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Assessing the governance of the independent regulatory agencies in China

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Assessing the governance of the independent regulatory agencies in China

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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

ii
TABLE OF CONTENTS

LIST OF TABLES iii
LIST OF FIGURES iv
ABSTRACT v
CHAPTER 1: INTRODUCTION 1
CHAPTER 2: BACKGROUND: IRAS IN THE WORLD AND IN CHINA 12
CHAPTER 3: THEORETICAL FOUNDATIONS 30
CHAPTER 4: METHODOLOGY 54
CHAPTER 5: FINDINGS: THE GOVERNANCE STATE OF CHINA IRAS 61
CHAPTER 6: FINDINGS: CONSTRAINTS TO CHINA IRAS 98
CHAPTER 7: CONCLUSIONS 133
BIBLIOGRAPHY 140
APPENDICES 146
APPENDIX A: THE QUESTIONNAIRE 146
APPENDIX B: INTERVIEW QUESTIONS 154
APPENDIX C: PARTICIPANTS OF THE SURVEY AND INTERVIEW 155
APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH
QUESTION IN THE QUESTIONNAIRE 156
APPENDIX E: SUB-V ARIABLES CHINA IRAS SCORE
RELATIVELY HIGH AND LOW 158

iii
LIST OF TABLES

Table 1.1: Independent regulatory agencies (IRAs) in China 8
Table 2.1: Typical institutional features of IRAs in Europe 15
Table 2.2: Organizational position of China IRAs 17
Table 4.1: The composing variables and sub-variables of the questionnaire 55
Table 5.1: China IRAs’ scores on independence 63
Table 5.2: China IRAs’ scores on independence from the government 63
Table 5.3: China IRAs and the laws 65
Table 5.4: China IRAs’ scores on independence from the regulated industry 71
Table 5.5: The revolving door in China 73
Table 5.6: China IRAs’ scores on decision-making competency 79
Table 5.7: Regulatory power possessed by China IRAs: the example of CBRC
and SERC 80

Table 5.8: China IRAs’ scores on accountability 86
Table 5.9: China IRAs’ scores on the three assessment variables:
Independence, decision-making competency, and accountability 95

Table 6.1: Characteristics of industries with IRAs 122

iv
LIST OF FIGURES

Figure 5.1: Independence Index 62
Figure 5.2: Decision-making Competency Index 78
Figure 5.3: Accountability Index 86
Figure 5.4: China IRAs’ scores on the three assessment variables:
Independence, decision-making competency, and accountability 95

Figure 5.5: The Governance Index of China IRAs 96

v
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 China’s regulatory state. The constraints identified in this research also
provide important references for the future design of new IRA in China.

1
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 nation’s economy and has yielded gradually to
market mechanism (Yu, 1997; Wang, 2003). The government’s 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

2
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 world’s 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.

3
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 Roosevelt’s 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

4
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
1940’s 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 Korea’s 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 Korea’s system from
that of Europe and the United States is that they did not rely on well-established and

5
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 firms—in other words, to create “national champions”
(Pearson, 2005).
This developmental state model accommodates with Japan and Korea’s
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-1990’s, 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

6
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 people’s 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. China’s 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 people’s 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.”

7
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 model’s 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.

8
Table 1.1: Independent regulatory agencies (IRAs) in China

Independent Regulatory Agency
Year
Established
Regulatory
Area
Financial
area
China Securities Regulatory
Commission (CSRC)
1998 Securities
China Insurance Regulatory
Commission (CIRC)
1998 Insurance
China Banking Regulatory Commission
(CBRC)
2003 Banking
Network
industries
State Electricity Regulatory
Commission (SERC)
2002
Electric
power sector
Civil Aviation Administration of China
(CAAC)
2002 Civil aviation

State Food and Drug Administration
(SFDA)
1998
Food and
Drug

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;

9
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.

10
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 China’s 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

11
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.

