People familiar with the plan say the oversight is intended to ensure complete control of the Communist Party, seen as the lifeblood of the economy.
Chinese President Xi Jinping is taking note of the ties that China’s state-run banks and other financial giants have developed with big private sector players, expanding their pressure to curb capitalist forces in the economy.
Xi, who began his campaign late last year with a regulatory attack on private technology giants, is launching a broader round of oversight of financial institutions. The inspections, announced in September with few details, focus on whether state-owned banks, investment funds and financial regulators have become too fickle with private firms, according to people with knowledge of the plan. , especially some that have recently landed in Beijing’s crosshairs, such as property giant China Evergrande Group, ride-hailing company Didi Global Inc and financial-technology firm Ant Group.
The test, which is led by China’s top anti-corruption agency and focuses on 25 financial institutions at the heart of the Chinese economy, is the most comprehensive in a field that has been questionable since coming to power nearly a decade ago. It is part of his broader effort to move China’s economic system away from Western-style capitalism toward a leadership change late next year, when Xi is asked to bypass the convention and extend his rule beyond the usual two-five-year terms. is expected to continue. .
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Evergrande, China’s most indebted property developer, has kept global markets on edge and held protests at home as it struggles to survive. The WSJ explains why the company’s crisis is raising questions about the state of the world’s second-largest economy. Photo: Alex Plewski/Shutterstock
Since this month, corruption-busters of the Central Commission for Discipline Inspection have been spreading through the offices of 25 state institutions, reviewing the files of their loan, investment and regulatory records and seeking answers that pertain to private firms. How some deals or decisions were made according to people familiar with the plan.
These men said that individuals who are suspected of engaging in unfair practices are likely to be formally investigated by the Communist Party and potentially charged later, while any institution that has gone astray , he will be disciplined.
The leadership will also use the findings of the inspections to decide whether to reduce the compensation of officers in the financial juggernaut of these states. Some officials in the finance ministry, which fund large state financial institutions, are pushing for cuts because compensation in the financial sector is considered much higher than in other industries.
At a September 26 meeting aimed at mobilizing troops ahead of the new inspection, the current head of Xi’s anti-corruption body, Zhao Leizhi, said the inspectors in charge of investigating the 25 institutions “will thoroughly investigate any political deviations,” adding that According to official Xinhua news agency.
Neither the Central Commission for Discipline Inspection nor the State Council, the Information Office of China’s cabinet, responded to questions. The press offices of the 25 institutions that are being investigated and the other companies mentioned in the article also did not respond to inquiries.
The financial-sector scrutiny comes as Beijing tries to remove the economy’s reliance on debt-fueled manufacturing, which is causing turmoil in China’s property sector. By expanding his economic campaign, Xi risks a dynamic that could severely curtail growth in the coming months.
Analysts said that amid the uncertainty, many banks are already withdrawing from lending to private developers and other businesses.
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“When uncertainty mounts, the only way to react is to stop doing what you’re doing,” said Michael Pettis, a finance professor at Peking University. But a slowdown in economic activity in the private sector – from tech giants uncertain about the regulatory environment to private developers whose lending spigot has been cut – presents a dilemma for Beijing. “Without ‘bad’ lending, you won’t be able to achieve the growth target,” Pettis said.
This could force the government to step in with its age-old incentive playbook of state lending for infrastructure investment – deepening the imbalance that leaders have pledged to shift that tilt away from the private sector.
Some officials said Xi’s goal is to ensure that the party takes full control of the country’s economic life, preventing the financial sector from being taken over by big private businesses and other power players that threaten state influence.
The details of anti-corruption investigations are often ambiguous. During his early years in power, Xi used a broad campaign to remove or sideline political rivals in order to clean up a party plagued by corruption and secure his hold on power.
The financial sector is known within China as the power base of Vice President Wang Qishan, who rose to prominence in the 1990s while running state-owned China Construction Bank Corp and has held key positions among state-backed financiers over the years. Close people were established. Including China Construction Bank.
Serving as Xi’s Antigraft Caesar during the leader’s first term, Wang largely avoided scrutiny of the financial sector while he probed into other parts of the economy. But financial risks remained in China due to aggressive lending by state banks to some well-connected corporate highflyers.
Wang’s political influence has waned in recent months. One of his longtime associates was accused in August of accepting more than $71 million in bribes. According to people with knowledge of the plan, Wang has links to some financial firms, which are now facing investigation.
