are inevitable. Accusations of IRA officials being captured 77

and pursuing illegal benefits for the regulated firms have occurred from time to time. But a more predominant characteristic of China IRAs, represented by CSRC, CIRC, and CAAC, is their active intervention in the regulated industry. To some extent, these IRAs are still like the administrative department in the planned economy time.

5.3

Decision-making Competency Figure 5.2 is the Decision-making Competency Index and Table 5.6 (see

next page) is a decomposing of the variable of decision-making competency to the sub-variables of regulatory power and regulatory measures, human resources, and information collection mechanism. Figure 5.2: Decision-making Competency Index
D si on- m ng C pet ency I ndex eci aki om 1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0

0. 73

0. 78

0. 81 0. 68 0. 73 0. 55

C C SR

CR I C

C C BR

SER C

C AAC

SFD A

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Table 5.6: China IRAs scores on decision-making competency Sub-variable Decision-making Competency CSRC CIRC CBRC SERC CAAC SFDA Average 0.73 0.78 0.81 0.68 0.73 0.55 0.71 Regulatory power and regulatory measures 0.95 0.95 0.95 0.85 0.90 0.90 Human resources 0.60 0.67 0.67 0.58 0.60 0.35 Information collection mechanism 0.70 0.80 0.95 0.65 0.75 0.45

All China IRAs score pretty high on the sub-variable of regulatory power and regulatory measures, and relatively low in human resources. SFDA scores very low (0.45 only) also on information collection mechanism. Sub-variable: regulatory power and regulatory measures In China, none of the IRAs has advisory power only. The laws have authorized them rule-making power, licensing power, and supervisory power. Take the examples of CBRC and SERC, part of the powers possessed by these two IRAs have been listed in Table 5.7 (see next page). Considering the characteristics of the financial industry, the three financial IRAs have also been authorized quasi-judicial power. But these IRAs did not possess this quasi-judicial power from the very beginning of their setup. CSRC and CBRC obtained such power by an amendment of the Securities Law and Banking Regulation Law in 2005 and 2006 respectively, and CIRC only obtained this power in 2008 through an amendment of the Insurance Law. 79

Table 5.7: Regulatory power possessed by China IRAs: the example of CBRC and SERC Rule-making power In accordance with laws and administrative rules, draw up and publish rules of regulation on the business activities of Chinas banking institutions. Licensing power Without approval from CBRC, no institution or individual should be allowed to set up financial institutions in the banking industry, nor to carry out financial business activities that only banking institutions are allowed. Supervisory power CBRC can carry out off-site supervision on banking financial institutions business activities and risk conditions, and conduct on-site inspections. CBRC undertakes qualification management on directors and senior management staff of the banking financial institutions. To supervise power generation enterprises market share in every district of the electricity market in China. To supervise the access to the grids, ensuring an open and fair electricity transmission market. To supervise power supply quality and their services to the final users. To be in charge of the supervision of power generation safety. To supervise electricity price together with the State Councils price management department.

CBRC

SERC

In accordance with laws and administrative rules, draw up and publish rules and regulations to regulate the electricity industry.

To issue or revoke electricity business license in accordance with laws and regulations.

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The regulatory measures available to the IRAs are different. The universal regulatory measures possessed by all the IRAs include information disclosure, on-site inspection, and off-site supervision. On activities violating regulatory rules, the IRAs can grant administrative penalties according to relevant administrative penalty rules. Administrative penalties refer to sanctions by the state administrative institutions on activities violating administrative regulations. Regulatory agencies began to promulgate their own administrative penalty rules and measures from 2004. For example, Measures on Administrative Penalty by China Banking Regulatory Commission took effective on February 1, 2005; Provisions on Administrative Penalty Procedures by Electricity Regulatory Agency took effective on April 1, 2006; and Provisions on Administrative Penalty by China Insurance Regulatory Commission came into effect in 2006. Administrative penalties include warnings, fines, confiscation of illegal income and proceeds, shutdown and reorganization, license revocation, and cancellation of directors and senior management professional qualifications, etc. However, in practice, even with law authorization, the legitimacy of the three financial IRAs and SERC in their exercising of the rule-making, licensing and supervision power and the possession of quasi-judicial power have been seriously questioned. This is because these four IRAs are designated as shiye danwei (public service unit); while in China, according to the Constitution and the Legislation Law, shiye danwei are not the government authorities that can possess the aforementioned power. Legal conflicts and contradictions reveal the embarrassment of designating the 81

IRAs as shiye danwei, which, in the interviews, was further identified as one of the most important factors affecting the decision making-making competency of China IRAs. I will return to this with more details in Chapter 6, in the section of Factors affecting the decision-making competency of China IRAs. Sub-variable: human resources Human resource management is a challenging issue for China IRAs. On one hand, serving in any of the regulatory agencies is deemed as a very attractive career choice. On the other hand the regulatory agencies are suffering from talent flight, especially the loss of the experienced middle-level officials. This problem is particularly obvious for the three financial IRAs. CSRC, CBRC and CIRC can easily recruit excellent young professionals for further fostering. But many of them regard their work experiences in these IRAs as gilded springboard to get higher paid jobs in the regulated financial institutions in the future. The income gap with firms in the regulated industries is the most direct reason that leads to talent flight. Although compared with Civil Servants in the traditional governmental departments, staff of the financial regulatory agencies are receiving higher and more flexible compensations and wages, yet they are still lagging behind compared with staff in financial institutions. Consequently, when opportunities arise, they may choose to leave. To overturn this situation of being unable to retain valued personnel, financial regulators hope to raise their wages to a level competitive to the financial institutions. In a report to the Ministry of Finance in 2008, CSRC said that in recent years, the 82

income level of the Commission staff has not increased, and we are experiencing serious personnel loss. We hope the personnel income criteria could be adjusted. CBRC and CIRC have expressed similar wishes to raise salary to a level competitive to that of financial institutions in the market. Feedback from the survey suggests that the absence of effective motivation mechanisms in the IRAs has also led to talent flight. Neither payment nor an achievement motivation mechanism is in place. Besides, all IRAs are typical bureaucratic systems with a clear hierarchical ranking in the personnel. The working environment inside is not considered friendly. Sub-variable: information collection mechanism Compared to SERC, CAAC, and SFDA, the three financial IRAs receive relatively higher scores in the construction of information collection mechanism. In recent years, the financial regulatory bodies have published a series of rules about information disclosure of the regulated firms. The Measures on Information Disclosure for Listed Companies by CSRC, Measures on Information Disclosure for Commercial Banks by CBRC, and the Measures on Information Disclosure for Insurance Companies by CIRC all started to take effect in 2006. Respondents also believed the authenticity of information disclosed had been effectively improved in recent years. Apart from the requirements of information disclosure, financial IRAs have also established some information collection mechanisms, i.e. the Green Passage system of CBRC. The Green Passage requires that the internal audit department of 83

the banks should report to the board of directors when serious problems are identified. If the problems could not be seriously investigated and dealt with, the audit department should report directly to CBRC on relevant issues. This system enables CBRC to have in-time grasp of potential operational risks of financial institutions. Besides, CBRC is also building a large-scale Supervision Information System for Banking Financial Institutions of China Banking Industry. Through this system, CBRC hopes to improve its information processing capability and to provide effective information support for regulatory decision-making. The interviewees also indicated that, in practice, timely and effective access to information from the regulated firms to a large extent depends on the traditional strength comparison between the IRA and the regulated industry. Among the IRAs, CAAC is considered as a strong regulator, while SERC is regarded as a weak regulator. The electric power industry in China is often described as the Power Tiger and has traditionally enjoyed the most support and protection from the state and hence been very powerful. In the first few years after its establishment, SERC often encountered delays or even refusal when asking power companies to submit data or disclose information. Such a situation has not completely changed so far. To summarize, on Decision-making competency, this dissertation reveals: a. Among the three assessment variables, China IRAs perform best in decision-making competency. These IRAs are vested with substantive power, including the supervisory power, licensing power, and rule-making power. The three financial regulators have also obtained quasi-judicial power. All the IRAs can 84

exercise administrative penalties on the regulated targets for violating rules or regulations. These penalties have very strong binding effects on the regulated institutions, and usually can be effectively executed. But the designation of the three financial IRAs and SERC as shiye danwei (public service unit) has put them in an embarrassing position, as according to the Constitution and the Legislation Law, these quasi-legislative and quasi-judicial power should not be vested to institutions designated as shiye danwei. The potential legal conflict has undermined the IRAs regulatory authority. b. The existing income gap between the IRAs and the regulated industries, and the lack of effective motivation mechanisms, have posed the risk of talent flight for the IRAs. c. China IRAs, especially the three financial IRAs, have made much progress in recent years in the construction of information collection mechanisms. The effectiveness of these mechanisms is heavily influenced by the strength comparison between the IRA and the regulated industry.

5.4 Accountability Figure 5.3 is the Accountability Index and Table 5.8 is a decomposing of the variable of accountability to the sub-variables of formal institutional mechanism to hold IRA accountable, supervision from the media, external auditing and performance review, norms of ethics, mechanism to challenge IRA decision, public participation, and transparency. 85

Figure 5.3: Accountability Index

A ccount abi l i t y I ndex 1 9 8 7 6 5 4 3 2 1 0

0. 0. 0. 0. 0. 0. 0. 0. 0.

0. 72

0. 76 0. 68

0. 73 0. 57 0. 58

C R S C

CR I C

C R B C

S R E C

C A A C

S A FD

Table 5.8: China IRAs scores on accountability Sub-variable Accoun -tability Formal institutional mechanism to hold IRA accountable 0.40 0.40 0.50 0.40 0.75 0.75 Supervision from the media 0.75 0.75 0.75 1 0.75 0.65 External Norms auditing & of performance ethics review 0.45 0.45 0.45 0.45 0.25 0.25 0.75 0.50 0.90 0.50 0.50 0.50 Mechanism to challenge IRA decision 1 1 1 1 1 1 Transp Public participation -arency 0.50 0.30 0.50 0.55 0.30 0.50 0.97 0.97 1 0.97 0.63 0.63

CSRC CIRC CBRC SERC CAAC SFDA Average 86

0.72 0.68 0.76 0.73 0.57 0.58 0.67

Compared to the three financial IRAs and SERC, CAAC and SFDA perform poorly in accountability. Table 5.8 reveals all the IRAs score low in external auditing and performance review and in public participation. In addition, the three financial IRAs and SERC score low in formal mechanism to hold IRA accountable but receive a high score in transparency. Sub-variable: formal institutional mechanism available to hold the IRA accountable Who should regulate the regulators? By referring to the laws, I found that the Securities Law and Insurance Law do not clearly stipulate the institution overseeing CSRC and CIRC; the Banking Supervision Law specifies that the auditing and supervision organs of the State Council shall, in pursuance of the law, supervise the activities of the Banking Regulatory Institution; and SERC shall accept supervision from the treasury, audit, and supervision organs under the State Council. Oversight of CAAC and SFDA also come from the supervision and audit agencies. In China, the National Peoples Congress, the highest authority of China, does not play a supervisory role on the IRAs. Under the existing system, except the top leadership, supervision on the IRAs comes mainly from the Ministry of Supervision and the National Audit Office, one respondent confirmed. But in practice, the audit by the National Audit Office is limited to financial balance and budget implementation check; the supervision from the Ministry of Supervision is relatively weak as both this Ministry and these IRAs are institutions under the State Council and their