12
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 model’s 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 agency—who 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

1
Lavrijssen (2004) calls the IRCs “independent agencies.”

13
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.

14
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).

2
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).

15
Table 2.1: Typical institutional features of IRAs in Europe
Britain France Germany Italy
Number of
regulators
Until 2000,
single person
for utilities,
commissions
for others;
moving towards
multi-person
Multi-person Multi-person Multi-person
Nomination
Power
Minister
Separate
places for
nominees of
President,
Prime
Minister and
heads of
parliamentary
houses
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
Autorite
administrative
independence
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:

16
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 China’s
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.

17
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
People’s 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)
……

18
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 worldwide？There 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

19
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.

20
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).

21
Both the functional and institutional imitation reasons discussed above have
been reflected in Mariana Mota Prado’s 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

22
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 China’s 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.
1949-1978：：：：Full government control under the planned economy
When the People’s 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.

23
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 people’s 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 country’s focus to modernization.
In 1982, The 12
th
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. People’s living standard was improved greatly. And, the private
sector has gradually grown into an important force in Chinese economy.

24
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 China’s 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 14
th
Chinese Communist Party Congress formally announced the objective

25
of China’s 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 China’s
economic reform. It provides theoretical support to China’s adoption of market
mechanism in its economic reform. A socialist market economy is a key component in
China’s 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,

26
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.

27
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 People’s 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 government’s administration
department of China’s securities market. Two years later, CSRC was established and
took over the administration responsibility on securities market from PBC. But
CSRC’s 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.

28
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 China’s 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 China’s 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

29
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 China’s administration system.
China has engaged itself in constructing a regulatory state.

30
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.

31
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)

32
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 agency’s 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

33
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

34
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

35
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

36
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

37
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).

38
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).

39
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 IRA’s 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

40
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.

41
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. Regulatory authority authorized by law.
b. 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

42
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 authority’s staff are important resources to
keep IRA independent.
e. Only court can overturn the IRA’s 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 regulator’s independence
might be compromised by the regulator’s 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

43
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,

44
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

6
Correa et al. (2006) refer this as “legal means.”

45
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 regulator’s decision

46
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

47
effectiveness, we need to further identify those factors that are negatively affecting
their regulatory governance—specifically, 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

48
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
structures—structures 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 all—and
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).
Moe’s 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
organization’s effectiveness. Next I will explore those constraints on regulatory
agencies that have been discussed in previous research.

49
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-CIER’s 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).

50
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 regulator’s 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).

51
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 agency’s 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

52
annual reports submitted by regulator are not always discussed with any
seriousness. Regulator’s 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 countries—even regulatory agencies in the same country—vary,
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,
China’s 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-state’s considerable financial and
social interests in these key industries” (1995: 298). In short, the state’s interest in

53
continuing to enhance its control over crucial assets significantly reduces the
possibility of regulatory independence.
Pearson’s 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 IRAs—which is absent in previous
research—this 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.

54
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

55
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
Independence
The law
Agency head
Financial
Interference from other government authorities

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
Accountability
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

56
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 interview—that is, an interview
not focusing on one specific IRA—was 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

57
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 official’s office.

58
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

59
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 variables—the
“Independence Index,” the “Decision-making Competency Index,” and the
“Accountability Index”—and 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.

60
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.

61
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 variables—the
“Independence Index,” the “Decision-making Competency Index,” and the
“Accountability Index”—and 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

62
the twenty questions covering the variable of independence was the IRA’s score on the
“Independence Index;” the average score of the six questions covering the variable of
decision-making competency was the IRA’s score on the “Decision-making
Competency Index;” the average score of the ten questions covering the variable of
accountability was the IRA’s 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
0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
1
C S R C C I R C C B R C S E R C C A A C S FD 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

