China also has a banking problem, but Xi Jinping has a solution ready: more power for the Communist Party. Coincidentally, just as three American banks were going bankrupt and a Swiss colossus was beginning to falter, the local parliament (called the National People’s Congress) in Beijing passed a new structure for banking supervision. Thus the State Office for Financial Supervision and Administration was born, absorbing powers and responsibilities previously distributed among various agencies responsible for the central bank, stock exchange supervision, control commissions for banks and insurance companies. The sole super-regulator will have to oversee a credit sector that manages the equivalent of around 55 trillion euros.
China’s housing bubble and credit problems
There is no shortage of issues to watch out for. In the past, Chinese banks were part of the real estate investment boom that ended in disaster: bankruptcies of construction giants, mountains of problem debt, and a local financial crisis (because local authorities funded themselves largely by selling construction licenses). and building land). The banking system has been under pressure ever since Xi decided to heal the housing bubble and halt over-investment in infrastructure. It must stop fueling speculation, but at the same time it must not stall the recovery of the second world economy, and the construction sector traditionally accounts for a quarter of China’s total GDP.
Xi Jinping needs credit companies as docile tools for his economic strategy, which has many “mirror” goals to those of Joe Biden: Xi also wants to make China more autonomous in advanced technologies, wants to accelerate the transition to a sustainable economy. One of the aims is to stimulate domestic demand in order to make the People’s Republic less dependent on exports. At the same time, a modern welfare system must be established that does justice to a rapidly aging society. After all, the still very high level of youth unemployment is a thorn in the side of China’s economic performance. Xi also wants to restrict international investment by major Chinese companies, including banks, which have had mixed results. All of this in a scenario of growing tensions with the West that pose headwinds. The partnership with Russia – which will be strengthened with Xi’s visit to Moscow next week – may not be enough to offset deteriorating relations with the West.
Bankers in handcuffs, the Chinese method
The banking system plays a vital role in any economy, and China is no exception. However, the regulatory instruments vary. Xi subjects his bankers to similar treatment to big tech tycoons like Jack Ma. Even in the financial world, arrests and trials follow one another. Former China Merchants Bank chairman Tian Huiyu was expelled from the Communist Party in October and then charged with abuse of power and insider trading. Another troubled financier links the world of banking and big tech: Bao Fan, whose China Renaissance Holdings group had strong ties to China’s digital economy. That’s why the Chinese Silicon Valley has its bankers in trouble. In his case, however, the treatment is different: Bao Fan, after a period of disappearance, announced that he was in the hands of the police, with whom he is “collaborating for the ongoing investigation.”
Solidarity Finance and the Chinese version of our ESG
The new heads of China’s banking regulator are echoing Xi Jinping’s doctrine of “shared prosperity”: a slogan describing goals to reduce inequality, consistent with the leftward swing that has taken place under this leader. Chinese bankers are being asked to distance themselves from Western models, from striving for profit at any cost. But in a sense, Xi’s doctrine converges squarely with recent developments in Western finance: the ESG investing trend is poised to distance itself from the pursuit of profit in favor of other goals such as environmental and social sustainability. Of course, where the Chinese model differs is in the dominant role attributed to the Communist Party in steering the bankers on the right path. In fact, the new architecture of regulators over the banking system explicitly aims to strengthen party control.
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