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When regulation becomes political

March 9, 2015

Flag_of_the_People's_Republic_of_China_svgIt might be argued that all regulation is ultimately political, but notices issued by the Chinese Banking Regulatory Commission and the Ministry of Industry and Information Technology appear to cross new boundaries. They threaten operations in China by all foreign banks, undermine competition in the technology sector and show complete disregard for the intellectual property rights of non-Chinese software companies.

In common with most jurisdictions, China has concerns over cyber-security and wishes to ensure effective oversight of the banking sector. However, the authorities appear to be making this into an opportunity to either eliminate competition or to acquire trade secrets via access to source code and encryption keys. Presumably such access would also enable the Chinese government to mount cyber attacks of its own against foreign countries.

Speaking with representatives of the banking industry, there is of course massive concern. One executive explained to me that the regulations as currently published would leave banks with two options. One would be to leave the Chinese market and the other would be to create a unique entity, using only Chinese origin software and technology. The problem with the latter solution – in addition to the expense – is that such an operation would then prevent the bank from meeting regulatory obligations elsewhere, since it would no longer have integrated visibility into worldwide operations.

It is hard to know what goals the Chinese authorities are pursuing. Is their intent to eliminate domestic competition in financial services? Do they really believe that non-Chinese institutions will obtain and hand over source code (which they of course do not have and which would leave them in breach of license terms) which will then be used to enable Chinese firms to replicate and undercut foreign rivals? Or is this simply posturing and a negotiating ploy that leads to some other goal?

This incident reveals the hidden danger of regulation. The more we have, the more that Governments will be tempted to use it for domestic policy and political purposes. In a networked world, it becomes very easy for authorities to justify their actions on the basis of ‘national security’; sadly, we must anticipate a growing threat to world trade driven by many forms of protectionism, of which this example is just one.

 

One Comment
  1. Eugene P. Grace permalink

    Sadly, this is nothing new. China has used the siren song of its market size to cause foreign companies to engage in imprudent conduct. Like most siren songs, the correct response should be caution. The Chinese seek access to source code in order to leapfrog their technology which will be used for various commercial and military purposes. Regulation is an instrument of government and so reflects the objectives of those in power; as such it is political by nature.

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