63
Table 5.1: China IRAs’ scores on independence
Independence
Independence from
the government
Independence from
the regulated industry
CSRC 0.67 0.75 0.50
CIRC 0.68 0.76 0.49
CBRC 0.73 0.77 0.66
SERC 0.65 0.64 0.68
CAAC 0.54 0.56 0.49
SFDA 0.57 0.59 0.51
Average 0.64 0.68 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
Sub-variable
The
law
Agency
head
Financial
Interference from other
government authorities
CSRC 0.75 0.50 0.82 1 0.80
CIRC 0.76 0.50 0.82 1 0.83
CBRC 0.77 0.50 0.82 1 0.88
SERC 0.64 0.25 0.78 0.97 0.57
CAAC 0.56 0 0.72 0.67 0.73
SFDA 0.59 0.5 0.72 0.67 0.57

64
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 People’s Congress (NPC, the Legislature in
China), or decree from the State Council, usually after a few years of the IRA’s
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 People’s 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

65
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 People’s 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
Law/Decree and the
year enacted
Notes
Regulatory
authority
formally
confirmed
CSRC, 1998
The Securities Law of
the People’s Republic
of China, 1998
Revised in 2005 by
the National People’s
Congress
1998 law
CIRC, 1998
The Insurance Law of
the People’s Republic
of China, 1995
Revised respectively
in 2002 and 2008 by
the National People’s
Congress
2008 revision
CBRC, 2003
Banking Supervision
Law of the People’s
Republic of China,
2004
2004 law
SERC, 2002
Ordinance on
Electricity Regulation,
2005
Enacted in 2005 with
the approval of the
State Council
2005 decree
CAAC, 2002
Civil Aviation Law of
the People’s Republic
of China, 1996
Revision expected in
2009
2009 revision
SFDA, 1998
Drug Administration
Law of the People’s
Republic of China,
2001
2001 law

8
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.

9
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.”

66
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 People’s 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.

67
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
China’s 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 China’s 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 China’s airlines.” Li’s 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 institution’s 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,”

68
said a respondent. The final appointment of Chai, Songyue reflected this point. Chai
was the governor of Zhejiang province before his appointment. Chai’s successor, You,
Quan, was transferred from the position of Vice Secretary of the State Council to
assume as the second Chairman of SERC. You’s appointment was regarded as a way to
strengthen the power of SERC, as You was transferred from such a powerful position.
You’s 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 Ministries”
11
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 levies—called
regulation fees in China—from 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.

69
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

70
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 SFDA’s 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 China’s 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 authorities—mainly 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,

71
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
Sub-variable
Influences from the regulated
industry to the IRA
Intervention of the
IRA in the regulated
industry
CSRC 0.50 0.50 0.50
CIRC 0.49 0.68 0.13
CBRC 0.66 0.68 0.63
SERC 0.68 0.69 0.68
CAAC 0.49 0.68 0.13
SFDA 0.51 0.38 0.78

72
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.

73
Table 5.5: The revolving door in China
CBRC
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.
CIRC
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.
CAAC
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.

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

74
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
government’s 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.

75
As the most powerful organization in the securities market, CSRC has long
been criticized for its overcharged regulatory responsibility. For example, a report
14

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 CSRC’s 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 don’t
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 China’s stock market, China’s 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”

76
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 CSRC’s
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-law”
15
of China’s civil aviation industry. In China, CAAC’s 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.

16
In 2007, CAAC even stipulated that before 2010, private airlines cannot own more than ten
airplanes.

77
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 people’s 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”

78
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 eci si on- m aki ng C om pet ency I ndex
0. 73
0. 78
0. 81
0. 68
0. 73
0. 55
0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
1
C S R C C I R C C B R C S E R C C A A C S FD A

79
Table 5.6: China IRAs’ scores on decision-making competency

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

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.

80
Table 5.7: Regulatory power possessed by China IRAs: the example of CBRC and SERC
Rule-making power Licensing power Supervisory power
CBRC
In accordance with
laws and administrative
rules, draw up and
publish rules of
regulation on the
business activities of
China’s banking
institutions.
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.
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.
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.
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 Council’s price management
department.

