Liu Feng: observations and reflections on the draft of Financial Law of China
The draft still leaves too much blurred: the boundary between "administration" & "supervision," the link between regulation, adjudication, and enforcement, etc.
Today's newsletter features one of the more serious Chinese responses to the draft Financial Law. As the first foundational law of its kind in China's financial sector, its public comment period has just closed.
The piece is authored by Liu Feng刘锋, Chief Economist at the International Institute of Green Finance of the Central University of Finance and Economics.
Liu belives the draft matters because it attempts to do something long overdue — put China's sprawling financial activity under a single, higher-order legal framework. But he is equally clear that a basic law should do more than codify the current system. It should impose discipline on it.
The draft, he argues, still leaves too much blurred: the boundary between "administration" and "supervision," the definition and handling of conflicts of interest, the link between regulation, adjudication, and enforcement, and the rules for licensing increasingly cross-sector, cross-border financial business.
In Liu's telling, a credible financial basic law must not only empower the state to manage risk, but also bind power itself through clearer division of functions, recusal rules, judicial review, procedural safeguards, and more coherent legal hierarchy.
He also places that question in a comparative frame. China's "centralized and unified" model, he argues, is good at mobilizing quickly against systemic risk; the U.S. model of multi-agency checks is better at constraining public power over time. The point is not to copy either wholesale. It is to build a Chinese financial constitution that can keep risk under control without letting regulatory ambiguity, institutional overlap, or legal vagueness become risks in their own right.
The piece was first published on April 20. Please note that the translation below is mine and has not been reviewed by Prof. Liu.
刘锋：关于《金融法》草案（征求意见稿）的观察与思考
Liu Feng: Observations and Reflections on the Financial Law of the People's Republic of China (Draft)
The Financial Law of the People's Republic of China (Draft) (《中华人民共和国金融法（草案）》) is now open for public comment. As the first foundational law in China's financial sector, the Draft establishes an overarching framework of "bringing all financial activities under regulation", and sets out a systematic approach to balancing development and security, strengthening oversight, and preventing risks. It is forward-looking and structurally comprehensive. Its introduction is of landmark significance for building a unified, coordinated, and efficient system of financial rule of law, preventing and defusing systemic financial risks, and promoting high-quality financial development.
That said, the drafting a financial law should not merely codify existing practice. It should also look ahead and construct a modern legal framework for finance that features clearly defined powers and responsibilities, aligned incentives, coherent rules, and compatibility with international standards.
If the Draft is to become a true "basic law" capable of guiding the modernization of financial governance over the coming decades, several of its key mechanisms still warrant further refinement and clarification. Drawing on long-term research into the structure of financial regulation, the governance of conflicts of interest, and legal coordination, as well as observations on the differences between Chinese and U.S. regulatory models, the author offers the following thoughts on the Draft.
I. Clarifying the Functional Boundaries Between "Administration" and "Supervision" to Strengthen Checks and Balances
Chapter VII of the Draft sets out the supervisory and administrative responsibilities of the financial management departments under the State Council. However, it is worth noting that the functional boundaries among different regulatory bodies, as well as those between regulation and administrative management, remain somewhat overlapping and unclear.
Literally, "administration" is more concerned with front-end guidance, such as policy formulation, market-entry approvals, and macro-prudential management.
"Supervision", by contrast, relates more to back-end correction, including conduct monitoring, compliance inspection, and risk disposal. The two serve different purposes and should therefore be clearly distinguished. Ambiguous boundaries may lead to overlapping regulation, inconsistent standards, or even regulatory gaps.
It may therefore be worth adding a dedicated clause in the general provisions or regulatory chapter to provide legislative definitions of "financial administration" and "financial supervision".
Financial administration could be defined as including the formulation of financial policy, industrial policy, rules, and standards; the granting of institutional and business-entry approvals; and the conduct of macro-prudential management. These functions should primarily be undertaken by development and reform, finance, and industry authorities.
Financial supervision, meanwhile, could be defined as the ongoing monitoring, assessment, and inspection of the compliance and risk profile of financial institutions, financial business, financial activities, and market participants; and taking regulatory measures and implementing administrative penalties in accordance with the law.
