Beijing is tightening its governance around banks and insurance companies to bar large shareholders from having excessive influence and engaging in unfair dealings.
China wants to rein in financial sector risk and corporate governance. Many of these affiliated deals have generated losses or bad debts for banks. But there are other layers to this new round of regulations—a new phase of the anti-corruption campaign waged by CCP regime boss Xi Jinping to root out political dissent.
The problem, as explained by the China Banking and Insurance Regulatory Commission (CBIRC) in an FAQ, is that “a small number of major shareholders have abused shareholder rights, improperly interfered with company operations, sought control in violation of regulations, and used affiliated transactions to transfer interests and transfer assets.”
In other words, certain powerful individuals affiliated with these institutions have obtained loans or transferred assets illegally, often using nonstandard terms and concealing the true beneficiaries behind those transactions from regulators.
These are serious issues. Major shareholders shouldn’t be able to obtain loans without underwriting. They must be engaged in an arms-length manner, and these relationships should be disclosed properly.
The new regulations are part of a renewed effort to inspect the country’s financial regulators, banks, insurance companies, and asset managers to root out corruption and illicit behavior. Beginning October, the Central Commission for Discipline Inspection, the Party’s top anti-graft body, will begin to inspect the CBIRC, China’s main banking regulator.
Xi appears to be embarking on another phase of the anti-graft, anti-corruption campaign that initially began with his ascension to the top position of the CCP. The years-long campaign has ensnared more than 1 million CCP cadres and most recently included the execution of Lai Xiaomin, ex-chairman of China Huarong Asset Management, one of the country’s largest “bad debt” managers.
So what drove this latest round of inspections?
The flip side of recent headlines surrounding property developer Evergrande and other highly indebted companies is the plight faced by China’s banks and financial institutions who lent to these overleveraged companies. If property developers can’t sink China’s economy, bank failures surely would. Most of these debt transactions were arms-length, albeit ill-advised from a risk perspective. But a small portion of loans was made to entities affiliated with bank insiders and political heavyweights who never intended to repay them. The new regulation is looking to combat this dark corner of lending.
It appears that there are still some “bad actors” remaining within China’s powerful financial sector, clinging onto corrupt positions and potentially using political power to push back against Xi’s policy shift away from the crony pseudo-capitalist policies of the last three decades. That previous policy began with CCP boss Deng Xiaoping and was continued by his successors Jiang Zemin and Hu Jintao, which allowed Party cadres to get rich by any means necessary, as long as they follow the CCP boss’s orders.
And that’s no longer the modus operandi of Xi’s regime.
The Caixin report specifically states two examples—the failures of Baoshang Bank and Anbang Insurance Group—that the new law will target.
Before its bankruptcy in 2020, Baoshang was the financial war chest of disgraced Chinese oligarch Xiao Jianhua and his investment firm, Tomorrow Group, which owned 89 percent of Baoshang. At the time, Baoshang held billions in bad debts and nonperforming loans, mostly from affiliated entities within Xiao’s financial empire.
Tomorrow Group and Anbang are both old news. But the fact that they’re dug up as justification for the current slate of regulation is telling. It appears that the latest slate of financial regulations is both economically and politically motivated.