81
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

82
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

83
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

84
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

85
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.”

86
Figure 5.3: Accountability Index
A ccount abi l i t y I ndex
0. 72
0. 68
0. 76
0. 73
0. 57 0. 58
0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
1
C S R C C I R C C B R C S E R C C A A C S FD A

Table 5.8: China IRAs’ scores on accountability

Accoun
-tability
Sub-variable
Formal
institutional
mechanism
to hold IRA
accountable
Supervision
from the
media
External
auditing &
performance
review
Norms
of
ethics
Mechanism
to challenge
IRA
decision
Public
participation
Transp
-arency
CSRC 0.72 0.40 0.75 0.45 0.75 1 0.50 0.97
CIRC 0.68 0.40 0.75 0.45 0.50 1 0.30 0.97
CBRC 0.76 0.50 0.75 0.45 0.90 1 0.50 1
SERC 0.73 0.40 1 0.45 0.50 1 0.55 0.97
CAAC 0.57 0.75 0.75 0.25 0.50 1 0.30 0.63
SFDA 0.58 0.75 0.65 0.25 0.50 1 0.50 0.63
Average 0.67

87
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 People’s 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

88
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 media’s 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 media’s discussion about SERC’s 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

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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 IRA’s
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 People’s 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: CIRC’s 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

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rushing to convene the public hearing and the hastiness to choose the hearing
representatives have only shown CIRC’s 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 People’s 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

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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 IRA’s
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

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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

Independence
Decision-making
competency
Accountability
CSRC 0.67 0.73 0.72
CIRC 0.68 0.78 0.68
CBRC 0.73 0.81 0.76
SERC 0.65 0.68 0.73
CAAC 0.54 0.73 0.57
SFDA 0.57 0.55 0.58
Average 0.64 0.71 0.67

Figure 5.4: China IRAs’ scores on the three assessment variables: independence,
decision-making competency, and accountability

0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
1
C S R C C I R C C B R C S E R C C A A C S FD A
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).

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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 hi na I R A s
0. 7
0. 69
0. 75
0. 68
0. 58
0. 57
0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
1
C S R C C I R C C B R C S E R C C A A C S FD 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?

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1. Generally, these China IRAs have “found their position” in China’s 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 haven’t 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 People’s 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.”
China’s 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 Council’s “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
People’s Congress or the Standing Committee of the National People’s Congress
during its recess. But for other institutions, including “Organizations directly under the

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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 government’s “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

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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 government’s 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

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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 NDRC’s 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 China’s 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

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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, NDRC’s influence on
SERC is far more substantial.
The establishment of SERC is the product of reforming China’s 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 China’s power
sector.
The establishment of SERC had been highly praised, which then was the first
independent regulator of China’s 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

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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 SERC’s 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

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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 SERC’s 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
“Analysis on Electricity Regulatory Function from the Sector’s Need”

20
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 SERC’s and CAAC’s 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 coach’s duty.
CSRC’s 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
company’s 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 China’s 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

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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
SASAC’s 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 China’s 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, CSRC’s 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 People’s 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 PBC’s 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 CSRS’s 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 bank’s macro-management and
CBRC’s 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 ABC’s
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

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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
People’s Republic of China was finally promulgated by the National People’s
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
agencies—the 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 Commerce—all 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 individual’s 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.

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Take CBRC as an example. One of CBRC’s 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

114
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 government’s 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 media’s 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

115
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 SFDA’s 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 China’s
Central Bank (the People’s 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 China’s 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 on—this 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.

117
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, China’s 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.

118
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 person’s 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.