At the same time, it is necessary to strengthen the independence of regulatory bodies so that they can focus on risk prevention and control, compliance review, and conduct supervision, free from unlawful interference in the performance of their duties. A mechanism should also be established to safeguard the independence of regulatory decision-making. In addition, further clarifying in Article 51 the specific division of labor between the State Council's financial management departments and local financial regulatory bodies with respect to "administration" and "supervision" would help prevent structural overlap in responsibilities.
II. Establishing a Systematic Mechanism for Defining, Avoiding, and Disposing of Conflicts of Interest
The Draft refers several times to concepts such as "benefit transfer" and "improper interests". Articles 28 and 37, among others, set principled requirements for related-party transactions and the due diligence obligations of third-party service providers.
However, the author believes that the Draft still lacks a systematic definition and handling procedure for conflicts of interest. Such conflicts are ubiquitous in financial activities, particularly within mixed operations, financial conglomeration, and the "revolving door" of regulatory personnel. If mishandled, they can seriously undermine market fairness and investor confidence.
A more systematic definition of the types of conflict of interest could therefore be included in the supplementary provisions or relevant chapters, covering, for example, related-party transactions, dual roles, and information advantages through a combination of listed examples and a catch-all clause.
For instance, financial institutions could be required to make their boards of directors ultimately responsible for conflict-of-interest management, and to establish institution-wide policies applicable to all staff. Directors, senior executives, shareholders, and actual controllers could be made subject to mandatory recusal obligations where matters involve major decisions, related-party transactions, or interest allocation, with such situations also brought within the scope of information disclosure.
Internally, an independent compliance department or post should be established to review and supervise conflict-of-interest management and report to the board. Financial regulators should also be granted the authority to investigate, order rectification, and suspend relevant rights where necessary. In addition, in Chapter VII on "financial supervision", it would be worth considering supplementary provisions requiring recusal by regulatory staff in conflict-of-interest situations, together with corresponding internal oversight and disclosure systems.
III. Smoothing the Connection Between Legislation, Judicature, and Law Enforcement to Ensure Procedural Justice
While the Draft touches upon the connection between law enforcement and the judiciary in legal liability and risk disposal, its provisions remain largely principled regarding post-legislative evaluation, the specialization of judicial trials, and the procedures, time limits, and responsible parties for linking regulatory enforcement with criminal justice.
It grants significant power to financial management departments in areas such as legal liability, risk disposal, and regulatory measures, but is relatively weak on judicial review, procedural justice, and rights relief, potentially affecting the fairness and predictability of law enforcement.
It would therefore be advisable to add provisions in the supplementary or general chapters authorizing the State Council's financial management departments to carry out regular evaluations of the implementation of the Financial Law (for example, every five years) and report to the Standing Committee of the National People's Congress, so that the law can be dynamically improved on that basis.
Building on Article 70, the law could go further by promoting the legal establishment of an integrated "three-in-one" mechanism for financial adjudication (civil, administrative, and criminal). Moreover, it could make clear that, under the guidance of the Supreme People's Court, financial courts or financial tribunals should be set up in financially active regions to centralize jurisdiction over major and complex financial cases. A financial expert juror system could also be established.
Judicial oversight of administrative enforcement should also be strengthened through a clear mechanism for judicial review of financial regulatory measures, allowing regulated entities to seek administrative reconsideration or bring administrative litigation against major regulatory decisions.
Article 59 could also be strengthened to improve the link between administrative enforcement and criminal justice, with clear standards, procedures, time limits, and two-way feedback obligations for the transfer of case leads. For major cases suspected of involving crimes, a joint investigation mechanism could be explored. In addition, setting out clear legal liability for regulatory departments and their staff in cases of dereliction of duty or misconduct in office would further strengthen institutional discipline.
IV. Establishing a Unified Qualification and Review Mechanism for Cross-Boundary, Cross-Industry, and Cross-Border Business
Financial business today is increasingly cross-sectoral, cross-industry, and cross-border in nature. Article 3 of the Draft defines financial activity, and Article 26 requires financial institutions to operate within their approved scope.
However, there is still no clear top-level design on which authority, or combination of authorities, should carry out "qualification recognition" for new hybrid businesses that cross sectors and markets, especially when undertaken by financial institutions such as financial holding companies, or on what "review standards" should apply. Entry regulation still largely follows the logic of separate regulation by sector, while the unified regulation of integrated operations remains unclear. This may open the door to regulatory arbitrage and hidden risks.
