On May 27th, the meeting of the Central Political Bureau of the Chinese Communist Party discussed the “Provisional Regulations on Preventing and Resolving Financial Risks and Holding Accountable,” reiterating the promotion of truly robust and sharp financial supervision, daring to be tough, capable, and persistent in the long term.
Coincidentally or intentionally arranged, on the following day, May 28th, the Tianjin Second Intermediate People’s Court publicly sentenced Bai Tianhui, former general manager of China Huarong International, to death for accepting bribes totaling more than 1.1 billion yuan. It is rare for corruption cases to result in a death penalty, and it’s surprising that two high-profile figures from Huarong have been sentenced to death. Prior to Bai Tianhui, Lai Xiaomin, former chairman of Huarong Asset Management Company, was executed on January 29, 2021.
Under the ruthless attack of corruption, China Huarong, as the largest distressed asset disposal institution in China, unexpectedly became a “distressed asset” (by the end of 2022, China Huarong’s total debt was 906.947 billion yuan; on April 1st, China Huarong was forced to halt trading due to the failure to release its 2020 annual performance), and it was taken over by Citic, officially bidding farewell to the financial stage on January 26th and renamed as “Citic Financial Assets.”
While Huarong’s fate seems to be sealed, the destiny of the other three AMC’s born at the same time as Huarong in 1999—China Great Wall, China Orient, and China Cinda—remains uncertain. Xinhua News Agency reported that in response to the official institutional reform plan, China Cinda, China Orient, and China Great Wall are expected to be included under China Investment Corporation soon. This plan has been long in the making, with rumors circulating within the industry last year, yet there are no concrete details regarding the implementation timeline, highlighting the challenges ahead.
Why is this the case? One major factor is that the operational status of these four AMCs is extremely poor. On January 4th of this year, Fitch Group downgraded the ratings of these four companies, followed by Moody’s on January 19th. China Investment Corporation is not naïve; they won’t easily come in to clean up the mess.
This reflects, from one perspective, the dangerous state of the Chinese financial industry and the difficulty faced by the CCP in “defusing the bomb.”
In 2017, Xi Jinping’s administration introduced the “Three Critical Battles,” with “preventing and resolving financial risks” ranking at the top. Over the next five years, a campaign of “precision bomb disposal” unfolded, resulting in numerous financial refugees due to drastic measures such as the crackdown on P2P lending and internet finance. However, the authorities shied away from enforcing real accountability in China’s financial mainstays—the banking sector, especially the six major state-owned banks. The bursting of the real estate bubble in 2021, economic instability, and heightened financial risks forced the CCP to emphasize “regulation” at the 20th Congress, urging for enhanced and modern financial regulation, fortifying the financial stability safeguard system, and legally incorporating all financial activities under supervision to prevent systemic risks.
In reality, without proper development, no amount of regulation can ensure safety. Conversely, if financial development is distorted, with bad money driving out good, regulation will be futile. Therefore, only benign development can guarantee safety; hence the saying, “One good competitor is better than ten regulators.”
The CCP, however, instead of addressing the core issues and researching how to promote healthy financial industry growth, has focused on “regulation” and dismissed criticisms such as those voiced by Jack Ma as provocations, swiftly silencing dissent.
Strengthening “regulation” only intensifies power struggles within the financial industry and factional infighting within the CCP (a piece of the pie that ordinary people can’t touch). Many in the financial industry are taking a more passive stance.
In response, Xi Jinping’s administration has proposed a strategy of “simultaneously cracking down on financial corruption and preventing financial risks,” aiming to both eliminate “rats” and protect “jade plates.” This strategy consists of two main components.
The first is to intensify “inspections” for a higher deterrent effect. In September 2021, the Central Inspection Team conducted routine inspections on 25 financial units, including the People’s Bank of China, the former CBIRC, the CSRC, SAFE, China Investment Corporation, three development/policy banks, the five major banks, Citic Group, Everbright Group, four insurance companies, the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and four AMCs (Asset Management Companies). In April 2023, the First Round of Inspections for the 20th Party Central Committee focused on the Party Committees of five central financial enterprises. In April this year, following the completion of revisions to the inspection regulations, economic sectors and financial units were prioritized, including ministries under the State Council, the National Development and Reform Commission, the Ministry of Finance, the China Banking and Insurance Regulatory Commission, the CSRC, and the People’s Bank of China, as well as organizations like SAFE, the Shanghai Stock Exchange, the Shenzhen Stock Exchange, Citic Group, ICBC, and ABC, and major insurance companies such as China Life, Pacific Insurance, and Export-Import Bank. This round of inspections specifically highlighted the supervision of top leadership, and the 18th Party Central Committee’s Eighth Round of Inspections mentioned strengthening supervision of major leaders and leadership teams. It appears that Xi Jinping’s administration is focused on “locating political deviations and promoting solutions to prominent problems,” particularly targeting the leadership of various financial units.
Secondly, there’s a focus on cracking down on financial corruption. In 2023, according to incomplete statistics, over 90 officials from the financial system were under disciplinary review by the Central Commission for Discipline Inspection. By mid-May 2024, according to public reports by the Central Commission for Discipline Inspection and the State Supervision Commission, nearly 30 financial officials were under investigation, including one “central-level official,” 21 from “central party and state organs, state-owned enterprises, and financial units,” and six from “provincial-level officials.” This crackdown also involved regulatory systems, including banking, insurance, securities, and other financial sectors, with the banking system serving as the major “falling cliff” for these officials.
The approval of the “Provisional Regulations on Preventing and Resolving Financial Risks and Holding Accountable” at the political bureau meeting indicates that in the eyes of Xi Jinping’s administration, preventing financial risks has become a critical area that can potentially impact the entire system.
The meeting’s language was stern, highlighting two further steps (further promote the comprehensive and strict governance of the party in the financial field, strengthen the centralized and unified leadership of the Party Central Committee on financial work; further stress the responsibilities of relevant management departments, financial institutions, industry regulatory departments, and local Party committees and governments in the financial sector), signaling a continued emphasis on regulation.
While further intensifying regulation may not always prevent risks, it will undoubtedly escalate tensions between the financial industry and the Xi Jinping administration. This underscores the CCP’s specific approach to the financial industry: dismantling prevalent notions of “Western superiority” and “financial elitism,” combating hedonism and extravagance, and fostering a unique “financial culture” with Chinese characteristics.
Finance is highly specialized. Within China’s financial industry, largely dominated by state-owned banks, practitioners won’t openly defy the Xi administration but will engage in soft resistance. Citing the principles of “three characteristics and four self-regulations” for commercial banks as stipulated in the Commercial Bank Law (i.e., operating based on the principles of safety, liquidity, profitability, and autonomous operations, risk bearing, profit and loss responsibility, and self-regulation), they adopt a policy of “policies at the top, countermeasures at the bottom,” making it challenging for relevant policies from the Xi administration to be implemented.
For the Chinese financial industry, it faces a dual risk—not only the inherent high financial risks but also a unique policy-based risk of inaction, which is unparalleled in the world.