119
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

120
China’s 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 China’s economic security, they
are “considered to be too politically and economically important to leave to an ideal of
evenhanded, politically insulated, arm’s-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 Characteristics of the Regulated Industry
China Securities
Regulatory
Commission
(CSRC)
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 China’s stock market.
China Insurance
Regulatory
Commission
(CIRC)
The four state-owned insurance companies, China Life
Insurance, China People’s Insurance, Pacific Insurance, and
PingAn Insurance, occupy 75% of the market share. But
private and foreign insurance companies developed rapidly
in recent years.
China Banking
Regulatory
Commission
(CBRC)
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 Electricity
Regulatory
Commission
(SERC)
State capital is in the dominant position in the market. The
two national power grids corporations have a 100% control
on China’s 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.
Civil Aviation
Administration of
China
(CAAC)
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.
State Food and
Drug
Administration
(SFDA)
The market is in complete competition. The market
participants have different capital sources.

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

123
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, CIRC’s 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 CIRC’s 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

124
“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 regulator’s 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 China’s 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

125
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
China’s 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” problems—that means, they were considered as the kinds of
problems widely existed in all kinds of institutions—and few respondents raised them
as problems that had to pay special attention.

126
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 translation—“Institutions
directly under the State Council”—does 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

127
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. China’s 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
government’s 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 China’s 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

128
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 Council’s 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.

129
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 People’s 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

130
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

131
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.

132
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.

134
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

135
“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

136
checks and balances from the National People’s 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 People’s Congress and the adoption of the
Regulatory Impact Assessment mechanism.

137
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. V oices 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,

138
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. China’s development experiences reveal that, in this crisis, compared with
their foreign counterparts, especially those in the financial industries, China’s 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

139
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 China’s 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.

140
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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 agency’s 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 Fang’an of the State Council (0)
c. Other _____________________

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

— Decree? a. Yes (0.5)
b. No (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 People’s Congress) (0.67)
c. a mix of the executive and the Legislature (1)
d. the Minister (0)

147
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? __________________________________

148
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 Stable/supportive
0 0.25 0.5 0.75 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 Very low
0 0.25 0.5 0.75 1

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
agency’s 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)

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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 Very low
0 0.25 0.5 0.75 1

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 Very low
0 0.25 0.5 0.75 1

Why this score? Please explain: __________________________________

150
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 _______________________________ (0.1)
b. Administrative penalty _____________________________ (0.1)
c. Non-administrative penalty regulatory mechanism __________ (0.1)
d. Quasi-judicial __________________________________ (0.1)
e. Coordination and arbitration ___________________________ (0.1)

How would you evaluate the effectiveness of these regulatory measures？

Not effective 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 abundant
0 0.25 0.5 0.75 1
Please explain the choice: __________________________________

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: ____________________________________________

151
Information collection mechanism

26. How would you evaluate the current information collecting mechanism of the
agency?

Not effective highly effective
0 0.25 0.5 0.75 1

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 highly effective
0 0.25 0.5 0.75 1

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 (0)

If there is problem, please describe:_______________________________

152
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) c. Other

If the answer is Yes, are they useful?
a. Yes (0.5) b. Somewhat (0.25) 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 agency’s 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 agency’s 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 agency’s decisions and actions?
_______________________________________________________

153
36. Does the agency prepare an annual report?
a. Yes (1) b. No (0)

What are the contents included in the annual report?
______________________________________________

154
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?

155
APPENDIX C: PARTICIPANTS OF THE SURVEY AND INTERVIEW
(√: Senior official from the IRA X: Independent scholar O: Outside consultant)
Participant
(each letter represents a participant)
Survey
Interview
General
Interview
CSRC CIRC CBRC SERC CAAC SFDA
A √ √
B √ √
C X X X X X X X
D X X X X
E O O
F √ √
G √ √
H O O
I √ √
J √ √
K O O
L √ √
M √ √
N X X X
O X X
P √ √
Q √ √
R O O
S √ √
T √ √
U O O
V X X
Totally 5 5 5 5 5 5 22

