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

In a moment where bilateral regulatory mistrust threatens to dismantle many of the financial ties built-up over the last three decades, understanding the mindset of the Chinese regulator becomes all the more important.  Policy Implications and Key Takeaways ● Whereas in the Anglosphere, financial regulation assumes the presence of rational investors, an arms-length regulatory state, and semi-stron. [...] In the Anglosphere, despite recent relaxations of the rationality assump- tion in terms of investor sophistication and vulnerability, scholars highlight how a clear thread of rationality still guides the logic of regulators.23 To the contrary of a growing literature in behavioral economics and the law, which has advocated for a more paternalistic approach to address investor cognitive biases, the. [...] Despite the blurring of the lines in terms of regulatory practice, as will be shown, given the anchoring fiction of an irrational investor, the rationalizing fiction of a market inefficiency, and an enabling fiction of state paternalism, ideational inconsistency leads to a roll-back towards the default. [...] As one foreign investor comments, “in the end you need the banks, the lawyers, the innovators, the financing, and the rule of law…but you target one piece of it and it’s just not going to end up right.”50 Regulatory skepticism of the efficiency-enhancing role of institutional inves- tors is clear. [...] The lack of openness to a more liberal approach to the stock market began with the collapse of faith in the western regulatory order fol- lowing the Global Financial Crisis.