One possible solution would be to establish a system of "comprehensive operation access". For financial holding companies and integrated business groups, unified qualification standards and review procedures could be introduced. For cross-sector and cross-industry operations, a "Joint Recognition Committee" made up of the relevant State Council financial management departments could be created and coordinated by the Financial Stability and Development Committee under the State Council.
The qualification review framework should be unified and cover matters such as capital adequacy, risk isolation (the "firewall" system), corporate governance, compliance management, information technology security, and anti-money laundering capability. For cross-border business in particular, it should also assess compliance with host-country regulations and home-country cooperation.
The law should make clear that, once a financial institution has obtained the relevant qualification, its parent company or holding company bears the primary responsibility for overall group risk. The licensed regulators of individual business subsidiaries are responsible for micro-prudential supervision. The "Joint Recognition Committee" is responsible for macro-prudential monitoring and coordination of the group's overall cross-sector and cross-industry risks.
Moreover, it is also necessary to improve cross-border regulatory coordination by encouraging information-sharing and enforcement cooperation between Chinese regulators and their overseas counterparts.
V. Strengthening the Connection Between the "Financial Law" and Other Laws, Regulations, and International Rules
As a foundational law, the Financial Law needs a clearer mechanism to lead and coordinate with sector-specific laws such as the Commercial Banking Law, the Securities Law, the Insurance Law, and the Trust Law. Furthermore, as China deepens its financial opening-up, this law must align with universally accepted international rules (such as the Basel Accords, FATF Recommendations, and IOSCO Principles) .
It is advisable that a principled clause could be added to the general provisions establishing the Financial Law is the basic law of the financial sector with priority application. Other financial laws, administrative regulations, and rules should remain consistent with it.
The State Council could be authorized to formulate implementation rules under this law and to coordinate the resolution of any conflicts between it and individual financial sector laws. It would also be worthwhile to introduce a principle of "regulatory consistency", drawing on the standards of international organizations such as the International Monetary Fund, the Financial Stability Board, and the Basel Committee, so as to promote alignment between China's financial regulatory rules and international practice.
A further provision could be added to Chapter IX, "Financial Development and Security", stating that the state shall actively promote the alignment of domestic financial regulatory standards with internationally accepted standards and best practices. When formulating relevant rules and standards, the State Council's financial management departments should study and appropriately incorporate internationally recognized regulatory standards, and steadily advance benchmarking and mutual recognition.
Moreover, the author believes the Draft should also add a dedicated chapter on "cross-border financial regulatory coordination" to address institutional gap. This would cover reciprocal access principles, cross-border regulatory cooperation mechanisms, and graded management of outbound data flows, providing clear legal expectations for institutions "going global."
Furthermore, the law should improve provisions on financial infrastructure by supporting interoperability between CIPS and major international payment and clearing systems, and by encouraging domestic financial infrastructures and their overseas counterparts to establish collateral mutual-recognition mechanisms, thereby providing technical support for the internationalization of Renminbi assets. It should also strengthen cross-border sharing and verification of beneficial ownership information in response to FATF assessment requirements, enhancing the international credibility of China's anti-money laundering regime. In addition, it should clarify the legal status of RMB-denominated assets issued offshore, providing a higher-level legal basis for products such as Panda bonds and offshore central bank bills.
VI. Improving Cross-Border Regulatory Coordination: Drawing on China-US Differences
The core difference between Chinese and U.S. financial regulation lies in their fundamentally different system logic. China follows an administrative, "centralized and unified" model, while the U.S. follows a law-based model of multiple authorities and mutual checks. China places greater emphasis on maintaining financial stability and centralized decision-making, while the U.S. seeks to prevent abuse of regulatory power through decentralization.
This difference is especially visible in cross-border regulation. Through laws such as the Holding Foreign Companies Accountable Act, the U.S. actively shapes cross-border regulatory rules. By contrast, although Article 85 of the Draft establishes a principle of "countering long-arm jurisdiction", it still lacks specifics on the daily coordination of cross-border capital flows, procedures for granting access to on-site inspections by overseas regulators, and approval standards for cross-border data flows.
It is therefore well worth serious consideration to add a dedicated chapter on "cross-border financial regulatory coordination" to the Draft. Such a chapter could include at least the following:
First, a principle of reciprocal market access, under which foreign financial institutions entering the Chinese market would be subject to regulatory treatment equivalent to that applied to Chinese financial institutions in the foreign institutions' home markets.
