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Xi uses a familiar playbook to control China’s banks

by SuperiorInvest

To a man with a hammer, a renowned psychologist once declared, everything looks like a nail.

For most of his decade in power, You are Jinping, China’s leader, usually came to the same conclusion as to how best to solve the country’s problems: involve the Communist Party more. And now that China is facing an economy that lacks the dynamism of the past and is teetering real estate sector in crisis and debt-ridden local governments, Mr. Xi is swinging the hammer again.

At the annual meeting of China’s National Legislative Assembly, which ended on Monday, Mr. Xi made a number of presentations extensive changes to the country’s regulatory framework, which allows top party officials to assert direct control over financial policy and banking regulation. Appointments of Mr. Xi’s allies to key regulatory roles and other changes are expected in the coming days to further strengthen the party’s oversight of the financial system.

“It’s very consistent with what Xi has been putting in place for the last 10 years,” said Max Zenglein, chief economist at the Mercator Institute for China Studies in Berlin. “Whenever he is confronted with a problem, the solution is more centralization into the party.”

The moves were the latest evidence of how Mr. Xi is moving on reshape China’s business climate, steering the world’s second-largest economy away from the free-market policies that fueled its rise. While past Chinese leaders have sought to maintain a buffer between the party and the private sector, Mr. Xi has blurred those lines and made it clear that companies are there to advance the party’s agenda.

Mr. Xi underscored that message on March 6 when he said the party had always viewed the private sector as “our own people” and that while she had a responsibility to support businesses in difficult times, she also needed to “offer guidance” in times of turmoil.

With the economy growing at near its slowest pace in decades, it is critical for Mr. Xi that the financial sector fulfills his vision. It needs bankers to allocate capital the way China wants to spend its money and prevent domestic funds from moving overseas, while being careful to avoid over-lending and putting the financial system at risk.

In what appeared to herald structural changes in the financial regulatory bureaucracy, China’s top anti-graft watchdog was also published a not-so-veiled warning to bankers last month. She said she would “seriously investigate and deal with people who neglect the leadership of the party in financial work and state-owned enterprises”.

Echoing a message of “shared prosperity”, one of Mr Xi’s signature slogans to reduce the wealth gap in Chinese society, the watchdog said bankers should embrace the party’s values ​​and avoid the ideologies of the “financial elite”. . The group said bankers should not imitate the West with its unique focus on money.

Heads are already spinning. Bao Fan, prominent investment banker and CEO of China Renaissance Holdings, disappeared last month. After initially saying he was unable to contact Mr. Bao, China Renaissance he said it has learned that the banker is cooperating with an investigation being carried out by some Chinese authorities.

Last month, China’s top prosecutor charged Tian Huiyu, former president of China Merchants Bank, one of the country’s largest commercial lenders, of abuse of power and insider trading. When he was expelled from the Communist Party in October, the party said in the statement that Mr. Tian led a “depraved life with loose morals” for receiving lavish gifts as well as invitations to banquets, travel and golf.

Bao Fan, a prominent investment banker and CEO of China Renaissance Group, in Hong Kong in 2018. He disappeared last month.Credit…Bobby Yip/Reuters

The heightened rhetoric, targeted surveillance and crackdowns on prominent figures are reminiscent of China’s so-called corrective campaign in recent years in the technology sector. This had the effect huge fines, upgrading business strategies and tycoons driven underground.

But unlike the tech industry, which has been flying high and gaining more influence in society, the financial sector is under enormous pressure in part due to shaky balance sheets of local governments and the banks that lend to them. ANZ Research estimates that China’s municipal debt has grown by 16 percent a year over the past five years.

After three years of footing the bill for China’s strict policy of constant “zero Covid” testing, the local government’s finances are stretched thin, a situation made worse by the collapse of the property market, which has reduced the once-reliable income stream from renting state land to real. real estate developers.

It was approved by China’s legislature known as the National People’s Congress on Friday proposal create a new regulatory body called the State Financial Supervision and Administration Bureau to oversee China’s 400 trillion yuan, or $57 billion, financial system. The new entity was created from the existing China Banking and Insurance Regulatory Commission and will absorb some of the roles played by other agencies, including the central bank and the securities regulator.

Darrell Duffie, a professor of management and finance at Stanford University and a close China watcher, said the changes are in line with China moving to add regulation to correct past mistakes. In this case, he said, it was to correct “excessive financial exuberance” that had caused dozens of developers to default on loans and left the sector in debt.

It’s a delicate dance, Zhaopeng Xing, chief China strategist at ANZ Research, wrote in a note, as authorities need to make sure banks and companies don’t indulge in risky loans while not stifling the economy, as credit “remains the most important driver of growth.”

Analysts say this latest campaign to clean up the financial sector is also rooted in growing concerns about the adequacy of the country’s financial regulation, which has been called into question in recent years by a series of missteps and scandals that have tested the party’s ability to maintain order. .

Peer-to-peer lending first took off in China around 2014 without much oversight a series of failures and scandals unleashed a wave of protests that forced the government to close down the sector a few years later. Last year, demonstrations broke out when depositors at rural banks in central China’s Henan province said institutions had frozen their savings accounts and refused to let them withdraw money.

Lu Ting, chief China economist at Japanese brokerage Nomura, said some of the changes were long overdue as “many problems” have emerged in recent years reflecting the challenge of local governments overseeing the financial institutions they rely on.

In addition to the government’s new financial regulator, the Communist Party is expected to resurrect a policy-making committee that will report directly to the top leadership. The Central Financial Works Commission was was established in 1998 after the Asian financial crisis so that party leaders could play a role in regulation. It was dissolved five years later when China established a banking regulator.

In its reincarnation, the commission is expected to work closely with the new regulator and be headed by a member of the Politburo Standing Committee, the inner circle of power in Chinese politics made up mostly of Xi loyalists and top party leaders who oversee the day-to-day running of the country. Bloomberg earlier reported revival of the committee.

The rebuild confirms what many in China already know. Be it politics, the military or the economy, all roads lead to Mr. Xi. On Friday, 2,952 delegates from the national legislature backed Mr. Xi for a rare third term as president. There was not a single dissenting voice.

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