China’s financial regulators and state-dominated financial industry are facing a new round of party discipline, which will have major implications on the income prospects of state-owned enterprises, the country’s de-risking efforts and funding for businesses.
Finance is among China’s most profitable sectors, with the combined profits of China’s six largest state-owned banks rising 6 per cent year on year to 1.36 trillion yuan (US$197.8 billion) in 2022. But the sector’s high exposure to property developers and local financing vehicles show they are prone to big risks, which regulators are keen to get on top of.
How different is this disciplinary campaign from previous ones?
China’s most recent anti-corruption campaign, which started in 2013, is believed to have been partly about political manoeuvring.
The crusade helped President Xi Jinping consolidate his power base, with more than 500 senior officials – vice-minister level and above – investigated and punished.
This time around, the Central Commission for Discipline Inspection (CCDI), China’s top anti-corruption agency, is focused on defusing domestic financial risk, dampening external shocks on the country and laying the groundwork for economic recovery and tech innovation.
The campaign announced on March 27 is targeting state-owned enterprises, including five financial institutions.
It coincides with a shake-up of the financial regulatory regime, including the recent establishment of the Central Finance Commission and the National Financial Regulatory Administration, which have consolidated the party’s control over the financial sector.
Who has been affected so far?
The five financial institutions being probed include China Investment Corp, the country’s US$1.35 trillion sovereign wealth fund, China Development Bank and China Everbright Group.
Twelve financial executives or regulatory officials have been investigated since the new government took office in mid-March, according to the CCDI website.
The recent investigations into former Bank of China chairman, Liu Liange, and former China Everbright Group chairman, Li Xiaopeng, raised market attention and reinforced speculation that even higher-ranking cadres could be targeted.
The two are the most senior financial executives to be investigated since the downfall of deputy central bank governor Fan Yifei in November.
What comes next?
The discipline inspection and nationwide fact-finding campaign launched by the Communist Party has called for public feedback on policies, including those targeting bad loans, property market distress, local government debt, and lack of funding support for small and private businesses.
To brighten the near-term growth outlook, Beijing is pushing banks to boost lending to the real economy. New yuan loans reached 4.9 trillion yuan in January and 1.81 trillion yuan in February, both hitting a record high in their respective month.
There could be more liquidity support for deeply indebted property developers to ensure delivery of houses to buyers and prevent more bad loans emerging on banks’ balance sheets.
There is also likely to be a deeper crackdown on illicit financial speculation, which may affect interbank businesses.
The government’s preoccupation on de-risking and economic recovery could also mean more caution on reforms and opening-up in the financial sector, especially as the collapse of Silicon Valley Bank has raised concern among regulators.
Professionals working for state-owned financial institutions have already seen a large salary cut in the past year. For instance, China International Capital Corp, the former China venture of Morgan Stanley, said in its 2022 annual report that its average payroll dropped 19.7 per cent from the previous year, while China Merchants Securities slashed its average salary by 22.8 per cent.
Pay in the finance sector is still much higher than other industries and the top discipline inspection agency warned in February that finance professionals must abandon their self-identification as elites.
Source : SCMP