87

administrative ranks are the same. Currently, then, an effective formal institutional mechanism to hold the IRAs accountable is absent. Sub-variable: supervision from the media Most respondents acknowledged the positive role the media plays in supervising the regulators. As one said, The media has maintained its independence. The medias questioning and challenging have become an important and effective binding force over the regulators. It is because of close media tracking and reporting that a series of corruption cases have been finally exposed to the public. The media usually stands in the consumers position to challenge the nonfeasance of the IRAs on the regulated firms infringement on consumers rights and interests. The media may also be the propellant of industry reform. For example, former Chairman of SERC, You, Quan, once gave high credit to the media for their attention on SERC and electricity market reform. He said that the medias discussion about SERCs regulatory duties and focus on electricity reform had provided favorable conditions for the reform. Sub-variable: external auditing & performance review The National Audit Office conducts routine annual audit on all the Ministries and Commissions under the State Council, including the IRAs. A corresponding audit report will be issued based on the findings of the audit. But as mentioned in the analysis on the sub-variable of formal institutional mechanism available to hold the IRA accountable, the audit focuses only on the annual financial revenues and expenditures and budget execution. The most recent audit report, released in 88

September 2008, revealed that in year 2007, there were more or less problems in these IRAs in budget execution.17 Responses from the IRAs, for example, from the CSRC, admitted that the audit was objective, impartial, independent and serious, and it would make relevant rectification according to the report. Currently, while the three financial IRAs and SERC have done some internal performance reviews on their own, no external assessment based on cost-benefit analysis on the performance of the IRAs has been conducted. Sub-variable: norms of ethics CSRC and CBRC have written norms of ethics. The China Securities Regulatory Commission Staff Code of Conduct and China Banking Regulatory Commission Staff Code of Conduct took effect respectively in 2000 and 2004. The other IRAs have not issued similar codes as of yet. The responses from the surveys on the effectiveness of the codes of conduct are close to neutral. As one respondent said, It is very hard to say it is effective or not. Anyway, I think it is always better to have it than without it. While not every IRA has a written code of conduct, the punishment to IRA staff for improper behaviors, e.g. violating regulation procedures or abusing the regulatory power, has been clearly stipulated in all the regulatory laws. Any regulatory

17

Problems revealed concentrated in three areas: personnel expenditures that exceeded the budget, the expanding scope of expenditures, and depositing funds out of balance sheet.

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staff who violates laws or regulations will be subject to administrative penalty and criminal responsibility.18 Sub-variable: mechanism for regulated entities to challenge the IRA decisions In all the regulated industries, the regulated entity can challenge the IRAs administrative penalty decisions by applying for administrative review, which should be filed within 60 days of receiving the written administrative penalty decision. An applicant who disagrees with the decision of the administrative review may institute a proceeding to the Peoples Court or apply to the State Council for a ruling within 15 days of receiving the written review decision. Before the decision of the regulatory agency is made, under certain circumstances (usually meeting certain requirements), the regulated entity may request a hearing. For instance, the Provisions on Administrative Penalty Procedures of SERC specifies that the regulated parties should be informed the right to hold a hearing before the administrative penalty committee makes penalty decision of revoking business license of electricity firms, imposing a fine of more than RMB 5,000 on an individual, or imposing a fine of more than RMB 500,000 on enterprises engaged in electricity business. The electricity regulatory institution (SERC) shall organize the hearings when the regulated parties make such requests.
18

For example, in the case of CBRC, the situations in which the regulator will be given an administrative sanction, even subject to criminal liabilities include: (1) Violating relevant requirements in reviewing and approving the establishment, modifications, termination, and change of operation scope of the banking financial institutions; (2) Violating relevant requirements in conducting on-site inspections on the banking financial institutions; (3) Violating relevant requirements in making inquiries on bank accounts or funds freezing; (4) Violating relevant requirements in taking measures against/punishing the banking financial institutions. In addition, in cases involving embezzlement, taking bribes, divulging state secrets, commercial secrets or personal privacy, the person involved will also be subject to administrative sanction, even criminal liabilities.

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Sub-variable: public participation No public hearings have been held in the past three years on the following fee collection cases, even though all of them have aroused great public attention because they involve the interests of the public: CIRCs introduction of compulsory transportation insurance fee; the acquiescence of CBRC to commercial banks charging of service fee over inter-bank inquiry; and the bunker surcharge collected by CAAC. SERC scores relatively high in public participation. On more than one occasion, SERC officials said that public hearings would be held if the resident retail electricity prices were to be adjusted. Even if a public hearing is convened, the effectiveness of the public hearing itself is questioned. In the case of CIRC, it did not convene any public hearings or provide any information to the public before it introduced in June 2006 the Compulsory Transportation Insurance Fee (CTIF). All car owners in China have to pay this fee annually. Facing strong challenges on the premium rate of this insurance, in December 2007, CIRC decided to hold a public hearing. This made those who had strongly criticized this insurance feel exhilarated. We think this shows the good will of the regulatory agency to take public opinions into consideration, said a lawyer in a TV interview, who was a strong opponent to this CTIF. But the hearing finally turned out to be merely a perfunctory show to the public. There were only two days left between the issuance of the notice of convening the public hearing to the openning of this public hearing. Furthermore, representatives of car owners to attend this public hearing were finally chosen by drawing lots. The 91

rushing to convene the public hearing and the hastiness to choose the hearing representatives have only shown CIRCs disregard of the rights of policy-holders. A hearing with representatives who do not represent the interests of the vast car owners will not bear any meaning or value, the lawyer wrote in an open letter to CIRC. Sub-variable: transparency Respondents gave high credit to the progress on information disclosure that the IRAs made in recent years. For the financial IRAs, the formalization and standardization of information disclosure started with the Ordinance of Government Information Disclosure of the Peoples Republic of China from the State Council on May 1, 2008. Since then, each financial IRA has published its information disclosure measures. Take the example of CSRC. The main contents of the CSRC measures include: the legislative basis for information disclosure; manners and scope of information disclosure; basic procedures; and legal responsibilities in information disclosure. The measures have also provided supervision and evaluation mechanisms for information disclosure. Compared to the financial IRAs, SERC is in the forefront with regard to information disclosure. As early as 2006, SERC published Measures on Electricity Regulatory Information Disclosure. In the case of CAAC and SFDA, while these two IRAs have not promulgated similar Measures, they have produced brochures called Guideline on Government Information Disclosure as a way to help the inquirer. The channels of information disclosure include Internet, press conferences and public notices, etc. Generally, all major decisions are publicized, but whether or 92

not the reasoning behind them is publicized depends on the IRAs, as different IRAs have different attitudes about doing so. All the IRAs, except for CAAC and SPDA, publish annual reports. The first annual report of CIRC, SERC, CBRC, and CSRC covered, respectively, year 2005, 2006, 2006, and 2007. The annual report usually includes an introduction of the IRAs regulatory responsibilities and the regulated industry, the achievements of the regulated industry in the past year, and the expectation for the next year. For instance, the CSRC Annual Report (2007) contained an introduction of the regulatory structure of China's capital market, the regulatory responsibilities and regulatory measures of CSRC, China capital markets development in 2007 and an introduction of the regulatory focus in 2008.

To summarize, on accountability, the survey has revealed the following positive aspects of China IRAs: a. There is a sound appeal system for firms in a regulated industry that have been penalized by an IRA. Mechanisms available include: petitioning for holding hearings, applying for administrative review, and resorting to judicial ruling. b. Supervision from the media on the IRAs is playing an active and effective role. c. China IRAs have done well in terms of information disclosure, especially since May 2008 when the "Regulations on Government Information Disclosure of the People's Republic of China" came into force. The IRAs have promulgated their own information disclosure rules which include detailed provisions on procedures 93

and contents of information disclosure. The public can have access to policies and decisions of the IRAs through the Internet, press conferences, and other publications from the IRAs. Currently, except for the CAAC and SFDA, all other IRAs are now publishing annual reports.

On accountability, the survey has also revealed the following inadequacies of China IRAs: a. The current institutional mechanisms, mainly audits and supervision, do not constitute adequate and effective supervision of the IRAs. The audit from the National Audit Office can only review budget implementation of the IRAs, and supervision from the Ministry of Supervision lacks adequate constraints on the IRAs since they are of the same administrative rank. The most common but also most important checks and balances from the Legislature are absent in China. b. Public participation in decision-making is not sufficient. Some mechanisms for public participation, such as the public hearing, are merely formalities and do not really take public views into serious consideration.

5.5 The overall governance state of China IRAs Table 5.9 is a combination of the specific scores China IRAs receive on the three assessment variables. Figure 5.4 is constructed based on Table 5.9.

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Table 5.9: China IRAs scores on the three assessment variables: independence, decision-making competency, and accountability Decision-making competency 0.73 0.78 0.81 0.68 0.73 0.55 0.71

Independence CSRC CIRC CBRC SERC CAAC SFDA Average 0.67 0.68 0.73 0.65 0.54 0.57 0.64

Accountability 0.72 0.68 0.76 0.73 0.57 0.58 0.67

Figure 5.4: China IRAs scores on the three assessment variables: independence, decision-making competency, and accountability
1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0 CR S C CR I C CR B C S R E C CA A C S A FD

I ndependence

D eci si on- m aki ng com pet ency

A ccount abi l i t y

Table 5.9 and Figure 5.4 provide a direct comparison among the six IRAs on each of the assessment variables. Of these six IRAs, CBRC ranks the highest, while CSRC ranks the third in each of the three assessment variables. CIRC ranks second to CBRC in independence and decision-making competency, while its accountability is not as high (0.68, which is fourth among the six IRAs). 95

To have a better understanding of the IRAs performance inside each assessment variable, I have highlighted those sub-variables where the IRAs score relatively high (higher than 0.75) and where they score relatively low (lower than 0.5). Please see Appendix E for a reference. Figure 5.5 is The Governance Index of China IRAs, which is a view and comparison of the overall governance state of the six IRAs. For each IRA, the average score across all 36 survey questions is its score in The Governance Index of China IRAs. Figure 5.5: The Governance Index of China IRAs
The G over nance I ndex of C na I R hi As 1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0

0. 7

0. 69

0. 75

0. 68 0. 58 0. 57

C C SR

CR I C

C C BR

SER C

C AAC

SFD A

From Figure 5.5, we see the governance state of China IRAs varies. The scores of the three financial IRAs are the top three, followed closely by SERC. CAAC and SFDA are the bottom two. There is a large gap between the highest CBRC (0.75) and the lowest SFDA (0.57). With Figure 5.4 and Figure 5.5, the governance state of China IRAs now is clearly presented with scores. Overall, what do these scores mean? And, what conclusions can we draw from the survey? 96

1.