For example, China Construction Bank helped finance HNA Group’s acquisitions overseas. HNA, whose chairman Chen Feng is a former associate of Wang, declared bankruptcy last year under a crushing debt load. Chen has recently been detained for suspected criminal offences, HNA revealed in late September.
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People said China Construction Bank’s loan to HNA is expected to be part of the new round of oversight.
State banks’ loans, especially to faltering developer Evergrande, will also be scrutinized, according to people familiar with the plan. Once the industry darling, Evergrande is now facing China’s biggest default as it struggles with more than $300 billion in liabilities.
One of Evergrande’s main lenders is the financial conglomerate Citic Group, which is now being investigated. Over the years, lenders to Cititic, founded in the late 1970s by China’s most famous “red capitalist” Rong Yiren, have created the closest thing to China to Wall Street culture, to experiment with capitalism.
They carry risks that some traditional lenders have shied away, even going so far as to create investment funds for firms like Evergrande. For example, when the developer needed funding for projects in 2015, he received a pledge of about $3 billion from Citi, according to people with knowledge of the matter. Citic then turned the fund into investment products sold to individual investors, promising a high rate of return funded by debt payments from Evergrande. A possible default by the developer would put investors’ money at risk.
Over the past few years, Citic has provided more than $10 billion to Evergrande, despite Beijing’s repeated warnings against lending real estate, according to people close to the bank.
Xie Hongru, who ran Citibank’s office in the southern city of Guangzhou, near Shenzhen’s home base of Evergrande, has been under investigation by party disciplinary officials since last month, according to the anti-corruption agency. Xie managed the bank branch from 2015 to 2018, a period when Citi extended its funding to the developer. The new round of financial oversight will subject the bank to a wider scrutiny of its lending practices.
Late last month, Citibank’s chief financial officer and the party’s highest official, Fang Haiying, told investors that the bank had taken measures to reduce its overall exposure to Evergrande and to prepare for potential losses from developer financing. More money has been set aside for
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Evergrande’s other large state lenders, including banks owned by the conglomerate China Everbright Group and one of the country’s four big banks, Agricultural Bank of China Ltd., are also being investigated, as part of the financial oversight case. People having knowledge of the same are also being investigated. said.
The inspectors will also investigate how a conglomerate of state funds, including those run by sovereign-wealth fund China Investment Corp, or CIC, and large banks and insurance companies, is now the center of Xi’s technical crackdown. to invest in private firms. People.
“Do those investments represent the interests of the state or certain individuals?” said one of the people. “That’s an important question.”
CIC, whose mandate is to scrape deals outside China, has invested in Ant Group, the troubled financial-technology firm founded by Jack Ma, and Didi Global, the ride-hailing company, which is selling its stock in New York City. After the sale is going through cyber security checks. York at the end of June.
According to people close to the CIC, the fund, which has about $1 trillion in assets, has set up an office to cooperate with inspectors, who are expected to march to the headquarters in Beijing this week. “People are nervous,” said one of the people.
China Life Insurance Company, one of the largest insurance companies in the country, also has investments in Ant and Didi. In 2016, the insurer invested some $600 million in Didi, cementing the Chinese company in a fierce competition that it eventually won with Uber Technologies Inc.
The Wall Street Journal previously reported that having such state veterans on the board helped Ant’s stock-listing application sail through various levels of securities regulators in the summer of 2020. According to people close to the company, these state investors, along with their deep pockets and political ties, helped Didi’s rapid expansion over the years.
According to the people, regulators including China’s central bank and top banking, insurance and securities watchdogs are also coming under scrutiny for any indication that they were negligent in monitoring companies or got too close to industry players. which they are supposed to regulate. Familiar with the plan.
One risk for Xi and China is that such widespread scrutiny could make the country’s financial system even less accessible to smaller private companies that already grapple with funding constraints.
The last time Xi investigated the financial industry was in the aftermath of the 2015 stock-market crash, which caused him to send public-security officials to China’s top securities watchdog and state-backed brokerage to investigate whether regulators allowed the stock to move forward. Worked with firms to increase The selloff in a suspected “financial coup” to destabilize the Chinese economy and Xi’s regime.
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That investigation resulted in some regulators, banking officials and investors going to jail for profiting from insider information. This prompted Beijing to shelve some long-awaited changes, such as making it easier for private firms to sell shares.