The Chinese Communist Party (CCP) is launching investigations into the financial industry, triggered by a looming debt crisis and under the guise of anti-corruption. These investigations appear to be an indication that China is moving further from a market economy, while they also serve Xi Jinping’s personal goal of solidifying his power.
China’s top anti-corruption agency is conducting an investigation into 25 financial institutions, examining ties between state-owned banks and big companies. In particular, Chinese regulators are scrutinizing the relationship that financial institutions have with high-profile companies with massive debt, like Evergrande, and those that have fallen out of favor with the CCP such as Ant Group.
Along with intensifying the Party’s control over the financial industry, Xi is cracking down on tech companies and billionaires. Additionally, he is spearheading wealth redistribution and “common prosperity” programs, all of which seem to be part of a larger movement away from capitalism.
Anti-corruption investigators are examining bank lending, investment, and regulatory records to see if any malfeasance has taken place. According to regulators, violators will be sanctioned and decisions will be taken regarding cutting the salaries of executives at state banks. Officials in the Ministry of Finance have been pushing, for some time, for salary cuts in banks because the banking sector pays higher wages than other sectors. As the banks are state owned, salaries are regulated by the government, rather than by market forces. Forcibly cutting salaries is one more indicator that the CCP is moving toward a future of stricter socialism.
The Evergrande crisis has been highly publicized, but it is actually only a small part of China’s $5 trillion dollar real estate debt bubble, which seems poised to burst. Another large developer, Fantasia Holdings Group Co., has defaulted on $206 million in dollar-denominated bonds. In total, Chinese banks are holding 2.7 trillion of non-performing loans (NPL), as well as $3.8 trillion of special mention loans. It could be argued that this level of potential defaults is the result of poor decision making in financial institutions, which the CCP claims is one of the justifications for the investigations.
The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong Province, China, on Sept. 26, 2021. Aly Song/Reuters
The question that must be answered, however, is why would bankers make decisions that do not maximize the bank’s return on capital? Xi claims that these decisions are the result of corruption and that bankers are receiving kickbacks from developers, which is certainly a possibility. Another possible reason, however, is that bankers were told by central authorities to make liberal loans to real estate developers in order to fuel China’s economic growth.
The real estate sector accounts for 29 percent of the Chinese economy. A dip in property development could cause Beijing to miss its GDP growth target in a given year. Consequently, banks were incentivized to lend to developers. Citigroup Inc. estimated that about 41 percent of the entire banking system’s assets, totaling $7.9 trillion, are either directly or indirectly associated with the property sector.
In spite of being faced with a looming economic crisis, due to defaults in the property market, central authorities have told smaller banks and local governments to increase lending in the mortgage and real estate sectors. The People’s Bank of China claimed this would maintain a “healthy property market.”
If the debt crisis was largely the result of non-market forces—the government encouraging banks to ignore credit risk when lending to developers—then what are regulators actually looking for? An implication that these investigations are politically or ideologically motivated, rather than motivated by economic factors, is that Zhao Leji, head of the anti-corruption body, stated that the investigators will “thoroughly search for any political deviations.”
Anti-corruption campaigns have historically been used by authoritarian leaders to eliminate opposition, take down political rivals, and solidify their power. Since Xi took power in 2012, he has used anti-corruption investigations to purge or punish over 1 million CCP members.
Until now, the anti-corruption campaigns have investigated numerous sectors of the economy, but not banks. Wang Qishan, former head of China’s top anti-corruption agency, was once a trusted supporter of Xi. Wang has since lost favor, however, because one of his aides has been charged with taking $71 million in bribes. Wang has also been found to have close ties to some of the banks now being investigated.
The scrutiny of banks, cutting executive salaries, and anti-corruption purges all increase the amount of control the CCP has over the economy. These moves are clearly part of a larger program, which includes the crackdowns on the tech industry and billionaires, and the state-led wealth redistribution and “common prosperity” programs. It looks as if Xi does not want any person or entity, particularly in the private sector, to become so wealthy that they feel they can exert influence over the economy or undermine the control of the CCP and himself.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo
Author
Antonio Graceffo, Ph.D., is a China economic analyst who has spent more than 20 years in Asia. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).