Generally, these China IRAs have found their position in Chinas political system. China IRAs have been formed, with the goal of greatly increasing the

professionalism and capacity of state efforts to govern the economy (Pearson, 2005). All these institutions now are key participants in industry regulation. None of them had been marginalized. They have established their status in the political system of China. 2. There has been substantial movement toward the global benchmark of the independent regulator in the development of China IRAs. In China, the pass line in an exam usually is 60 out of 100. If we take 0.6 as the pass line for these IRAs, we can see that, except for CAAC and SFDA, the other four have passed the line. The scores of CAAC and SFDA, 0.58 and 0.57 respectively, are also very close to 0.6. Since their establishment, efforts to improve independence, decision-making competency and accountability havent stopped. Considering the highly time-compressed nature of the development of this IRA model in China, which occurred only since 1998 and accelerated from 2002, the achievement is astonishing. 3. There are still many inadequacies in China IRAs. The average scores China IRAs receive on independence, decision-making competency, and accountability are 0.64, 0.71 and 0.67 respectively. These scores indicate that with the standard of a benchmark IRA model, there are still many improvements needed for China IRAs.

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CHAPTER 6: FINDINGS: CONSTRAINTS TO CHINA IRAs

This chapter is organized as follows. Section 6.1 discusses the factors identified as affecting the independence of China IRAs. Through in-depth interviews, this dissertation has identified three factors which have negatively affected the IRAs independence from the government. They are: 1) the establishment of the IRAs lacks legal basis and the legislation lags far behind actual needs; 2) over-reliance on the cooperation from some government authorities and interference from other government authorities; and 3) the chase for administrative rank and the officialdom worship (Guan benwei). This dissertation has also identified one factor which has negatively affected the IRAs independence from the regulated industry; that is, the state control required by state industry policy makes it impossible for the IRA to maintain a neutral position in the regulated market. I will discuss all the above factors in Section 6.1. Section 6.2 will discuss the factor identified as affecting decision-making competency: the embarrassing designation of China IRAs as shiye danwei. Section 6.3 will discuss the two factors identified as affecting accountability: the inadequate checks and balances from the National Peoples Congress on the IRAs, and the absence of the Regulatory Impact Assessment mechanism.

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6.1 Factors affecting the independence of China IRAs 6.1.1 The establishment of the IRAs lacks legal basis and the legislation lags far behind actual needs Legislation First is the convention of the Western governments in setting up regulatory bodies. For example, the United States established the first IRA, the Interstate Commerce Commission (ICC) based on the Interstate Commerce Act in 1887. Based on the Securities Exchange Act in 1934, the US set up the Securities and Exchange Commission (SEC) to regulate the securities industry. Based on the Federal Communications Act in 1934, the Federal Communications Commission (FCC) was established. In Great Britain, the Office of Telecommunication (Oftel) was established based on the Telecommunications Act in 1984, and the Office of Gas was established based on the 1986 Gas Act. Chinas IRAs were established in the administrative system restructuring process (the restructuring itself is a reform to suit with the rapid economy development) and did not go through a serious legislative process (Ma, 2008a; Ma, 2008b). Their establishment was based on the State Councils San-ding Program. According to the provisions of The Organization Law of the State Council, among the composing institutions of the State Council (see Table 2.2 for reference), the establishment, revocation, or consolidation of Ministries and Commissions of the State Council should be proposed by the Premier and determined by the National Peoples Congress or the Standing Committee of the National Peoples Congress during its recess. But for other institutions, including Organizations directly under the 99

State Council, Offices, Institutions directly under the State Council, and Administration and bureaus under the Ministries and Commissions, their establishment can be solely based on the approved San-ding Program. Then what is San-ding Program? What is the essence of it? Can it form the very basis of legal authorization? San-ding Program is actually the stipulation of the functions, internal organizational structure, and personnel arrangements of the composing institutions of the State Council. Normally, it is configured by the State Commission Office for Public Sector Reform (SCOPSR) and presented to the State Council for review and approval. When approved by the State Council, it will be promulgated in the form of Notice by the General Office of the State Council, but not in the form of ordinance/decree by the State Council. So, in essence, San-ding Program is only an internal document of the State Council. The San-ding Program has the following drawbacks. First, as it is only an internal document of the State Council, it is questioned and challenged by scholars whether it can be the sound legal basis for the establishment of institutions and organizations under the State Council. Second, the lack of participation from the Legislature means the establishment, revocation or consolidation of the IRAs lack legal protection and they are therefore subject to a certain degree of arbitrariness. In theory, each new government can replace the last governments San-ding Program with a new one, which will seriously undermine the independence and stability of the IRAs. Third, after being established, there is no law for the IRAs to refer to. Therefore, it is only an empty talk to say regulating according to law (Chen, 2005). It is 100

usually after a few years that laws are passed by the Legislature to formally confer the legal status and the regulatory authority to the IRAs. Before that, the IRAs are actually operating without legal references. The legislation therefore lags far behind the actual needs. San-ding Program is a unique product in China's economic reform and government restructuring. As an interviewee put it, Considering the cumbersome and time consuming nature of legislation, and the urgent need arising from economic development, using the San-ding Program as a temporary and transitional legal basis for the establishment of the IRAs is understandable. But its intrinsic serious shortcomings have also underlined the necessity to reform it. The interviewees have a consensus that regulatory agencies to be set up should adhere to the principle of Legislation First. As one concluded, Only by doing so can the law enforcement authority and accountability of the IRAs be enhanced, the governments credibility on free market commitment be improved, and foreign investors confidence in the Chinese market be boosted. 6.1.2 Over-reliance on the cooperation from some government authorities and interference from other government authorities a. From the State Council The interviewees agree that under the current political system, the relationship between the State Council and the IRAs in essence is still a superior-subordinate relationship within the government. The State Council actually determines the creation of the IRAs and their personnel appointments. Not only through the ministries, the 101

State Council also implements its policies on various industries and sectors through these IRAs. When the regulators can not very well carry out the will of the top government leaders, transfers or replacements are inevitable. b. From the National Development and Reform Commission (NDRC). NDRC, formerly State Planning Commission (SPC, 1952-1998) and State Development Planning Commission (SDPC, 1998-2003), is a macroeconomic management commission under the State Council, which has broad administrative and planning control over Chinese economy. Namely, the NDRCs functions are to oversee and formulate macro policies for economic and social development, maintain the balance of economic development, and to guide the restructuring of Chinas economic system. In practice, NDRC is still a legacy of central planning. As a comprehensive commission, it carries both the functions of macroeconomic policy formulation and microeconomic activity management. For the wide range of functions and responsibilities it undertakes, NDRC is nick-named as a Mini State Council. Among the multiple functions NDRC enjoys, price management and to examine and approve major construction projects are of special importance. When involving these two territories, the IRAs have to resort to the cooperation from NDRC. To cite CBRC as an example, not only does NDRC have the authority to determine the criteria of the regulation fee of CBRC, it also has the authority to investigate and supervise the service fee collection criteria of the commercial banks. Therefore, NDRC naturally joined CBRC in the investigation of the alleged fee collection collusion 102

among the big four commercial banks on inter-bank withdrawals in 2007. Next based on the interviews with SERC officials and outside consultants, I will use the case of SERC to illustrate the influence that NDRC exerts on the IRAs. Compared to its influences on the financial industry regulators, NDRCs influence on SERC is far more substantial. The establishment of SERC is the product of reforming Chinas electricity industry. China's market-oriented reform of the power industry started in the 1980s. In 1995, the Electricity Law was promulgated. In late 1990s, as an effort to separate the government from the enterprises, the State established the State Power Corporation (SPC) and the Electric Power Ministry was removed. The reform accelerated in 2002, when the State Council issued a systematic reshuffling plan to spearhead industrial reform. Under the plan, the State split the SPC into eleven separate companies, including two grid corporations, five power-generating groups and four other companies conducting power-related auxiliary businesses. Later in the same year, SERC was established to unify the previously scattered regulatory power over the industry. On behalf of the government and consumers, SERC beared the responsibility of regulating the power market and promoting systematic reform of Chinas power sector. The establishment of SERC had been highly praised, which then was the first independent regulator of Chinas network industries (Tian, 2007). To make the institutional innovation a real breakthrough, SERC was expected to be authorized with the full regulation responsibility over the industry. However, arguing that the 103

electricity price, like petrol and gas prices, concerns the overall stable operation of the national economy, NDRC insisted that the regulation on electricity price should be put under its jurisdiction. The final result was a compromise: NDRC shared the electricity price-setting authority with SERC. At the same time, as to examine and approve major construction projects is one of the main and traditional functions of NDRC, the power of investment approval on electricity investment projects was also reserved for NDRC. Pricing regulation is one of the most effective ways of imposing industrial regulation. The lack of independence in this respect sours the SERCs authority. The lack of power of investment approval further undermines its authority, said an outside consultant of SERC. Compared to SERC, NDRC has stronger and more effective influences on the electric power industry. At least in the first two years following its establishment, people have heard stronger voices from NDRC than SERC in major power-related matters, such as dampening investment heat and coordinating the price brawls between coal and power companies. SERC is ridiculed for being a vase, merely playing the role of a consultant to the electricity reform. At the risk of being marginalized, since 2005 SERC initiated a number of fight-back measures. The first was through legislation. Understanding that the revision of the 1995 Electricity Law still lies far ahead in the future, in 2005 SERC successfully had the State Council promulgate the Ordinance of Power Regulation to legitimize its regulatory status. This ordinance now is the legal back-up for its role as 104

an electricity industry regulator. The second was to bring the reform authority under its name. The Electricity System Reform Leading Small Group, once located in NDRC, had been transferred to SERC in 2006. The third was through image rebuilding. Within its existing regulatory territory, SERC enhanced and strengthened its image as a regulatory authority. In a report 19 issued in May 2007, SERC on the one hand indicated that the existence of multiple regulators in current power regulation system has resulted in SERCs inability to fully play its due functions; on the other hand, SERC also believed that the current limited regulation could still be developed into an effective regulation. Meanwhile, through public activities such as holding conferences and organizing expert seminars, SERC called for the rationality of transferring the power on electricity price-setting and investment approval from the NDRC to itself. c. From the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). SASAC is one of the Special Organizations directly under the State Council. In China, SASAC is a very powerful comprehensive government commission. It assumes the responsibility as the investor, guides and pushes forward the reform and restructuring of state-owned enterprises in China. 20 Especially, SASAC is responsible for preserving and enhancing the value of assets of 169 key state-owned enterprises directly under the central government, excluding banks and securities companies.
19 20

Analysis on Electricity Regulatory Function from the Sectors Need See SASAC website: http://www.sasac.gov.cn/

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Among the IRAs, CSRC, SERC and CAAC have frequent contacts with SASAC. Let us first take a look at SERCs and CAACs relations with SASAC. All the main participants in the electricity industry, the two electricity grids (State Grid Corporation of China and China Southern Power Grid) and the five power generating groups (Huaneng Group, Datang Corporation, Huadian Corporation, Guodian Corporation, and China Power Investment Corporation) are among the 169 key SOEs and are attached to SASAC. SASAC is also the majority shareholder of the three civil aviation groups (China Eastern, China Southern, and Air China). SERC and CAAC will inevitably come into contact with SASAC in their regulation on those enterprises. When describing the relationship among SERC and CAAC, SASAC, and the regulated industry, one of the interviewees made a very vivid analogy: the regulatory agency is like a referee that the father (SASAC) has invited for the match among his sons (state-owned enterprise). As discussed in Section 6.1.2, this referee sometimes also undertakes the coachs duty. CSRCs regulation in the field of securities also need cooperation from SASAC. The relationship between SASAC and CSRC can be illustrated by the roles they play in the Split Share Structure Reform. One of the most prominent works of CSRC since 2005 has been its promotion of the Split Share Structure Reform (Wu, 2006). The so-called split share structure refers to the situation in which part of a listed companys shares are in circulation, while the rest are in a state of non-circulation (non-tradable shares).21 By the end of 2004, one third of outstanding shares in China

21

There are two types of non-tradable shares: State Shares and Legal Person Shares.