156
APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH QUESTION IN THE QUESTIONNAIRE

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

157
APPENDIX D: SCORES CHINA IRAS RECEIVE ON EACH QUESTION IN THE QUESTIONNAIRE
(continued)
Decision-making
competency
Regulatory powers and
regulatory measures
Q21 1 1 1 1 1 1
Q22 0.9 0.9 0.9 0.7 0.8 0.8
Human resources
Q23 0.8 1 1 0.8 0.8 0.2
Q24 0 0 0 0 0 0
Q25 1 1 1 0.95 1 0.85
Information collection
mechanism
Q26 0.7 0.8 0.95 0.65 0.75 0.45
Accountability
Formal institutional
mechanism to hold IRA
accountable
Q27 0.4 0.4 0.5 0.4 0.75 0.75
Supervision from the
Media
Q28 0.75 0.75 0.75 1 0.75 0.65
External auditing and
performance review
Q29 0.5 0.5 0.5 0.5 0.5 0.5
Q30 0.4 0.4 0.4 0.4 0 0
Norms of ethics Q31 0.75 0.5 0.9 0.5 0.5 0.5
Mechanism for regulated
entities to challenge
the IRA decision
Q32 1 1 1 1 1 1
Public participation Q33 0.5 0.3 0.5 0.55 0.3 0.5
Transparency
Q34 1 1 1 1 1 1
Q35 0.9 0.9 1 0.9 0.9 0.9
Q36 1 1 1 1 0 0
Ave Ave Ave Average rage rage rage 0.70 0.70 0.70 0.70 0.69 0.69 0.69 0.69 0.75 0.75 0.75 0.75 0.68 0.68 0.68 0.68 0.58 0.58 0.58 0.58 0.57 0.57 0.57 0.57

158
PPENDIX E: SUB-V ARIABLES CHINA IRAS SCORE RELATIVELY HIGH AND LOW
(√: higher than 0.75 X: lower than 0.5)
CSRC CSRC CSRC CSRC CIRC CIRC CIRC CIRC CBRC CBRC CBRC CBRC SERC SERC SERC SERC CAAC CAAC CAAC CAAC SFDA SFDA SFDA SFDA
Independence

Independence
from the
government
The law X X
Agency head √ √ √ √
Financial √ √ √ √
Interference from other
government authorities
√ √ √
Independence
from the
regulated
industry
Influences from the regulated
industry to the IRA
X
Intervention of the IRA in the
regulated industry
X X √
Decision-making
competency
Regulatory powers and
regulatory measures
√ √ √ √ √ √
Human resources X
Information collection
mechanism
√ √ X
Accountability
Formal institutional mechanism
to hold IRA accountable
X X X
Supervision from the Media √
External auditing and
performance review
X X X X X X
Norms of ethics √
Mechanism for regulated
entities to challenge the IRA
decision
√ √ √ √ √ √
Public participation X X
Transparency √ √ √ √

Abstract (if available)

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 China’s regulatory state. The constraints identified in this research also provide important references for the future design of new IRA in China.

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Asset Metadata

Creator Hu, Jiabin (author)

Core Title Assessing the governance of the independent regulatory agencies in China

School School of Policy, Planning, and Development

Degree Doctor of Philosophy

Degree Program Public Administration

Publication Date 07/29/2009

Defense Date 02/20/2009

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag independent regulatory agencies,OAI-PMH Harvest,regulatory governance

Place Name China (countries)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Robertson, Peter J. (committee chair), Hentschke, Guilbert C. (committee member), Tang, Shui Yan (committee member)

Creator Email hujiabin@yahoo.com,jiabinhu@163.com

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m2408

Unique identifier UC1213562

Identifier etd-hu-2960 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-566134 (legacy record id),usctheses-m2408 (legacy record id)

Legacy Identifier etd-hu-2960.pdf

Dmrecord 566134

Document Type Dissertation

Rights Hu, Jiabin

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu