The Role of Chinese Courts in Financial Regulation: Active Judging and Social Governance

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Key takeaways:

As China tightens its financial regulation, Chinese courts have taken the initiative to participate in financial regulation by hearing finance-related cases over the last five years.
Following the Shanghai model, the Beijing Financial Court and the Chengdu-Chongqing Financial Court, the second and the third of its kind, were established respectively in 2021 and 2022.
To achieve its goals, among others, in guiding and regulating financial transactions in order to make finance serve the real economy, Chinese courts are required to, when hearing relevant cases, protect such financial transaction models that can effectively reduce transaction costs, and achieve inclusive finance and legal compliance, and to implement veil-piercing regulation against financial irregularities that cover up financial risks, evade financial regulation and carry out arbitrage under the disguise of financial innovation.

On 7 Mar. 2023, China issued a new reform plan for government institutions, proposing the establishment of a State Administration for Financial Regulation.

This shows that China is now tightening its financial regulation. Chinese courts have, actually, taken the initiative to participate in financial regulation by hearing finance-related cases over the last five years.

I. Financial regulation by Chinese courts

Chinese courts’ active involvement in financial regulation can be traced back to the National Financial Work Conference (NFWC) held in July 2017, which was attended by China's President, Prime Minister, President of the Supreme People's Court (SPC), Procurator-General of the Supreme People's Procuratorate (SPP) and heads of all financial regulation departments. After the NFWC, SPC began to pay attention to financial regulation.

In August 2017, the SPC issued the “Several Opinions on Further Strengthening Financial Trials” (关于进一步加强金融审判工作的若干意见). This document requires local courts to guard against and control financial risks in financial cases.

The following year, China established its first financial court - Shanghai Financial Court. Established on 20 Aug. 2018, it became the first court, in China dedicated to hearing finance-related civil and administrative cases. Following the Shanghai model, the Beijing Financial Court and the Chengdu-Chongqing Financial Court, the second and the third of its kind, were established respectively in 2021 and 2022.

II. Why Chinese courts intervene in financial regulation

The SPC makes clear its purposes for intervening in financial regulation in the Several Opinions on Further Strengthening Financial Trials issued in 2017.

Firstly, the SPC expressed its view on the financial industry, "finance represents one important aspect of the core competitiveness of a country, financial security is a significant part of the national security, and financial system is an essential basic system in economic-social development". On this basis, the SPC further said that Chinese courts will give full play to the "function of financial trial, so as to promote the virtuous cycle and healthy development of economy and finance".

SPC continues to delineate its three specific objectives:

to guide and regulate financial transactions in order to make finance serve the real economy;
to guard against and address financial risks and maintain financial security; and
to serve and safeguard financial reform, and establish and improve new mechanisms within the judicial system accordingly.

For example, as for the first objective, the SPC indicated that Chinese courts should, when hearing relevant cases, protect such financial transaction models that can effectively reduce transaction costs, and achieve inclusive finance and legal compliance. By contrast, Chinese courts should implement veil-piercing regulation against financial irregularities that cover up financial risks, evade financial regulation and carry out arbitrage under the disguise of financial innovation, that is, to determine the effectiveness of legal relations and the rights and obligations of relevant parties on a substantive rather than a formal basis.

III. Why Chinese courts can intervene in financial regulation

Chinese courts not only try cases brought by parties in a passive manner, but also exercise the function of social governance.

Professor Hou Meng (侯猛), a Chinese scholar, put forward the view of the "Public Policy Court" in “The Operation Process of the Administration of Justice” (司法的运作过程). He believes that the SPC has become a court for formulating public policies, because the influence of the SPC is not limited to the trial process of courts at all levels, but has extended beyond the litigation process and the court system, exerting an ever-increasing impact on society at large.

Chinese courts participate in social governance mainly in two ways:

(1) Case hearing. Chinese courts determine the rights and obligations of the parties through the case-by-case trial. Then, they express their understanding of relevant issues through public judgments, thus providing guidance for the public and the market.

(2) Judicial policy formulation. The SPC has the power to interpret the law and, to a certain extent, create new rules by interpreting the law. Such rules not only provide guidance on the application of law for local courts in terms of case hearing, but also provide guidelines for the public and the market.

By doing so, the SPC and local courts achieve the goal of financial regulation.

IV. The way forward for Chinese courts

The SPC is strengthening its cooperation with government financial regulation departments.

On 10 Jan. 2023, the SPC, in concert with three local financial courts, the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission, held a working conference on the financial trial of courts nationwide.

Zhou Qiang (周强), the former SPC president, said that the SPC would cooperate with financial regulators to improve the working mechanism for guarding against and addressing financial risks, as well as support and facilitate financial regulators to perform their regulatory obligations according to law. Heads of financial regulation departments expressed their willingness to cooperate with the court as well.

This means that China will usher in an era of judicial-aided financial regulation in the future. Therefore, for investors and researchers who want access to the Chinese financial market, Chinese courts are not to be sniffed at.

Contributors: Guodong Du 杜国栋

The Shanghai Financial Court

Insight: China Justice

Banking and Finance

Financial Courts