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stock markets were circulating shares, which were purchased mainly by institutional and individual investors; the other two thirds of the outstanding shares were non-circulating shares (non-tradable shares). The majority of the non-circulating shares (74%) are under the control of SASAC and its subsidiaries in each province. This situation, in which shares of the same listed company are split into tradable and non-tradable shares, was unique to the Chinese stock market. This arrangement had been widely criticized as it had seriously undermined the healthy development of Chinas stock market. Under share-split arrangement, there is no incentive for listed companies or major shareholders to care about share price fluctuations, which is not conducive to safeguarding the interests of investors in the market. Also, share-split has made it impossible to merge and acquire listed companies through public stock transactions. The fundamental issue to resolve the share split problem is to balance the interests of circulating shareholders and non-circulating shareholders through an effective negotiation mechanism, so as to gradually realize the circulation of those non-tradable shares. Thus, the drawbacks brought about by the different circulation status of the two types of shares would be eliminated. In practical operation, to make the non-tradable shares become tradable, the shareholders of the non-tradable shares will yield part of the proceeds, which is to be realized when those non-tradable shares begin to circulate in the stock market, to the current tradable shares holders. How much will the proceedings be, and how much should be yielded? The solutions to these questions depend on the negotiation between 107

the two sides. As the representative of non-tradable shares holders, and out of the consideration of preserving and increasing the value of state-owned assets, SASAC plays a key role in the negotiation. Therefore, for the Split Share Structure Reform which is pushed mainly by CSRC to proceed smoothly, there must be cooperation from SASAC. Without SASACs cooperation, the reform could possibly run into deadlock because of possible failure of the negotiation process. Fortunately, the reform has received strong support from the top leadership and is viewed as a significant political and economic task of the government. CSRC and SASAC therefore form a close collaborative relationship. On the second day after the pilot reform was launched, CSRC and SASAC jointly issued the Work Opinions on Promoting Pilot Reform on Share Split Structure, asking for a thorough understanding of related parties on the significance and urgency of the reform and to provide strong support to push forward the pilot reform. CSRC is the regulator of the securities market; as the shareholder of so many listed companies, SASAC is a key player in Chinas securities market. However, in this Split Share Structure Reform, you cannot define the relationship between CSRC and SASAC as a regulator and a regulated entity, rather, they are cooperators. This collaborative relationship between CSRC and SASAC was also reflected in the financial turmoil of 2008. To stabilize the financial market, SASAC called for state-owned enterprises to repurchase and increase their shareholdings. Without

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support from SASAC, CSRCs ability to stabilize the stock market would be greatly undermined.22 d. From the Ministries Some interviewees on CAAC and SFDA have raised concerns about possible interference from the Ministries. After being relocated from organizations directly under the State Council to institutions under the supervision of the Ministries in the institution restructuring of 2008, the regulatory practices of CAAC and SFDA might be affected by the Ministries. For instance, as one interviewee observed, these two agencies now have to present their reports to the State Council through the two Ministries, while before, they could present the reports directly. However, as there has been only a half-year since this institutional restructuring, it is far from prudent at this time to conclude the existence of unnecessary interference from the Ministries. e. From the Central bank The Peoples Bank of China (PBC) is the central bank in China. Before the separation of CBRC from PBC in 2003, the central bank concentrated both monetary policy formulation and banking supervision responsibility in itself. In practice, the central bank had incurred criticism for setting interest rates or determining money supply in the interests of the commercial banks. The establishment of CBRC was to separate PBCs banking supervision responsibility from its monetary policy formulation responsibility. By doing so, on the one hand, it guarantees the independence and flexibility of monetary policy so that
22

But to promote market stability in such a manner already conflicts with CSRSs role as an independent regulator in the market.

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money supply can better meet the needs of the development of national economy (Liao and Wang, 2003: 53); on the other hand, it strengthens the effective supervision over the banks. Since then, the risk awareness of Chinese banks has been improved greatly, which is conductive to the development of a health financial market in China. Although it is claimed that the central banks macro-management and CBRCs supervisory role will complement and underpin each other (Liao and Wang, 2003: 58), in practice the policy inconsistency between the two institutions can place commercial banks in a dilemma. The friction on the issue of mortgage policy on the second apartment purchased is a typical case. In October 2008, the central bank lowered the interest rate for individual commercial mortgage loans, allowing banks to provide more favorable interest rate to qualified applicants. Following this policy, the Agricultural Bank of China (ABC) immediately worked out its corresponding mortgage rules and publicized them on its website. However, the next day, under pressures from CBRC, the ABC had to remove those rules. But what is more dramatic is that on the third day, the same mortgage rules were placed online again on ABCs website. As a commercial bank, within three days the ABC moved back and forth on its policy over this mortgage rate. The fundamental reason behind this is that the central bank and CBRC disagreed with each other about whether there is a need to reduce the mortgage loan interest rate. By lowering the mortgage rate, the central bank hoped to stimulate real estate consumption, thereby stimulating economic development. But CBRC, with a focus on the risks of banks, has different consideration. The 110

property market in China amidst the 2008 financial crisis was sliding further, and if banks continued to issue mortgage loans on a large scale, they could possibly harvest the bitter fruit of rising bad mortgage loans. The original intentions of both the central bank and CBRC were beyond reproach, but in this case it is believed that the central bank and CBRC clearly lacked communications with each other. f. From Anti-monopoly agencies After over 13 years of drafting, the long awaited Anti-Monopoly Law of the Peoples Republic of China was finally promulgated by the National Peoples Congress on 30 August 2007. The Anti-Monopoly Law would come into effect on 1 August 2008 and aims to provide a comprehensive framework for regulating market. Within the following month after its promulgation, the three major law enforcement agenciesthe Anti-Monopoly Bureau of the Ministry of Commerce, the Department of Price Supervision and Inspection of National Development and Reform Commission, and the Anti-monopoly and Anti-unfair Competition Enforcement Bureau of the Administration for Industry and Commerceall came into being. Although the law has been enacted and law enforcement agencies have also been set up, there is still no final conclusion on the relationship between anti-monoply law enforcement agencies and the sector regulators: the IRAs.23 One interviewee predicted that, in the future, the above three major anti-monopoly law enforcement
23

International experiences: In Belgium, France, Japan and many other countries, regulators only execute regulation from the perspective of market access and production safety supervision, while leaving the jurisdiction over competition cases in the market to the anti-monopoly law enforcement agencies. In some countries, such as the United States and Brazil, anti-monopoly law enforcement agencies and regulatory bodies co-share regulatory jurisdiction over the competition cases. However, under such circumstances, regulators deal with competition cases in accordance with the competition law, not any other conflicting law.

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agencies would be the main law enforcement agencies. But for special industries such as civil aviation, electric power, and telecommunications, IRAs in these industries would also join the anti-monopoly agencies in the law enforcement. However, this might lead to friction among these agencies. The final law enforcement system in these industries would very likely be a product of compromise. Consequently, there is the need to establish a coordination mechanism when law enforcement involves multiple agencies, said a respondent. In early September 2008, a case in the city of Chongqing attracted wide media reports for its claim as the first anti-monopoly case in China. In this case, an individual sued the Bank of Construction for violation of the Anti-monopoly Law, as the bank refused the individuals requirement to withdraw some of his deposited funds. Although it was clarified later that contract law rather than the anti-monopoly law is more applicable in this case, the case itself raised the pressing need to establish an appropriate coordination mechanism between anti-monopoly law enforcement agencies and the sector regulators. g. From local government While it was specified in the authorization law that when the IRAs and their staffs carry out the regulation responsibility in accordance with the law, local governments at all levels, public organizations or individuals shall not interfere with the regulation. In practice, however, when the regulation involves local interests (usually deemed by local government as an encroachment on local interests), local governments are very likely to interfere with the IRAs regulation. 112

Take CBRC as an example. One of CBRCs regulated targets is city commercial banks (CCBs), whose operations are normally confined within one particular city. At present, there are all together 113 CCBs throughout China. CCBs in general have support from local governments, which normally are the largest shareholders of those banks as well. Many chairmen of the board of directors and general managers of CCBs come directly from local governments. The operation of most of the CCBs, however, is miserable. By the end of 2004, the overall capital adequacy ratio for all 113 CCBs was only 1.36%, and more disturbingly, their average non-performing loan ratio was as high as 11.7%.24 In order to prevent potential financial risks, CBRC attempted to standardize the operation of the CCBs. CBRC demanded that by the end of year 2006, all CCBs should raise capital adequacy ratio to no less than 8%, or they would be forced out of the market. But this reform was obstructed by local governments for it challenged their vested interests. It is very important for the local government to have control over at least one bank, said an interviewee, This is because local governments have no say in the four major state-owned commercial banks, but in order to promote local economic development and even to support face projects, they do need a CCB to provide service at their will. Intervention from local governments also occurred in SERC. In 2005, SERC set up six pan-regional power supervisory bureaus and eleven city supervisory offices. The creation of regional electricity regulators meant that the regulatory authority over

