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This chapter starts by reviewing four broad regulatory approaches that exemplified state-of-the-art in major jurisdictions: market-driven approach (the United States), state-driven approach (China), rights-driven approach (the European Union) and innovation-driven approach (the United Kingdom, Singapore, Hong Kong SAR). This chapter then examines possible regulatory updates with regards to walled gardens and shadow banking, the first two of the challenges first identified in Chapter 3. The next two chapters will then examine possible regulatory updates to address the remaining challenges identified.

The chapter studies the role of Financial Technology (FinTech) in disrupting the existing traditional banking system. It identifies FinTech’s evolution in Asia across Deposits & lending, Capital Raising, Investment Management, Market provisioning, Payments, and Insurance. This technology revolution allows us to have a banking system based on values that serve customers better, reduce risk to the society and improve returns for the shareholders. Data on unbanked population, smartphone penetration, and Internet penetration has led to retail side innovations such as Mobile Wallets, P2P Payments, and Real-time Payments in the most of Asia (except China). A total of 49% of Global Investments in FinTech are in Asia and the Chinese dragon alone accounts for 46%. India is witnessing a strong amount of FinTech deals in 2017 and it is being driven by payment and lending solutions. ASEAN FinTech industry is dominated by m-wallets and online payments; this is followed by retail investment and financial comparison. The chapter dives into the challenges Asian banks are facing because of this disruption. Now more than ever, is the important role governments and central banks of each nation play to assess the path these start-ups are headed on and this will unfold the landscape of banking in Asia a few years down the lane.

This paper proposes that if a political system is more like to facilitate a unified government, to establish a strong executive body and to respond to the needs of the majority, financial reforms are more likely to emerge from the policymaking process and produce positive results. On the contrary, political systems that discourage those governing features are less likely to produce reforms. This chapter compares financial reform processes in China, Taiwan and New Zealand. All of them performed low level of financial reforms in the early 1980s but resulted in different situations later. In the mid-2000s, New Zealand heralded the most efficient and stable financial system; while Taiwan lagged behind and China performed the worst. Evidence showed that China’s authoritarian system may be the most superior in forming a unified government with a strong executive, but the policy priority often responds more to the interests of a small group of power elites; therefore the result of financial reform can be limited. Taiwan’s presidential system can produce greater financial reform when the ruling party controls both executive and legislative bodies, but legislative obstructions may occur under a divided government. New Zealand's Westminster system produces the most effective and efficient financial reform due to its unified government and a strong executive branch with consistent and stable supports from the New Zealand Parliament.

While many believe that nonperforming loans (NPLs), privatization of banks, informal lending, and other forms of shadow-banking, as well as technological advances in machine learning for assessing creditworthiness will place China's financial regulatory system on a trajectory toward openness and privatization, other trajectories are possible and likely. Consider that each disturbance can be met with controlled alternatives. For NPLs, there are asset management companies; for informal lending, there is new technology to lower transaction costs and increase formalization and consolidation; for systemic risk presented by other forms of shadow-banking, there is systemic isolation of the traditional banking sector which substantially lowers that risk; and while machine learning promises more accurate assessments of creditworthiness for millions of individuals and small- to medium-sized enterprises, it promises far less improvement to assessments of China's 3,500 large enterprises that present substantially different variables. Privatization and openness is not necessary for China's continued development for a time just as liberalized payment regimes and foreign direct investment rules do not imply the implementation of broad, liberal capital controls. Financial regulators in China, therefore, will continue to implement policies of limited and piecemeal openness so long as the benefits of control continue to exceed those of faster-paced development.

This chapter examines China’s corporate governance and accounting environment that shapes the adoption of internationally acceptable principles and standards. Specifically, it examines international influences, including supranational organizations; foreign investors and international accounting firms; domestic institutional influences, including the political system, economic system, legal system, and cultural system; and accounting infrastructure. China’s convergence is driven by desired efficiency of the corporate sector and legitimacy of participating in the global market. Influenced heavily by international forces in the context of globalization, corporate governance and accounting practices are increasingly becoming in line with internationally acceptable standards and codes. While convergence assists China in obtaining legitimacy, improving efficiency is likely to be adversely affected given that corporate governance and accounting in China operate in an environment that differs considerably from those of Anglo-American countries. An examination of the corporate governance and accounting environment in China suggests heavy government involvement within underdeveloped institutions. While the Chinese government has made impressive progress in developing the corporate governance and accounting environment for the market economy, China’s unique institutional setting is likely to affect how the imported concepts are interpreted and implemented.

China has achieved continuous economic growth and become more integrated with the global economy since the start of the current financial crisis in late 2008. As the second largest economy in the world, China's political policies, economic and social development have influence on global economy. Attention has been paid worldwide to the current Chinese legal system, political policies and the development of economic reform since China entered the World Trade Organisation in November 2001. The corporate governance reform is the centre of the enterprise reform. In September 1999, The Fourth Plenum of the Chinese Communist Party's 15th central Committee identified that corporate governance is the core of the modern enterprise system. In recent years China has made significant progress in developing the foundations of a modern corporate system. There are more than 1,200 companies which have successfully diversified their ownership through public listing and 80% of small and medium size companies have been transformed into non-state-owned enterprises. More and more state-owned enterprises are on the way to transforming into corporations. China has formed a legal framework for corporate governance.

The interbank market in China experienced remarkable squeezes in liquidity in 2013. In particular, the overnight Shanghai Interbank Offered Rate reached a historical high in June. Banks were unprepared, facing the occurrence of various liquidity demands simultaneously. Effects of the liquidity squeeze spread across markets, and concerns were expressed about the health of the banking sector in the world’s second largest economy. Yet the central bank of China maintained an unswerving view that the tightness of liquidity was only structural, and could be overcome by the commercial banks themselves. While it may be too early to judge whether the central bank was correct, or whether there is systematic liquidity risk in the banking sector, markets received a clear signal from the People’s Bank of China. The central bank stopped acting as a ‘perpetual put option’ for commercial banks and refused to take responsibility to satisfy liquidity needs in the interbank market. Its intention is clear; that is, to adjust monetary policy and support economic reform in China. The new Chinese government seems determined to steer a new course away from the previous growth episode. Its resolution has been published and actions have been taken. Among them, the central bank’s changes to monetary policy have received responses from the markets, and the People’s Bank of China is now in the vanguard of a battle to squeeze liquidity. It is difficult to predict what further actions the government will take. However, it should be aware that the driving force of economic reform in China comes from structural change and productivity improvement. Without follow-up policies, complication in the financial system could undermine the central bank’s effort and international capital flows may quickly substitute the opening position of the central bank in the interbank market. More wisdom is required if China is to win the battle for deleveraging and structural reform.