Second, a cross-border regulatory cooperation mechanism, clearly defining the statutory authority of the People's Bank of China and the State Administration of Foreign Exchange to take the lead in signing regulatory cooperation memoranda with overseas regulatory bodies, and standardizing approval procedures for providing documents and materials abroad.
Third, a graded system for outbound data management, distinguishing among "core," "important," and "general" financial data, with different approval procedures for each category. Such an arrangement would provide financial institutions with clear legal expectations when expanding overseas, avoiding business disruption caused by unclear compliance pathways.
VII. Taking a Long-Term View: Implementation Paths Aligned with International Rules
In the area of international capital flows, moving from "case-by-case approval" to "transparent rules" is a direction worth serious attention.
In the short term, supporting rules could clarify a “whitelist” mechanism for cross-border capital flows, shifting mature channels from approval to filing. In the medium term, revisions to the Foreign Exchange Administration Regulations could replace transaction-by-transaction approval with a dual-pillar framework of "macro-prudential management + micro-level supervision". In the long term, the goal should be capital-account convertibility.
For financial institutions expanding overseas, the broader trend is to move away from "going it alone" and towards “regulatory mutual recognition”. In the short term, the Financial Law could clarify the principle of "reciprocal regulatory mutual recognition", thereby providing a legal basis for launching equivalence negotiations with the European Union, the United Kingdom, Singapore, and others. In the medium term, China could promote bilateral regulatory cooperation memoranda with key Belt and Road partner countries. In the long term, it should actively participate in the formulation of international regulatory standards so that Chinese practice can be incorporated at the rule-making stage.
In anti-money laundering, the internationally accepted path of evolution is from "formal compliance" to a "risk-based" approach. In the short term, the law could clarify the filing, verification, and cross-border sharing of beneficial ownership information, while fully bringing designated non-financial institutions into the anti-money laundering framework. In the medium term, China could formulate Measures for the Administration of Anti-Money Laundering in Virtual Assets. In the long term, it should revise the Anti-Money Laundering Law and establish a differentiated framework for the allocation of compliance resources.
For Renminbi internationalization, the inevitable path is from "policy-driven" to "market-driven". In the short term, the Financial Law could clarify the legal status of offshore RMB-denominated assets. In the medium term, revisions to the Law of the People's Bank of China could formally recognize Renminbi internationalization as a statutory function. In the long term, the aim should be broad capital-account convertibility and the emergence of the Renminbi as the third-largest currency in the SDR basket.
For the internationalization of RMB-denominated assets, an encouraging direction would be to move from a "mainland-led" model to one driven by "offshore interaction". In the short term, the law could explicitly support domestic institutions in setting up RMB clearing centers and custody institutions overseas. In the medium term, China could revise the Securities Law to add a dedicated chapter on the offshore issuance of RMB-denominated securities. In the long term, it could explore an upgraded version of cross-border connectivity mechanisms, enabling continuous trading across multiple time zones.
VIII. Conclusion: The "Financial Law" as the Rule-of-Law Foundation for a "Financial Powerhouse"
The formulation of the "Financial Law" lays the rule-of-law foundation for China's evolution into a "financial powerhouse." The Draft has already made systematic arrangements in areas such as "full-coverage regulation", "risk disposal", and "serving the real economy".
But if it is to become a true "financial constitution" capable of resolving disputes, guiding development, and preventing risks, it still requires more careful institutional "fine-tuning" in key areas such as the boundary of regulatory functions, conflict-of-interest mechanisms, the linkage among legislation, justice, and enforcement, market access for cross-sector business, and alignment with international rules.
From a broader perspective, China's "centralized and unified" model is well suited to building systems quickly and concentrating resources to prevent systemic risk, while the U.S. "multi-agency checks and balances" model places greater weight on preserving market flexibility and maintaining vigilance against public power through long-term institutional contestation.
In drafting the Financial Law, China need not mechanically imitate either model. Instead, on the basis of its own national conditions, it should absorb the reasonable core of internationally accepted rules and organically combine "effective control" with "sufficient flexibility", thereby providing robust legal support for the building of a financial power.
Finally, the author hopes that, during the public comment period, the legislature will fully absorb the practical experience of market participants and translate policy intent and institutional requirements into legal language that is more accurate, concise, and enforceable. That would help make China's financial governance more law-based, professional, and international, and in turn better serve the real economy, contain financial risks, deepen financial reform, and lay a solid institutional foundation for the building of a financial power.