China: Courting Financial Innovation

The third plenary session of the Communist Party’s 18th Central Committee issued a clear call for major reforms, including in two important areas: permitting the leasing of rural collective land and overhauls to financial regulation.

Nevertheless, recent moves by the government to make a show of targeting small ownership houses, those built on collective rural land but sold to urban buyers, and cracking down illegal fundraising seem to be contrary to the spirit of the reforms. The meaning of such conservative moves might be to preserve the economic order and avoid any disturbances on the eve of major reforms.

A look at the overall picture of the recent reform s makes it clear that there will be a major overhaul to the sections of the Criminal Law regarding illegal fundraising. If this law is not changed, it will be difficult to truly reform China’s financial institutions.

In the Criminal Law, three activities constitute “illegal fundraising”: the illegal acceptance of public deposits, fundraising fraud and the issuance of company stock or company bonds without authorization. Of those, illegal acceptance of public deposits is the most commonly applied by the courts. This crime is a killer that strikes fear into the hearts of private entrepreneurs. They often wonder whether the law exists in other countries. The answer is yes, there are similar laws in other countries, but they are essentially different from the Criminal Law.

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