The Next Phase in the Anti-corruption Campaign
On 23 October 2015, Wang Qishan, the head of the Central Commission for Discipline Inspection (“CCDI”), the Chinese Communist Party’s (“CCP”) main anti-corruption organisation, said that new targets would include the China Banking Regulatory Commission (“CBRC”), the China Securities Regulatory Commission (“CSRC”), the People’s Bank of China (“PBOC”), and state owned banks.
The statement launched a new front in the anti-corruption campaign, moving away from Zhou Yongkang, the former head of the internal security apparatus whose ouster and prosecution has dominated anti-corruption activities in China. Moreover, with finance, Wang is returning to home territory; he helped recapitalise the banks in the 1990s, and is fully aware of the vulnerabilities of the sector and its employees.
Banking and Finance as a Target
Hints of possible action against the financial sector emerged early in 2015, with the seizure of Mao Xiaofeng, President of Minsheng Bank, and of Lu Haijun, President of Bank of Beijing. Those arrests related to investigations into former CCP General Secretary Hu Jintao’s aide Ling Jihua, but still provoked shudders across the sector.
The stock market fall over the summer of 2015 heightened fears, as the government subsequently employed criminal probes in order to shore up market values. Citic Securities, China’s biggest brokerage, became one target, as did hedge fund Zexi Investments, headed by Xu Xiang. Now, the campaign is focusing on the banking and finance sectors; on 2 November 2015, Zhang Yun, President of Agricultural Bank of China, was arrested.
Why Banking and Finance is a Current Target
Wang, as anti-corruption chief, understands the need to curtail graft, but just as important a motive is control. These investigations seemingly relate to an effort to seize the commanding heights of finance by a coterie of officials, nurtured by former Premier Zhu Rongji and trusted by General Secretary Xi Jinping. They include Wang Qishan himself, Liu He, head of the leading group on the economy and finance, and Zhao Xiaochuan, head of the PBOC. Their power has grown; in October their allies took on key posts in securities regulation.
Any significant change in management automatically poses uncertainties to investors; new regulatory initiatives may follow, and key partners will face removal. Yet, although stark, this shift also presents longer term potential opportunities for foreign investors. These officials enjoy a reputation as champions of market reform, and have secured policy successes; the PBOC on 11 August altered the exchange rate regime and on 23 October lifted caps on interest rates. Such changes are essential to affect a transition away from an economic model reliant on investment to one geared towards consumption.
What Does This Mean for Foreign Business?
This unprecedented action in the financial sector presents opportunities and threats to bankers and the financial services industry. The rise of a reformist faction may facilitate financial liberalisation, reinvigorating the economy and providing opportunities for profit. However, in the interim investigations pose real risks, by altering the regulatory landscape, by removing partners, and by raising the prospect of the arrest of executives, both local and foreign. Investors wishing to take advantage of the opportunities to come in the finance sector must first mitigate risks.
SVA recommend that businesses in China conduct the following measures:
- Carry out internal appraisals to establish potential exposure to such investigations;
- Prepare contingency plans to cover various concerns, including the vulnerabilities of executives, travelling in country and outside China;
- Establish mechanisms to protect executives;
- Examine the identity and background of partners and counterparties, exploring in particular the impact of any prospective investigation or arrest;
- Assess how the changing regulatory landscape will affect finance, and;
- Develop strategies to deal with projected sectoral changes.