24

Data source: http://finance.sina.com.cn/stock/t/20060427/0000668724.shtml

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electricity generation, transmission and distribution once enjoyed by provincial governments were beginning to be handed out. This was of course not what provincial authorities wanted to see. In order to preserve part or all of the regulatory authority within the province, provincial governments repeatedly called for the joint establishment of provincial electricity regulatory agencies by provincial governments and SERC, said a respondent. When this proposal was finally vetoed by the central government, local resistance to the work of SERC surfaced. Local governments interference in SFDA is pretty common and has led to very serious consequences. Some local governments regard food and medicine industries as vital vehicles to revitalize local economic development, to raise tax revenue, and to promote employment. Hence, regional protectionalism on these industries is prevailing and serious. Usually, local government will try to seek the identification from local SFDA on local interest (in other words, to capture them); otherwise, the local SFDA will be regarded as a trouble maker. The very serious toxic milk powder incident in 2008 is a typical case. In early 2008, the media paid much attention to an incident in which a large number of infant patients with the same symptoms appeared in hospitals within a short period of time. The medias tracking reports found that these infant patients were all consumers of infant milk powder of the same brand Sanlu Milk Powder. Sanlu Group, the manufacturer of this powder, is the largest enterprise and also a major tax source in the city of Shijiazhuang, a relatively poor inland city in China. As reporters dug in depth, and with the involvement of the local judiciary, it was found that the manufacturer had added 114

chemical materials into the milk powder in order to lower production costs, and such illegal activity had been going on for a pretty long time. It was exposed this time only because the manufacturer had carelessly added too much of these chemical materials into some of the milk powders. Later, it was also revealed that at least one year before someone had reported this illegal conduct to the local government and to the local SFDA. The local SFDAs investigation on Sanlu Group was stopped by the local government and failed to proceed. Officials from the local government interpreted this report as a way to intentionally bring shame to a famous brand. After the incident was fully exposed, in the ensuing housecleaning, a large number of local SFDA officials and local government officials were deposed and prosecuted. h. Last but not least, from the Party In China, the Chinese Communist Party (CCP) remains the ultimate arbiter of political and economic affairs, although the exact mechanisms of party influence are poorly understood. Organizationally, the party interests are manifested through several channels. One major channel is the leading small groups, called lingdao xiaozu in Chinese, inside the Party. For example, in foreign affairs, it is the Central Foreign Affairs Leading Group (CFALG). In the financial and economic area, it is the Central Financial and Economic Leading Group (CFELG).25 Led by Premier WEN, Jiabao, the current CFELG members include four vice Premiers, the Director and deputy Director of NDRC, the Minister of the Ministry of Finance, the Governor of Chinas Central Bank (the Peoples Bank of China), the Director of SASAC, the Chairman of
25

The full name of CFELG should be: the Financial and Economic Leading Small Group of the Central Committee of the Communist Party of China.

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CSRC and the Chairman of CIRC. From this name list, it is hard for one to dispute that CFELG is the core decision maker of Chinas economic policy. Decisions of CFELG are transformed into government economic policies and executed through the State Council and the Ministries and Commissions under the State Council. 6.1.3 The chasing for administrative rank and the officialdom worship(Guan benwei) Both the IRAs and the staff inside the IRAs chasing for higher administrative rank has been identified as another important factor that is affecting China IRAs independence from the government.26 What then is administrative rank? In China, the bureaucratic hierarchy is reflected by the administrative rank, which in general is classified, from low to high, as follows: section level, division level (or county level), bureau level (or department level), ministerial level (or province level), and the Premier level. Administrative rank could refer to the level of an institution or an individual. For example, you can say this is a bureau level department, or you can describe someone as a departmental level official. People with any of the aforementioned administrative ranks could be called officials in China. People out of these ranks are the general staff. From the general staff to the section level, from the section level to higher levels and so onthis is the promotion process of a Chinese official in China's bureaucratic system. A person's administrative rank directly reflects the level of his/her official position, which in turn is directly related to their individual treatment and benefits.
26

This chasing for higher administrative rank applies not only to the IRAs and their staff but in fact to all the state-related institutions in China and their staff.

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As the name suggests, only government administrative organs and people inside them (in other words, the Civil Servants) should be granted an administrative rank. But in reality, Chinas shiye danwei and state-owned enterprises, and people inside them, have also been granted administrative ranks (Zhang, 2005; Shu, 2008). For example, the Chairman of the CBRC, the Chairmen of the four major state-owned commercial banks, the Chairman of SERC, and the chairman of National Grid are all granted the ministerial rank. Chairmen of the five power generation groups are enjoying the vice-ministerial rank. Universities and hospitals are no exception. For example, the President of Peking University has also a ministerial rank. The assignment of administrative ranks to these IRAs has been challenged and criticized by scholars. Essentially, the IRAs exercise regulation based on the authorization of laws. Hence, except for the law, they should have no other authority to yield to. Any disputes could eventually be resolved through legal channels. But in reality, this is not the case in China. Then, could it be possible to not assign administrative ranks to the IRAs? Practically, at least by now, it is unfeasible. The regulatory authority would be jeopardized without high administrative ranks, said a respondent, who is also a senior IRA official. This is because, it has to be admitted, legal consciousness is still lax in China at present. So often, the authority the IRAs have over regulated entities comes from their administrative ranks rather than from their legal authorization, said this respondent.

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But this resort to administrative rank is proving to be a double-edged sword. When regulating an institution with the same or higher administrative rank, the IRAs often appear to be incompetent. For example, as the local regulatory agencies vertically under SERC, regional electricity regulatory bodies are usually of bureau ranks. But the two grid firms are ministerial-level rank, and the five power generation corporations are vice ministerial-level. In the regional power market, electricity regulatory bureaus have to regulate firms with the same or higher administrate ranks. This has made it unrealistic to be optimistic about the effects of this regulation, said a respondent. The fact that regulatory authority relies on administrative rank has led directly to an undesirable consequence: the IRAs themselves are chasing higher administrative ranks, and are increasingly relying on their administrative rank to exercise regulation. Not only are the IRAs trying to obstain higher administrative ranks, so are their staff. This is closely related to the officialdom worship (in Chinese, called guan benwei) culture, which has a long history in China. The so-called officialdom worship, or official orientation, suggests that a persons life accomplishment is simply valued by his/her official level in the bureaucratic system. Meanwhile, to become an official and to get promoted in the bureaucratic system is regarded as the most important life pursuit (Xu and Li, 2007).27 Although the New China founded in 1949 claims to serve the people, through the establishment of this administrative

27

An old Chinese saying has it that millions of other occupations are all inferior, but the only superior one is being educated. In ancient China, only through education could one enter the bureaucratic system, while farmers and businessmen, no matter how rich they were, were not respected.

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rank system, the Chinese government has actually encouraged the Chinese people to continue to carry on the officialdom worship and to take pride in eating the state rice (to become civil servants). Since the reform and opening-up in the late 1970s, the officialdom worship has been considerably weakened, but its impact is still lingering. Under the influence of officialdom worship, for a large number of Chinese, including the staff in the IRAs, obtaining political status promotion in the stern hierarchical bureaucratic system is of paramount importance. Since the promotion of administrative rank and political status comes from the appointment by higher level officials, a potential negative consequence is that Chinese officials are doing things to meet the preferences of these higher officials. There is a saying in the Chinese bureaucracy: what is important is not how your people evaluate you, but how your superiors view you. Therefore, one of the malpractices of Chinese bureaucrats is to construct face projects, which means that these projects are mainly for the purpose of recognition and praise from the leadership, but not for the benefits of the people. The IRAs practices can hardly be the exception. Regulatory practices can simply be catering to the preferences of higher level officials, rather than for the benefits of the regulated industry or the interests of the public. 6.1.4 State control required by state industry policy makes it impossible for the IRA to maintain a neutral position in the regulated market In China, the relationship between the IRAs and regulated firms is deeply affected by the nature of the regulated sectors. Currently, the guideline policy in 119

Chinas economic reform is that, the state should withdraw its capital, step by step, from those sectors that are not strategically important. At the same time, the government must strengthen its effective control over those strategically important sectors. State capital must have a major share in those strategically important sectors. According to the State-owned Assets Supervision and Administration Commission (SASAC), the strategically important sectors can be separated into two tiers.28 The first tier includes armaments, power transmission and distribution grids, oil and petrochemicals, telecommunications, coal, aviation and shipping. These seven sectors are considered as the vital arteries of the national economy and essential to national security. In the first tier of industries, the state capital must have absolute control. Foreign and private investments to these sectors, even if it is not totally prohibited, are highly restricted and have to meet special requirements. The second tier includes industries such as machinery, automobiles, IT, construction, iron and steel, and non-ferrous metals. State-owned enterprises (SOEs) are encouraged, and consequently supported by the government, to become heavyweights in these sectors. However, like SOEs in non-strategically important sectors, the second tier SOEs are
28

This list of strategically important sectors was developed by SASAC in December 2006. Strategically important sectors, or strategic industries, has been a phase frequently used by Chinese officials to refer to those economic sectors that are considered as important. Prior to this point, however, it had never been specified clearly which sectors are on this list. The specification and publication of this list had its consideration. In year 2006, foreign investors (most famous of them, Carlyle Group from US) set off a wave of transactions to buy out or merge SOEs in China. These foreign investments raised many concerns and debates among Chinese scholars and officials on national economy safety. After the publication of the list of strategically important sectors from SASAC, the National Development and Reform Commission (NDRC) worked out a similar list of strategic and sensitive industries. Foreign investment to these industries would be carefully reviewed before approval, and should not affect the national economy safety.

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left to market competition and might be merged and privatized. All the SOEs in these strategically important sectors are under the supervision of SASAC. The financial industry is also a strategic industry but is excluded from the supervision of SASAC. While the restrictions on foreign investment in financial sectors have been loosened since China entered the World Trade Organization (WTO), it is still required and strictly enforced that state capital must be in the controlling position in the major financial institutions, including banks, insurance companies and securities corporations. Table 6.1 in next page summarizes the characteristics of industries with an IRA. As we can see, except the drug and food industry, state-owned enterprises are the major players in all the other industries. As strategic industries are seen as crucial to Chinas economic security, they are considered to be too politically and economically important to leave to an ideal of evenhanded, politically insulated, arms-length regulation (Pearson, 2005: 313). Not only can they not be controlled by foreign and private capital or crushed by foreign competitors, it is hoped that these industries will develop into internationally competitive industries; SOEs in these industries are also expected to grow into national champions in the world market.

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Table 6.1: Characteristics of industries with IRAs IRAs China Securities Regulatory Commission (CSRC) China Insurance Regulatory Commission (CIRC) China Banking Regulatory Commission (CBRC) Characteristics of the Regulated Industry State capital holds the majority shares and is the major participant in the market. Foreign investment can hold no more than 49% of the shares in joint venture securities and fund firms. Qualified Foreign Institutional Investors (QFII) now are allowed to invest in Chinas stock market. The four state-owned insurance companies, China Life Insurance, China Peoples Insurance, Pacific Insurance, and PingAn Insurance, occupy 75% of the market share. But private and foreign insurance companies developed rapidly in recent years. State capital holds the majority shares and is the major participant in the market. For example, in 2007, state-owned commercial banks accounted for 53% of the total assets of banking financial institutions. Foreign capital can be strategic investors in China banks with share holding generally no more than 20%. State capital is in the dominant position in the market. The two national power grids corporations have a 100% control on Chinas electricity transmission market. The major five power generation groups (all of them are 100% state capital) occupy over 90% of China's power generation market. Foreign and private investment in the electricity industry has very little influence. The three State-owned airlines, Air China, China Eastern Airline, and China Southern Airline are the major market participants and monopolize almost all major routes and flight hours. The market is in complete competition. The market participants have different capital sources.

