A few questions have been nagging me recently about our financial regulation.

The first one is about the stock market's circuit breaker mechanism, which was triggered twice on January 4 and two more times on January 7. The China Securities Regulatory Commission (CSRC) suspended it late on January 7. Analyses about why this happened have focused on the weak conditions of the economy, the depreciating yuan and the six-month prohibition on sales by big shareholders of listed firms. But the public already knew these factors in December. If investors thought they would affect stock prices negatively, they would have sold their holdings before the circuit breaker mechanism came into effect. Why they should have waited until January 4 to sell, causing stock prices to fall precipitously, has not been explained in any research report I've read.

Also, since last year, the regulator has repeatedly revised its policies under market pressure – and done so hastily. It rushed out a regulation to soften the impact of the ending of the six-month embargo on stock sales, but did so on January 8 after the market had taken a hit. Why did not it make the rules clear sooner?

In addition, suspending the circuit breaker mechanism after only four days serves as a reminder that other rules the regulator adopted in crisis mode last year may not have been clearly thought out. Now is the time to ask whether we have reviewed those regulations and fixed their flaws before it is too late. We cannot always wait until hidden perils have surfaced to tackle them.

There's been a lot of reflection going on about last year's stock market collapse. What's missing in all the discussions, however, is how financial regulators have failed to attract and keep talent. This is very important.

The CSRC, for example, has been losing talents to a brain drain. During a visit to a southern coastal province not long ago, I found that many people working in financial institutions there have far better qualities than those at the securities regulator. Many of them used to work for the government. Some came from Wall Street and were trained by top financial institutions overseas; others grew battle hardened by working in the Chinese stock market since its early days. Seeing this amazing mix of talent, I could not help but wonder how regulatory officials could possibly beat the market, however hard they may work into the night. If the regulator does not have the best people, how can it supervise the market effectively?

The ranks of regulators have also been thinned out because of institutional deficiencies that erode their talent from within. More CSRC officials were arrested last year than ever before and the highest ranks were affected. This is heart wrenching. Among the most senior officials detained, some participated in the country's securities market from early on as investors or regulators. They did not start out being corrupt, so what made these high-flyers a target of investigators? I think it has to do with the all-powerful but little-supervised stock issuance system, which has created enormous rent-seeking opportunities. Not everyone can withstand the temptations of power and money. Those who failed became corrupt.

It has been proposed recently that the regulator set up an advisory group to counter the loss of talents. This is a very dangerous suggestion indeed. Two cases that follow serve to illustrate my point.

One is the committee the CSRC created to help review IPO requests. Many experts from the market were invited to join the body to counterbalance the regulator's authority. But the arrangement has big loopholes, as can be inferred from widely circulated stories about how the committee's members can be bought. As it turned out, increasing the body's size only adds to the cost of bribing its members. This is probably why the central government has insisted on reforming the IPO system. People are not born good or evil. Good institutions protect good people and keep bad ones at bay; bad institutions do the opposite.

The other case is associated with the government's bailout of the stock market last year. The CSRC recruited private institutions and personnel to intervene in the market in much the same way it has been advised to lean on the opinions of outside experts. It chose some companies, and their executives happily embraced the idea. Now they must be regretting it because huge paper losses have been the result. Also, some executives of those companies have been arrested over crimes allegedly tied to the bailout, proving yet again that cheating is inevitable when the athletes serve as their own referees.

It is true that the United States and Hong Kong bailed out their securities market, but in neither place was the securities watchdog tasked with the job. Instead, monetary authorities or finance officials did it. This is one way to prevent fraud and cheating – by having the officials who carry out a bailout supervised by another group of officials. Of course, the principles and methods of a bailout in the United States and Hong Kong are different from ours. Exploring the differences is another matter that we shall not dive into here.

This is why I think creating an advisory group is a bad idea. There is absolutely no need for regulators to arrange for fixed institutional channels for outsiders to weigh in on policy issues. More likely, these relationships will be used to steal insider information. There are many government-supported or private think tanks that publish their research results and can be hired to examine specific issues.

As long as regulators are open-minded and can learn well, they will not run out of good suggestions. The key is creating good institutions for them to attract and keep talented people. If this is not done, China's stock market will continue to suffer one crisis after another.

Li Jiange is the co-head of Tsinghua University's National Institute of Financial Research. This article is taken from a speech he made in Chinese at the 20th China Capital Market Forum in Beijing on January 9