In the era of reform and opening up in the past, China’s financial industry has always imitated Western industry standards. However, as the relationship between the Chinese Communist Party (CCP) and the West becomes increasingly cold-war-like, these financial institutions have become the target of CCP’s transformation, and the Wall Street model is facing the prospect of extinction.
China International Capital Corporation (CICC) may have been one of the most international financial institutions in Mainland China. It aimed to be the “Morgan Stanley of China,” competing with top investment banks on Wall Street. Under the leadership of figures like Zhu Rongji and Wang Qishan, CICC once dominated the market and was known as a “noble investment bank,” handling large-scale IPO projects of state-owned enterprises.
However, the steadfast belief in market dominance by CICC has now faded away. According to reports from Bloomberg, an increasing number of bankers at CICC are now proudly wearing CCP badges, with approximately one-third of bankers at the company being CCP members. In the past, being a CCP member in the financial circle was a taboo topic, with some bankers refusing to join the party.
With the expanding influence of the CCP, some senior employees feel worried, morale is low, and many are starting to leave work early.
Adding to the woes, due to the tension in US-China relations and Beijing’s desire to control economic activities, CICC’s business has dried up. With a sharp decline in IPO transactions, CICC’s profits and revenue continued to slide in 2023. Over the past two years, CICC’s stock market value in Hong Kong has dropped by nearly 46%.
In April of this year, CICC reduced the basic salary of its mainland employees by 25%, with most employees not receiving any bonuses in 2023. In the past, CICC, which promoted Wall Street culture, used to pay its senior bankers almost as much as counterparts at Goldman Sachs or Morgan Stanley, but now it’s only about half.
CICC is also planning to cut one-third of its domestic investment banking staff between 2024 and 2026; due to the decline in domestic transactions, CICC plans to expand its business in Southeast Asia.
Just a few years ago, CICC employees often flaunted their wealth, but recently, there was news of a 30-year-old female employee at CICC who committed suicide due to salary cuts and inability to repay her mortgage, creating a stark contrast.
Professor Zheng Zhengbing from the Department of Finance at Yunlin University of Science and Technology in Taiwan told Epoch Times that when CICC was established, it looked very promising. It allowed Morgan Stanley to invest under the leadership of Zhu Rongji and Wang Qishan, and Morgan Stanley provided many technical services. However, as a state-owned enterprise, CICC was very rigid internally, always dominating and forcing Morgan Stanley to withdraw due to a lack of professional knowledge and international relations networks, resulting in a decline in competitiveness.
“Additionally, although CICC had many privileges, its lack of flexibility, diversity, and support for small and private enterprises were insufficient. In this aspect, CITIC Securities and Oriental Wealth are better than CICC. Therefore, CICC’s industry ranking had dropped out of the top three around 2020.”
Zheng noted that CICC’s profits in 2023 and 2024 had sharply declined to an unsustainable point, requiring drastic changes.
He said that now CICC cannot support the Wall Street-style salary structure, indicating a dire situation. The difficulty of IPOs on Wall Street is increasing, and the function of Hong Kong IPOs has significantly declined. The domestic economic situation is poor, and the stock market continues a downward trend. CICC’s problems are very serious, and a more pessimistic estimate is that it might face extinction.
“Now, the CCP is forcing the financial industry to accept its leadership. This policy will have a significant impact on the entire financial sector, especially on already struggling institutions like CICC.”
CICC is a microcosm of China’s regression from the era of reform and opening up to a communist China. To maintain its regime, the CCP is willing to sacrifice the economy and the interests of the people to develop a “Chinese (CCP) distinctive path of financial development” that is fundamentally different from Western financial models.
According to an article in the CCP journal “Qiu Shi” at the end of 2023, the so-called “Chinese (CCP) characteristics” include incorporating external political factors such as Marxist-Leninist ideology and the leadership of the Party, with a core principle of “adhering to the centralized and unified leadership of the Party Central Committee in financial work.”
Zheng expressed that it’s strange for the Party to determine the goals and methods of financial operations. In Western societies, even the government’s leadership in finance is already questionable as their financial regulators or central banks operate independently of the government.
“The financial industry originally based its transactions, contracts, execution, and financial judgments on honesty. However, the Party is a very self-interested entity that adds many elements for its own survival, undermining market mechanisms and financial operations. This is a nightmare for the financial industry, and many anticipate a financial storm in China’s future.”
Analysts point out that on the eve of the CCP’s third plenary session, they redefined finance with six main points: not benchmarking the American financial model and not solely focusing on profitability; emphasizing the political and people-centered nature of finance; learning Marxist political economic theory; emphasizing finance as a service industry to serve the real economy rather than prioritizing financial industry development; avoiding excessive specialization in finance; and not needing too many financial centers, with Hong Kong and Shanghai being sufficient.