State Electricity Regulatory Commission (SERC) Civil Aviation Administration of China (CAAC) State Food and Drug Administration (SFDA)

Under such circumstances, it is no longer accurate to define and limit the relationship between the IRAs and the regulated SOEs as referees and players only. Moreover, regulation has become a means to help the SOEs develop better and faster. One more layer of relationship, i.e., that between coach and athlete, is then added to 122

the relationship between IRAs and SOEs. This kind of coach-athlete relationship has made it impossible for the IRAs to maintain a position as a neutral regulator in the market. The regulations the IRAs enforce have inevitably shown partiality toward the SOEs. This partiality is especially obvious and clearly reflected in the practices of CAAC and CIRC. CAAC is fostering with great care the international competitiveness of the three state-owned airline companies. In the name of aviation safety, the most profitable domestic routes are reserved for them. The private airline companies in China are limited to the operations in several tributary lines, and by year 2010, each private airline can have no more than ten airplanes. As an independent regulator, CIRCs core functions are to monitor the solvency of insurance companies, review the fairness of insurance policies, and to make sure the interests of policy holders are not infringed. But in the interviews, comments such as these were expressed frequently: It is as if CIRC had become a parent of state owned insurance companies, CIRC has a kind of paternal mentality. Interviewees pointed out that CIRC bears the responsibility of helping the Chinese insurance companies, mainly the state owned insurance firms, become bigger and stronger. The following two cases can very well illustrate CIRCs support to the state-owned insurance companies: The formulation of industry policies favoring large state-owned insurance companies. At the end of 2005, CIRC asked for suggestions from the insurance companies for a new policy to be introduced. The proposed policy suggested that 123

firms that do not set up a subsidiary insurance assets management company would lose the right to make assets investment. The policy triggered drastic reactions from non-state-owned small and medium insurance companies, who expressed their strong discontent over the regulators frequent line-crossing behavior. These measures are strongly favoring large state-owned insurance enterprises, and are trying to make a significant amount of insurance companies without an assets management company become the sales departments of a few large state-owned insurance companies, an executive from an insurance company commented in a financial newspaper. Essentially, CIRC is using these measures to help state insurance firms depress their competitors. If this is the intention of CIRC, then Chinas insurance market before opening up, when only several state-owned insurance companies existed, would have sufficed. The reform and opening up in the past years would have been unnecessary. In the face of strong opposition from the industry, CIRC ultimately did not introduce this policy. The promotion of Compulsory Transportation Insurance (CTI). The CTI fee collected from the beginning of 2006 has aroused much criticism. It has been suggested that this compulsory insurance, through unfair premium calculations and clause design, has provided ample opportunities for those large state owned insurance companies that underwrite this insurance to make absurd profits. In the design of CTI, CIRC cares more about the profits of insurance companies than the interests of policy holders. The design of this insurance has made it a huge interests pipeline, enabling those large state-owned insurance companies to be the 124

beneficiaries, said a respondent. Critical voices described this CTI as another big milk bottle handed by CIRC to the state owned insurance companies. Not only are China IRAs playing the interest-conflicting role as both referee and coach in the strategic industries, furthermore, in some cases, the government relies upon the IRAs to help it achieve certain social/political goals seen as central to maintain social stability. This is the so-called politicization of regulatory responsibilities. For instance, CSRC is widely regarded as a stock index controller of Chinas stock market. China's stock market is a one-direction market, which means that you can only long stocks rather than short them to make profit. When the government believes that the stock market is overheated and a bubble exists, CSRC will come out and make comments to dampen the market. When the stock market is in the doldrums, CSRC would then become the market saver. This role of index controller that CSRC plays has long been widely criticized.

6.2 Factors affecting the decision-making competency of China IRAs On factors affecting the decision-making competency of China IRAs, respondents have mentioned factors such as regulatory power available, human resources, and information collection mechanism. It was agreed generally that improvements are necessary in those areas. However, these problems were also regarded as common problemsthat means, they were considered as the kinds of problems widely existed in all kinds of institutionsand few respondents raised them as problems that had to pay special attention. 125

But there is one factor that had been raised by over two thirds of respondents as an important constraint to the decision-making competency of China IRAs: the embarrassing designation of China IRAs as shiye danwei. Next is a detailed analysis of this factor. On the nature of regulatory agencies, there are two types in Western countries: one is administrative agencies and the other is public legal entities. Regulatory agencies in the United States are defined as administrative agencies, while in the United Kingdom they are public legal entities. But in China the situation is different. Among the six IRAs discussed in this dissertation, CAAC and SFDA are administrative agencies, while the three financial IRAs and SERC belong to shiye danwei. As we can recall, these four IRAs are Institutions directly under the State Council. However, this translationInstitutions directly under the State Councildoes not reflect precisely its Chinese indication. The right but more puzzling translation should be shiye danwei directly under the State Council. Then, what exactly is shiye danwei? Let me clarify this as it is such an important concept in China. Related to the state, in China there are three main institutions: xingzheng jiguan, shiye danwei, and qiye. Generally, xingzheng jiguan refers to the government and can be translated into administrative organs. Shiye danwei can be translated into public service unit. This kind of organizational nature is reserved primarily to public service, education, media and health care, and not-for-profit organizations. Shiye danwei are different from xingzheng jiguan in that they usually do not have 126

administrative powers over other bodies. Qiye refers to those state-owned enterprises, which are differentiated from other two types of organizations in that they are oriented towards profit making. Chinas large and diverse sector of shiye danwei is a galaxy of public service providers operating alongside core government (OECD, 2005). The original purpose of designating the three financial IRAs and SERC as shiye danwei is to differentiate them from the government administrative organs. Such differentiation underlines the point that these IRAs do not belong to the governments administrative system. To a certain extent, this is also a reflection of independence from the government. There are also some practical considerations for designating them as shiye danwei. As one of the interviewees commented, in Chinas bureaucratic system, this designation of shiye danwei to the four IRAs is a kind of very special, or we can say, practical-oriented institutional arrangement. Such designation has important meanings and influences to their operations. First, such designation enables them to subvert normal bureaucratic restrictions. This designation allows the IRAs to circumvent limits on the pay scales of government officials (the Civil Servants); this is particularly important for financial regulators that hope to compete for top talent with high paying private institutions, such as international investment banks. Second, as shiye danwei, the IRAs avoid the restrictive headcount limits that were placed on the size of the government. But there is an obvious problem. The three financial IRAs and SERC are performing unimpeachable administrative functions. However, in China, generally 127

shiye danwei are not allowed to have administrative powers. To acquire this administrative power, the IRAs must be expressly authorized by laws. Therefore, following the establishment of these IRAs, law-making or law amendments to grant them legal administrative powers have been carried out and completed one after another in recent years. Putting aside the embarrassing legal status of these IRAs before the authorization of law, even after the authorization, the legal status of these IRAs is still doubtful (Ma, 2006). While the administrative power can be conferred through the authorization of the law, can the rule-making and quasi-judicial power also be authorized to these IRAs? To cite the power of rule-making as an example, according to the Constitution and the Legislation Law, only the State Councils Ministries, Commissions, the People's Bank of China, the National Audit Office, and the Affiliated Agencies with administrative functions possess the power to lay down rules.29 Institutions directly under the State Council do not possess the power to make rules. Consequently, the power to lay down rules and the quasi-judicial power enjoyed by the three financial IRAs are in fact in contradiction with the Constitution and the Legislation Law. The direct consequence of this legal conflict and contradiction is that the legitimacy of the power enjoyed by the four IRAs is still being questioned today.

29

See Article 90 of the Constitution and Article 71 of the Legislation Law, in Section 2 of Chapter 4.

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6.3 Factors affecting the accountability of China IRAs The absence of effective formal institutional arrangements to hold the IRAs accountable has been further identified in the interviews as the key factor affecting the accountability of China IRAs. In particular, the interviewees raised the concern as to how the National Peoples Congress (NPC) can play a more active and effective role in supervising the IRAs. Currently, the appointment and dismissal of the heads of the IRAs do not need to be approved by NPC, unlike those heads of Ministries and comprehensive Commissions. At the same time, the IRAs do not need to report to NPC. A few suggestions intending to strengthen the checks and balances from NPC on the IRAs include: the appointment and dismissal of the heads of the IRAs shall have approval from NPC; the IRAs should make reports to the Financial and Economic Affairs Committee under NPC; and NPC may set up a special investigation committee to investigate the corruption of the IRAs. In addition, the absence of a Regulatory Impact Assessment (RIA) mechanism has been identified in the interviews as another important factor that is affecting the accountability of China IRAs. The role of RIA is to identify and assess the problem at stake and the objectives pursued. It helps to identify the main regulatory options for achieving the objectives and analyzes their likely impacts in the economic, environmental and social fields. It outlines advantages and disadvantages of each option and examines possible

129

synergies and trade-offs. The existence of a good RIA mechanism centering on cost-benefit analysis can help an IRA make rational decisions and improve its regulation quality, thereby increasing the accountability of the IRA. The absence of RIA may lead to two negative results. One is the inefficient allocation of the regulation resources. Because of the lack of comparison of the cost-benefit tradeoffs of the different regulatory options, the IRA is unable to choose the most beneficial one. In some cases, it may even lead to over-regulation; that is, the IRA intervenes in issues that should be left to the market. The other problem is that, without a clear calculation/understanding of the costs and benefits of different regulatory policies, regulation policy may even be designed to reflect the personal interests of the regulators. For instance, in a reflective report on the corruption case of Zheng, Xiaoyu of SFDA, Hao (2007) writes that, since 2000, one of the regulation policies Zheng and his subordinates had been strongly promoting was to upgrade the drug manufacturing standard from local standard to national standard. The intention of the policy sounds good as an improved drug manufacturing standard will improve drug safety. However, it was found later that most pharmaceutical factories could easily have this national standard certificate as long as they were willing to bribe SFDA officials. This upgrade was proven to be just a camouflage. The SFDA officials had deemed this upgrade a good opportunity for taking bribes. Worldwide, RIA mechanisms have been adopted in more and more countries (Xi, 2007). To improve regulation quality in China, the adoption of an RIA mechanism has also become a pressing issue. The interviewees agree that it would not be easy to 130

design and implement the RIA mechanism in the political and economic environment in China. There is still a lot we need to learn from the Western successful experiences, i.e. those best practices in OECD countries, said one of the interviewees. Regarding the process of constructing this RIA mechanism in China, the interviewees raised concerns about the following issues: a. The legal status of the RIA mechanism. It is preferred that the adoption of the RIA mechanism would be a legal requirement for the IRAs. b. A clear definition of the criteria and the scope of RIA. This needs to take into consideration such factors as the assessing capability, the resources available, and the political and economic characteristics of China. c. The establishment of an independent institution to review and check the RIA reports prepared by the IRAs, ensuring that they have met the quality requirements. d. The establishment of an effective data collection mechanism. To conclude this chapter, I make a comparison between the findings of this research and the findings of previous research on constraints to regulatory agencies. Some constraints recognized in this research, i.e., interference from other government authorities and inadequate accountability, have also been raised in research like C-CIER (2007; 2008). Generally, these are the kinds of constraints regulatory agencies worldwide will encounter. But the influences the same kind of constraint have on different regulatory agencies may vary. For example, for different regulatory agencies, both the degree of interference from other government authorities and the government authorities that intervene in them will be different. 131

There are more constraints identified in this research that are unique to China IRAs. Lack of legal basis in the establishment of the IRAs, officialdom worship, state control in strategic industries, and the designation of China IRAs as shiye danwei, all are constraints occur only in the special institutional environment of China. This indicates that to understand the constraints on any regulatory agencies, one has to have comprehensive understanding on the political economic environment in which the regulatory agencies operate.

