Necessary Fictions: The CSRC’s Stock Market Philosophy and its Implications for US-China Engagement

Why do Chinese regulators continue to employ hard paternalistic tools that appear to undermine their efforts to build a better and more global stock market? In contrast to studies focusing on fleet-footed capital, political patronage, and state capitalism, this research project unveils the hidden ideational underpinnings of financial regulation in China to explain the persistence of hard paternalist tools. As a matter of Sino-American financial relations, the CSRC’s interventionist behavior has fueled conflicts over information disclosure requirements, led to restrictions on US investments in China, and the de-listings of Chinese firms on American bourses. I argue that regulators in China, as they are elsewhere, are guided by a host of “necessary fictions” that undergird financial regulatory interventions. In particular, I highlight how Chinese regulators are driven by the specter of irrational investors, a paternalistic state, and an inefficient market. These economic ideas are self-reinforcing, and shape the way regulators approach the market, sometimes with devastating consequences. In a moment where bilateral regulatory mistrust threatens to dismantle many of the financial ties built-up over the last three decades, understanding the mindset of the Chinese regulator becomes all the more important.