Lei Shaohua, a staff member from a law firm founded by Chen Chuang in California, USA, told the Epoch Times that decades ago, China began developing its finance industry, adopting many policies based on Europe and the US. However, since Xi Jinping came to power, he has been cracking down on the financial sector, including abolishing the China Insurance Regulatory Commission, stripping the China Securities Regulatory Commission of power, and arresting some financial institution personnel.
“He always focuses on strengthening the Party’s leadership and centralizing all power in his hands; everything serves the power, with other aspects being secondary.”
Zheng commented that the CCP is increasingly veering off course. The redefinition of the six aspects of finance shows that they want the CCP to completely lead the financial industry.
He analyzed that emphasizing that profitability must serve functional purposes is completely off course. All financial institutions aim for profits, indirectly promoting economic development. Exaggerating the functional aspect seems ridiculous. Countries practicing Marxist political economics have economic troubles and dismal financial conditions, making learning from them questionable. Breaking down financial elitism essentially means targeting Western financial elites. With experts remaining silent due to the pressure of common prosperity and the crackdown on corruption, only obedient and mediocre individuals will stay.
Lei believes that the CCP’s goal may be to gradually distance itself from industries with more foreign communication. It fears that the technical bureaucrats and elites sympathetic to reform and opening up over the past few decades will continue to play roles in various positions. Hence, they want to enhance control and purge them.
Now, the CCP also aims to establish its own global financial center. On one hand, it believes that with manufacturing, the financial sector must align. On the other hand, it faces challenges from Western financial institutions.
Zheng mentioned that developed countries with prosperous finance sectors always have robust legal systems, high ethical standards, and operate entirely based on commercial logic and market mechanisms.
“Now, the CCP also wants to become a financial center. However, its legal system, impartial and objective enforcement system, and the moral character of industry personnel are far behind. The legal system, accounting system, and trading system are all corrupt, with a tendency for fraudulent accounting and financial reports – making Chinese companies unwelcome on Wall Street, and increasing the difficulty for companies to list in the US.”
He stated that although the CCP established the Beijing Stock Exchange to enable IPOs of emerging domestic companies in China, despite the country’s substantial economic size, the capital market’s scale is much smaller compared to the West. Consequently, amidst tense US-China relations, the situation where Chinese companies used to raise exorbitant financing amounts for listing opportunities in the West is becoming increasingly challenging.
He added that the financial market in Hong Kong is rapidly declining and Chinese wealthy individuals feel insecure about keeping their capital on the mainland, preferring to move it overseas. Therefore, the goal for China’s financial market to achieve capital financing on the scale of Wall Street is significantly distant. While it once aspired to be the world’s number one, it’s now struggling to maintain its position.
In this scenario, the CCP continues to intensify control and purging in the financial industry, determining which companies and industries to support or not. According to Bloomberg calculations based on official announcements, at least 130 financial officials and executives were investigated or punished in 2023.
Lei mentioned that financial risks accumulate from risks in the real economy. Issues like local government debt, urban investment bonds, the Belt and Road Initiative, and massive physical investments ultimately lead to bad debts in the financial sector, resulting in insurmountable debt. The CCP is unable to resolve these issues but is focused on controlling finance, weakening the foundation of the real economy. Trimming the flowers attached to the real economy will only worsen the situation.
“In the future, the freedom of finance will decrease, gradually losing its market function. This includes financial industry professionals, market capacity, and vitality potentially shrinking. It may regress to the era before reform and opening up when Chinese banks were not genuine commercial banks, but just branches of the Ministry of Finance, resulting in significant non-performing loans.”
Zheng stated that China’s financial industry is currently deteriorating; it is not on the right path and is attempting to follow Mao Zedong’s old path, relying on the Party to lead finance. With real estate industry problems surfacing, the largest loans in the financial sector linked to real estate, estimations show a sharp increase in non-performing loans for Chinese banks, leading to the closure of small to medium-sized banks and a significant drop in capital adequacy ratio.
He noted that during Xi Jinping’s second term, it is evident that reclaiming Hong Kong and Taiwan is his main goal. He is conscious that relations with the West will be confrontational, willing to sacrifice economic growth. When the economy faces challenges, instead of pursuing massive stimulus plans like Hu and Wen’s earlier policies, Xi Jinping is traversing an odd path, indicating a shift in his original goals and motivations.
If this trajectory continues, the situation will worsen, jeopardizing the CCP’s political stability and legitimacy of governance.