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CHAPTER 7: DISCUSSION

7.1 Summary of this dissertation Following the global wave of transformation towards a regulatory state, from 1998 on, through a series of administrative system restructurings, the Chinese government has established IRAs in areas such as finance and network industries. Current research on China IRAs, however, is still at the primary stage and falls far behind the practical institutional development and innovation. Through this research, I have attempted to contribute to the understanding of China IRAs. Specifically, this is accomplished by assessing their regulatory governance state, and by further identifying the factors that are negatively affecting their performance. I used a semi-structured survey to assess the regulatory governance of China IRAs. The questionnaire used in the survey was developed based on an assessment framework that is composed of three key assessment variables; they are: independence, decision-making competency, and accountability. I used in-depth interviews to identify the major factors that are considered as constraints to China IRAs. Both the survey and interview were conducted with senior officials from the IRAs, outside consultants to the IRAs, and independent scholars. Findings from the survey reveal that the overall governance state of China IRAs, which is reflected in their scores on The Governance Index of China IRAs, range from 0.57 to 0.75. Of these, the three financial IRAs perform relatively well, followed closely by SERC. CAAC and SFDA are at the bottom, and there is an obvious score gap between these two IRAs and the other four IRAs. 133

Surprising progress has been made on each assessment variable. On independence, especially, China IRAs have regulatory authorities that have been authorized by law. They usually have stable financial sources. On decision-making competency, all the IRAs have been vested substantive power, including supervisory power, licensing power, and rule-making power. The three financial IRAs have also obtained quasi-judicial power. All the IRAs can exercise administrative penalties to the regulated bodies for violating rules or regulations. These penalties have strong binding and usually can be effectively executed. On accountability, there is a sound appeal system for regulated firms to challenge the IRAs decisions; and China IRAs have done well in information disclosure. The public can have access to the policies and decisions of the IRAs through different channels, and most of the IRAs are now publishing annual reports. However, the inadequacies of China IRAs are also obvious. Specifically, on independence, the independence from the government is far from ideal. The establishment of the IRAs based on San-ding Program has been challenged for lacking legal basis; interference from other government authorities on the IRAs is common; the IRAs regulation in some areas over-relies on cooperation from some other government authorities. The IRAs have not kept enough independence from the regulated industry either. Both influences from the regulated industry to the IRAs and intervention from the IRAs in the regulated industry are serious. To some extent, China IRAs are still like the administrative department in the planned economy time. On decision-making competency, the designation of the three financial IRAs and SERC as 134

shiye danwei has undermined their regulatory authority. The existing income gap between the IRAs and the regulated industries has also made it a challenging task to maintain talented professionals in the IRAs, which may therefore affect their regulatory capability. On accountability, the current institutional mechanisms do not constitute adequate and effective supervision of the IRAs. Public participation in decision-making is far from enough. Some mechanisms for public participation, such as the public hearing, are merely formalities, and do not really take the public views into serious consideration. Findings from the interviews reveal that some of the factors identified by the interviewees as constraints to China IRAs were also mentioned in the survey. In the interviews, these issues were emphasized and elaborated. To summarize, factors which have negatively affected the IRAs independence from the government include: the establishment of the IRAs lacks legal basis and the legislation lags far behind actual needs; there is over-reliance on cooperation from some other government authorities and interference from other government authorities; and the IRAs and their officials chase after administrative rank and support officialdom worship (Guan benwei). The most important factor identified for having affected the IRAs independence from the regulated industry is: the state control required by state industry policy makes it impossible for the IRA to maintain a neutral position in the regulated market. The embarrassing designation of China IRAs as shiye danwei was raised as the most important factor for affecting the IRAs decision-making competency. Finally, the two factors identified for affecting the accountability of China IRAs are: the inadequate 135

checks and balances from the National Peoples Congress on the IRAs, and the absence of a Regulatory Impact Assessment (RIA) mechanism.

7.2 Contributions and limitations By assessing their regulatory governance, this dissertation has substantively improved the understanding of China IRAs. Centering on their independence, decision-making competency, and accountability, the achievements and inadequacies of China IRAs have been clearly presented. Findings from the research can be important references in the construction of a regulatory state in China. From a practical perspective, for China IRAs, the constraints identified in this research point out the direction of future reform. Considerable improvements are needed for China IRAs. For instance, for new IRAs to be established, Legislation First must be a principle to be adhered to. The responsibilities and authorities of new IRAs should be clearly defined so that unnecessary interference from other government authorities can be minimized. For both new and existing IRAs, the assignment of administrative rank and the shiye danwei designation need to be changed. The assignment of administrative rank to IRAs is a reflection of officialdom worship. The chasing for administrative rank has weakened the respect to law, which should be the only source of regulatory authority. The legitimacy of the regulatory power enjoyed by China IRAs has been challenged for their designation as shiye danwei. Finally, the accountability of China IRAs can be improved with strengthened checks and balances from the National Peoples Congress and the adoption of the Regulatory Impact Assessment mechanism. 136

From a research perspective, the assessment of the governance of China IRAs has provided a direct and deep view on how China IRAs are fulfilling their responsibilities, which can provide a basis for future comparative studies of IRAs around the world. For instance, from this study we see IRAs in the West and in China are functioning in rather different political and economic environments. Except for the difference in the political systems, a most important difference between them is that, in the West, the emergence of IRAs usually accompanies the privatization of the regulated industry; while in China, the Chinese government has not given up state control over those strategically important industries where the IRAs have been established. This research also has its limitations. First, considering the sources available, the assessment of the governance state of each IRA was limited to a group of five respondents. Theoretically, if I could have included a larger number of qualified respondents, the research findings might be even more objective. Second, opinions from people in the regulated industry are absent in this research. Voices from the firms in the industries, including the SOEs, private and foreign companies, would be a valuable source of additional information regarding an assessment of the regulatory governance of China IRAs.

7.3 Future research This research has drawn a general picture of China IRAs and identified the major constraints to them. To provide guidance for the construction of the regulatory system in China, however, this is only a first step. On the basis of this research, 137

additional research focusing on the problems identified in this dissertation should be conducted. For instance, how could the negative influences brought about by the embarrassing designation as shiye danwei be minimized? Is a simple change to xingzheng jiguan (administrative organ) enough, or are there any other better solutions? In fact, from early 2008 on, the Chinese government has set out to reform the shiye danwei system in China. The reform started in a few local cities. The administrative ranks assigned to the shiye danwei in those cities have been abolished. While the reform is still in the experimental stage and there must be a long way ahead, it is expected to be a change that will have enormous influence on the IRAs. Other research efforts can include exploration of how to improve the public participation in the IRAs decision making process, or how to introduce the Regulatory Impact Assessment mechanisms in the environment of China. A disturbing but also very interesting question raised by the 2008 global financial and economic crisis is: how do we (re)evaluate Chinese state control over strategic industries (especially over the financial industries) and therefore the functions and responsibilities of these China IRAs? In China, state control over strategic industries has been gradually and effectively enhanced through the establishment of the IRAs. Chinas development experiences reveal that, in this crisis, compared with their foreign counterparts, especially those in the financial industries, Chinas state control, if not preferred, is at least not a bad thing. This obviously contradicts with experiences in the West, where IRAs are created in the process of privatization and introduced by the governments to provide more credit commitments to private and 138

foreign investors. The current crisis makes it hard for one to conclude easily which development method is preferable. Some Chinese scholars give high marks to Chinas state control, and at the same time, they laugh at the West, saying that the latter now is also on the way towards socialism. From my perspective, I think these are inappropriate comments. It is far from reasonable, just because there are cases of nationalization of some financial institutions in the West, to then argue for the state control policy in China and even to seek justification for China IRAs partiality for the state-owned enterprises in the regulated industry. This kind of conclusion is not conducive to the construction of a regulatory state in China. In my understanding, the fundamental reason for this crisis, especially the crisis in the financial system, is the lack of powerful and effective market regulation and supervision from the government. Such absence of institutions and mechanisms to foster an efficient and effective market brings the market into dysfunction and eventually leads to the chaos we have observed in the US and Europe and elsewhere as well. That is to say, the failure does not lie in the market itself, but rather lies in the failure of regulation and supervision over the market. Hence, the appropriate solution in the future would be to strengthen the regulation and supervision from the IRAs on the market and its participants. All in all, further research to understand and interpret this crisis and the appropriate role of IRAs is surely needed as this issue concerns the construction and improvement of the regulatory state in the West and in China as well.

