Bankers to be targeted in next phase of Beijing's anti-graft push, says new report

Nov 16 2015 Ajay Shamdasani, Regulatory Intelligence

Financial institutions should prepare contingency plans to deal with the sudden arrest of top regulators and bankers as part of China's anti-corruption drive, a report said. In recent weeks the Chinese authorities have moved to stamp out graft at the highest levels.

"Chief executive officers, general counsel and board level decision makers…need to address the new realities. This situation is a significant landscape change," said Steve Vickers, chief executive of Steve Vickers and Associates (SVA), a political and corporate risk consultancy in Hong Kong, which issued the report. "Compliance officers are not really set to address these challenges."

The SVA report was a response to the October 23 statement by Wang Qishan, head of Beijing's Central Commission for Discipline Inspection (CCDI), the Chinese Communist Party's (CCP) main anti-corruption organisation, that new targets would include the China Banking Regulatory Commission, the China Securities Regulatory Commission, the People's Bank of China and the country's state-owned banks.

The report said Wang's statement launched a new front in the anti-corruption campaign. It also said that with finance, Wang was 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".

Not even the nation's financial regulators are free of the perception of taint and therefore, scrutiny from those they report to up the governmental hierarchy.

The deputy head of China's securities regulator is being investigated for suspected "serious breaches of discipline", the ruling Communist Party's anti-graft watchdog said on Friday, using the usual euphemism for corruption.

The brief statement by the Central Commission for Discipline Inspection gave no further details of the probe into Yao Gang, a vice chairman of the CSRC. It was not possible to reach Yao for comment and unclear if he has a lawyer or what the detailed accusations are against him.

Fifty-three year-old Yao took up his current job in 2008 and is the second most senior CSRC official to come under investigation following market turmoil, which began in June. In September, the graft watchdog began a probe into an assistant chairman at the securities regulator called Zhang Yujun, also for suspected serious violations of discipline.

The moves come as authorities seek to restore confidence in the domestic stock market after a fumbled intervention and suspicion of irregular trading. China's financial regulators have been under heavy pressure since stock markets collapsed in mid-June following a long bull run, though the statement made no mention of the markets.

China's Cabinet said on Friday it had asked financial regulators to improve their supervision of market players to better protect consumer rights.

Compliance and risk-mitigation tips

Such unprecedented action in China's financial sector presents opportunities as well as threats to the financial services sector. For example, the rise of a reformist faction in Beijing may facilitate financial liberalisation, reinvigorating the economy and providing opportunities for profit, the report said.

Yet, in the short term, anti-bribery and corruption investigations posed risks because they could alter 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 said.

To that end, the firm recommended that businesses in China, financial or otherwise, carry out internal appraisals to establish potential exposure to such investigations, prepare contingency plans for various concerns — including the vulnerabilities of executives, travelling in country and outside of the mainland, and establish mechanisms to protect executives.

The report also suggested examining the backgrounds and identities of partners and counterparties, particularly by exploring any prospective investigations or arrests, either continuing or in their pasts. Firms should perform risk assessments on how the changing regulatory landscape would affect finance and accordingly, developing strategies to deal with projected sector specific changes.

Banking and finance as a target

Hints of possible action against the financial sector emerged earlier this year, with the seizure of Mao Xiaofeng, president of Minsheng Bank, and of Lu Haijun, president of the Bank of Beijing. Those arrests related to investigations into Ling Jihua, the aide of former CCP general secretary Hu Jintao, "but still provoked shudders across the sector," the report said.

The decline in China's stock markets in August heightened fears, SVA said, as the government subsequently employed criminal probes in order to shore up market values.

For example, Citic Securities, China's largest broker, became one target, as did hedge fund Zexi Investments, headed by Xu Xiang.

"Now, the campaign is focusing on the banking and finance sectors," the report said.

On November 2, 2015, Zhang Yun, president of [the] Agricultural Bank of China, was arrested. And on Friday last week, Yao Gang, a vice chairman of the China Securities Regulatory Commission (CSRC, was placed under investigation by the Central Commission for Discipline Inspection, the ruling Communist Party's anti-graft watchdog.

Policy rationale

"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," the briefing said.

Yet, SVA cautioned that any significant change in management automatically posed market uncertainty.

"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."