To a man with a hammer, a renowned psychologist once posited, everything looks like a nail.
For most of his decade in power, Xi Jinping, China’s leader, has usually arrived at the same conclusion for how best to deal with the country’s issues: get the Communist Party more involved. And now, as China is confronting an economy lacking the dynamism of the past and teetering from a real estate sector in crisis and local governments overrun with debt, Mr. Xi is again wielding his hammer.
At the annual gathering of China’s national legislature, which concluded on Monday, Mr. Xi introduced a series of sweeping changes to the country’s regulatory framework, allowing the party’s top leaders to assert more direct control over financial policy and bank regulation. Appointments for allies of Mr. Xi to key regulatory roles and additional shake-ups are expected in the coming days, further cementing the party’s oversight of the financial system.
“It’s very consistent with what Xi Jinping has been rolling out over the past 10 years,” said Max Zenglein, chief economist at the Mercator Institute for China Studies in Berlin. “Whenever he’s confronted with a problem, the solution is greater centralization to the party.”
The moves were the latest evidence of how Mr. Xi continues to reshape China’s business climate, steering the world’s second-largest economy away from the free-market policies that underpinned its ascent. While past Chinese leaders sought to maintain a buffer between the party and the private sector, Mr. Xi has erased those lines and made clear that businesses are there to advance the party’s agenda.
Mr. Xi underscored that message on March 6 when he declared that the party had always regarded the private sector as “our own people” and that while it had a responsibility to support businesses in difficult times, it also needed to “offer guidance” in times of confusion.
With the economy growing near its slowest pace in decades, it is essential to Mr. Xi that the financial sector comply with his vision. He needs bankers to allocate capital in the ways that China wants its money spent and prevent domestic funds from moving overseas, while exercising caution to avoid overextending loans and jeopardizing the financial system.
In what appeared to be a precursor to the structural changes in the financial regulatory bureaucracy, China’s top anti-graft watchdog also published a not-so-veiled warning to bankers last month. It said it would “seriously investigate and deal with the people who neglect the party’s leadership in financial work and state-owned enterprises.”
Echoing the message of “common prosperity,” one of Mr. Xi’s hallmark slogans to narrow the wealth gap in Chinese society, the watchdog said bankers should embrace the party’s values and avoid the ideologies of the “financial elite.” The group said bankers should not emulate the West with its singular focus on money.
Heads are already starting to roll. Bao Fan, a prominent investment banker and chief executive of China Renaissance Holdings, vanished last month. After initially saying that it was unable to contact Mr. Bao, China Renaissance said it had learned that the banker was cooperating with an investigation being carried out by certain Chinese authorities.
Last month, China’s top prosecutor charged Tian Huiyu, the former president of China Merchants Bank, one of the country’s biggest commercial lenders, with abuse of power and insider trading. When he was expelled from the Communist Party in October, the party said in a statement that Mr. Tian had led “a corrupted life with loose morals” for accepting lavish gifts as well as invitations for banquets, travel and golf.
The pointed rhetoric, targeted oversight and crackdowns on high-profile figures are reminiscent of China’s so-called rectification campaign of the last few years in the technology sector. This resulted in huge fines, the upending of business strategies and tycoons driven underground.
But unlike the technology industry, which had been flying high and amassing greater influence in society, the financial sector is under tremendous pressure partially because of the shaky balance sheets of local governments and the banks that lend to them. ANZ Research estimates that Chinese local government debts have grown 16 percent annually over the last five years.
After three years of footing the bill for China’s strict “zero Covid” policy of constant testing, local government finances are depleted, a situation worsened by a property market collapse that has diminished a once-reliable revenue stream from leasing state-owned land to real estate developers.
On Friday, China’s legislature, known as the National People’s Congress, approved a proposal to create a new regulatory body called the State Bureau of Financial Supervision and Administration to oversee China’s 400 trillion yuan, or $57 billion, financial system. The new entity was formed out of China’s existing banking and insurance regulatory commission, and it will absorb some roles played by other agencies including the central bank and the securities regulator.
Darrell Duffie, a professor of management and finance at Stanford University and a close watcher of China, said the changes are consistent with how China turns to additional regulation to redress past mistakes. In this case, he said, it wanted to correct the “excess financial exuberance” that has caused dozens of real estate developers to default on loans and left the sector awash in debt.
It is a delicate dance, Zhaopeng Xing, senior China strategist at ANZ Research, wrote in a report, because the authorities need to make sure that banks and companies don’t binge on risky loans, while not suffocating the economy, because credit “remains the most important driver of growth.”
Analysts say this latest campaign to clean up the financial sector is also rooted in growing concern about the adequacy of the country’s financial regulation, which had been called into question in recent years by a series of missteps and scandals that tested the party’s ability to maintain order.
Peer-to-peer lending initially took off in China around 2014 without much oversight until a series of defaults and scandals unleashed a wave of protests that forced the government to shut down the sector several years later. Last year, demonstrations erupted when depositors in rural banks in Henan Province in central China said the institutions froze their savings accounts and refused to let them withdraw their money.
Lu Ting, chief China economist at Nomura, a Japanese brokerage, said some of these changes were long overdue because “many problems” emerged in recent years reflecting the challenge of local governments supervising the financial institutions that they rely on.
In addition to the new government financial regulator, the Communist Party is expected to resurrect a policy-setting committee that will report directly to top leadership. The Central Financial Works Commission was formed in 1998 after the Asian financial crisis so that party leaders could play a role in regulation. It was disbanded five years later when China established a banking regulator.
In the reincarnation, the commission is expected to work closely with the new regulator, and it will be headed by a member of the Politburo Standing Committee, the inner circle of power in Chinese politics comprising mostly Xi loyalists and the party’s top leaders who oversee the day-to-day running of the country. Bloomberg earlier reported the revival of the committee.
The revamp confirms what many in China already know. Whether it is politics, the military or the economy, all roads lead to Mr. Xi. On Friday, the 2,952 delegates of the national legislature endorsed Mr. Xi for a rare third term as president. There was not a single dissenting vote.
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