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APPENDICES APPENDIX A: THE QUESTIONNAIRE NOTE: For any question, when the surveyee think the answer is not in the choices provided, or not applicable to the regulatory agencys situation, or in cases the surveyee think the scores assigned to the choices are not appropriate, please feel free to ask me. I. Independence Independence from the government The Law 1. The IRA is created based on: a. the Law (1) b. the Sanding Fangan of the State Council c. Other _____________________

(0)

2. Has the regulatory authority of the IRA been authorized by (single choice): law? a. Yes (1) b. No (0) Decree? a. Yes b. No (0.5) (0)

If the answer is No, then how the agency obtain its regulatory authority? ___________________________________ Agency head 3. What is the managing type of the agency? a. Principal-in-charge (0.5) b. Committee-in-charge (1) c. Others 4. Who has the authority to appoint and dismiss the head/board members of the agency? a. the State Council (the executive) (0.33) b. the Legislature (National Peoples Congress) (0.67) c. a mix of the executive and the Legislature (1) d. the Minister (0) 146

5. Is agency head/board member appointed for a fixed term? a. Yes (0.5) b. No (0) For how long? ____________________________ Can head be re-appointed? a. Yes (0.5) b. No (0) 6. Is technical background/expertise required for the agency head/board member? a. Yes (1) b. Somewhat (0.5) c. No (0) Please explain your choice: _________________________ 7. Agency head/board member can be dismissed for: a. only for malconduct and crime (1) b. for holding different industry policy with the authority (0) c. both a and b (0) 8. Is the agency free to decide its internal organizational arrangement and make internal personnel decisions (e.g. hire, promote, discipline)? a. Yes (1) b. No (0) If no, please identify the authority with the power to make those decisions ____________________________ Financial 9. How is the IRA financed (please specify the percentage of the budget) ? Government budget ________% Levies from the regulated industry /license fees ________% Customer levies ________% Other (Please describe): ________% (The score equals to the percentage on the levies from the regulated industry/license fees) 10. Are there any other government authorities who have influences on the government budget to the IRA, or, on the amount of levies to collect from the regulated industry? a. Yes (0) b. No (1) If the answer is yes, who are they? __________________________________ 147

If the answer is yes, then in the past 3 years, has budget cutting or cut the levies allowed to collect from the regulated industry been used as a way to influence the IRA? a. Yes (0) b. No (1) 11. How do you evaluate the financial support to the operation of the agency? Unstable/not supportive 0 0.25 0.5 0.75 Stable/supportive 1

Interference from other government authorities 12. Is the IRA the only regulatory agency on the industry? a. Yes (1) b. No (0) If the answer is no, please specify the other regulatory agency and describe the relationship between the IRA and the other regulatory agency ________________________________________________________ 13. How would you evaluate the interference from other government authorities (including, but not limited to the Ministries) to the practices of the agency? Very high 0 0.25 0.5 0.75 1 Very low

If there are interference from other government authorities, please identify the sources and describe how the interference is exerted: ___________________________________________________ 14. Except the court, is there any other government authority who can overturn the agencys decision where it has exclusive competency? a. Yes (0) b. No (1) Who are they? Please describe: _______________________________________ Independence from the regulated industry Influences from the regulated industry to the IRA 15. Can officials of the regulatory agency hold positions in the regulated industry while they are in office? a. Yes (0) b. No (1)

148

16. After their terms in office, are there any conflict-of-interest clauses (e.g. quarantine) applied to the officials of the regulatory agency? a. Yes (1) b. No (0) If the answer is Yes, please specify _________________________________ Before his/her term in this regulatory agency, what are the position hold by the agency head? (please provide the cases of the most recent three heads): _______________________________________________________ After their terms in office, what are the new positions assumed by the heads of your agency? (please provide the cases of the most recent three heads) _______________________________________________________ 17. In the past 3 years, are there any accusations of bribery on the IRA? a. Yes (0) please describe: _______________________ b. No (1) 18. How would you evaluate the influences from the regulated industry to the practices of the IRA? Very high 0 0.25 0.5 0.75 1 Very low

Why this score? Please explain: __________________________________ Intervention of the IRA in the regulated industry 19. Does the regulatory agency have the responsibility of helping the State Owned Enterprises (SOEs) in the regulated industry to grow bigger and stronger? a. Yes (0) b. No (1) c. Somewhat (0.5) Would you please describe? __________________________________ 20. How would you evaluate the intervention from the IRA in the regulated industry? Very high 0 0.25 0.5 0.75 1 Very low

Why this score? Please explain: __________________________________

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II. Decision-making competencies Regulatory power and regulatory measures 21. Please check the regulatory powers that the IRA has possessed: a. Advisory power: __________________________________ (0.25) b. Supervisory power: _______________________________ (0.25) c. Licensing power:__________________________________ (0.25) d. Rule-making power:_______________________________ (0.25) e. Others:__________________________________________ Sum: ________ 22. What are the regulatory measures available to the agency? a. Information disclosure _______________________________ b. Administrative penalty _____________________________ c. Non-administrative penalty regulatory mechanism __________ d. Quasi-judicial __________________________________ e. Coordination and arbitration ___________________________

(0.1) (0.1) (0.1) (0.1) (0.1)

How would you evaluate the effectiveness of these regulatory measures Very effective 0 0.1 0.2 0.3 0.4 0.5 Why this score? Please explain: __________________________________ Human resources 23. How would you evaluate the human resources and expertise available to the agency? lack of human resources seriously Please explain the choice: abundant 0 0.25 0.5 0.75 1 __________________________________ Not effective

24. Is motivation mechanism available to the staff of the agency? a. Yes (1) b. No (0) 25. How do you evaluate the overall attractiveness for jobs in the agency? (The evaluation can be based on payments & welfare, the prospect of the job, etc.) Not attractive highly attractive 0 0.25 0.5 0.75 1 Please explain: ____________________________________________ 150

Information collection mechanism 26. How would you evaluate the current information collecting mechanism of the agency? Not effective 0 0.25 0.5 0.75 1 highly effective

Please explain: ________________________________________________ III. Accountability Formal institutional mechanisms to hold IRA accountable 27. Are there any formal/institutional mechanisms available to hold the agency accountable? a. Yes b. No If the answer is Yes, then how would you evaluate the effectiveness of current institutional mechanism to hold the IRA accountable? Not effective 0 Supervision from the media 28. How would you evaluate the effectiveness of the media (e.g. TV, website, radio, newspaper, etc.) in supervising the regulatory agencies? a. Effective (1) b. Somewhat (0.5) c. Not effective (0) Please explain: ________________________________________________ External auditing and performance review 29. Does the agency accept external auditing? a. Yes (0.5) b. No (0) If yes, which institution is the auditor?_____________________________ And, what is the result of the last auditing? a. The agency has no problem (0.5) b. The agency has some problem If there is problem, please describe:_______________________________ 151 0.25 0.5 0.75 1 highly effective

(0)

30. Is there any performance review (e.g. through cost-benefit analysis) on the regulatory agency? a. Yes (1) b. No (0) Norms of ethics 31. Does the agency have norms of ethics? a. Yes (0.5) b. No (0) If the answer is Yes, are they useful? a. Yes (0.5) b. Somewhat (0.25)

c. Other

c. No

(0)

Mechanism for regulated entities to challenge the IRA decision 32. Is there a formal mechanism for regulated entities to challenge regulatory agency decisions? a. Yes (1) If yes, how does it work? ______________ b. No (0) Public participation 33. Does the agency hold public hearings for decisions affecting the public a. Yes (0.5) b. Sometimes (0.25) c. No (0) How would you evaluate the importance of opinions from the regulated firms, consumers and other stakeholders in the agencys decision-making? Not important Very important, serious consideration

0 0.1 0.2 0.3 0.4 0.5 Please explain: ____________________________________ Transparency 34. Are there any legal requirements for the publication of the agencys decision? a. Yes (1) b.No (0) 35. Does the agency publish its major decisions? a. Yes (0.5) b. No (0) Does the agency publish the reasoning behind major decisions? a. Yes (0.5) b. No (0) What are the sources for the public to know the agencys decisions and actions? _______________________________________________________ 152

36. Does the agency prepare an annual report? a. Yes (1) b. No

(0)

What are the contents included in the annual report? ______________________________________________

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APPENDEX B: INTERVIEW QUESTIONS

1. From your perspective, in China, what are the main legal, political, economic, or institutional restrictions/constraints that have affected the independence of the IRA when performing its responsibilities? 2. From your perspective, in China, what are the main legal, political, economic, or institutional restrictions/constraints that have affected the decision-making competency of the IRA? 3. From your perspective, in China, what are the main legal, political, economic, or institutional mechanisms that are missing to hold the IRA accountable?

154

APPENDIX C: PARTICIPANTS OF THE SURVEY AND INTERVIEW

(: Senior official from the IRA Participant (each letter represents a participant)
A B C D E F G H I J K L M N O P Q R S T U V Totally

X: Independent scholar

O: Outside consultant) Interview

Survey CSRC CIRC CBRC SERC CAAC SFDA

X X O

General Interview

X X O

X X

X O O O

X X

O X X

X O O X 5 X O O X 22

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APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH QUESTION IN THE QUESTIONNAIRE

Question Number The law Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Influences from the regulated industry to the IRA Q16 Q17 Q18 Intervention of the IRA in the regulated industry Q19 Q20 CSRC 0 1 0.75 0.33 1 1 0 1 1 1 1 1 0.4 1 1 0 0.5 0.5 0.5 0.5 CIRC 0 1 0.75 0.33 1 1 0 1 1 1 1 1 0.5 1 1 0 1 0.7 0 0.25 CBRC 0 1 0.75 0.33 1 1 0 1 1 1 1 1 0.65 1 1 0 1 0.7 0.5 0.75 SERC 0 0.5 0.75 0.33 1 0.8 0 1 1 1 0.9 0.5 0.2 1 1 0 1 0.75 0.5 0.85 CAAC 0 0 0.5 0.33 1 1 0 0.75 0 1 1 1 0.2 1 1 0 1 0.7 0 0.25 SFDA 0 1 0.5 0.33 1 1 0 0.75 0 1 1 0.5 0.2 1 1 0 0 0.5 0.8 0.75

Agency head Independence from the government Financial Independence Interference from other government authorities

Independence from the regulated industry

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APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH QUESTION IN THE QUESTIONNAIRE (continued)
Regulatory powers and regulatory measures Decision-making competency Human resources Information collection mechanism Formal institutional mechanism to hold IRA accountable Supervision from the Media External auditing and performance review Accountability Norms of ethics Mechanism for regulated entities to challenge the IRA decision Public participation Transparency Q21 Q22 Q23 Q24 Q25 Q26 Q27 Q28 Q29 Q30 Q31 Q32 Q33 Q34 Q35 Q36 Average Average 1 0.9 0.8 0 1 0.7 0.4 0.75 0.5 0.4 0.75 1 0.5 1 0.9 1 0.70 1 0.9 1 0 1 0.8 0.4 0.75 0.5 0.4 0.5 1 0.3 1 0.9 1 0.69 1 0.9 1 0 1 0.95 0.5 0.75 0.5 0.4 0.9 1 0.5 1 1 1 0.75 1 0.7 0.8 0 0.95 0.65 0.4 1 0.5 0.4 0.5 1 0.55 1 0.9 1 0.68 1 0.8 0.8 0 1 0.75 0.75 0.75 0.5 0 0.5 1 0.3 1 0.9 0 0.58 1 0.8 0.2 0 0.85 0.45 0.75 0.65 0.5 0 0.5 1 0.5 1 0.9 0 0.57

157

PPENDIX E: SUB-VARIABLES CHINA IRAS SCORE RELATIVELY HIGH AND LOW

(: higher than 0.75 X: lower than 0.5)
CSRC Independence from the government Independence from the regulated industry Decision-making competency The law Agency head Financial Interference from other government authorities Influences from the regulated industry to the IRA Intervention of the IRA in the regulated industry Regulatory powers and regulatory measures Human resources Information collection mechanism Formal institutional mechanism to hold IRA accountable Supervision from the Media External auditing and performance review Norms of ethics Mechanism for regulated entities to challenge the IRA decision Public participation Transparency CIRC CBRC X X X X X X X X X X X X X X X X SERC X CAAC X SFDA

Independence

Accountability

158