Chinese Financial Institutions With Ties To Private Firms Under Xi Jinping’s Scanner

Continuing his spree of crackdowns, China’s President Xi Jinping is now reaching out to state owned banks and other affiliated financial institutions that have cultivated close relationships with critical private-sector players.

This move is being seen in culmination with Jinping’s crackdown on other capitalistic forces in the country since earlier this year, starting with Jack Ma’s Alibaba Group.

Several financial institutions are now under the scanner of authorities inviting inspections. These inspections were announced in September, but details were not made available immediately. However, the focus was largely on state-owned banks, investment funds, and other key regulators that were perceived to be too close to the private sector.

The crackdown has become more important given the recent Evergrande crisis which many are terming as China’s Lehman moment.

The crackdown is being led by China’s leading anti-corruption regulator and is zeroing in on 25 financial institutions critical to the national economy.

For Jinping, the investigations ensure a shift away from the Western-style capitalism, suited more to the Chinese characteristics where the state gets the final say in all matters. From a political perspective, it also aids his transition into the third-term, beginning next year.

Beginning later this month, officials from the Central Commission for Discipline Inspection are going to be scanning through the offices of the top 25 state-backed and state-owned financial institutions, going through files documenting the lending process, investment and regulatory records, and seeking answers about certain deals and decisions pertaining to the private sector.

Further, employees and other officials, suspected to have been involved in unfair practices or unauthorised dealings, would then be investigated by the Chinese Communist Party.

Upon being found guilty, these officials would be charged. The investigations would also be used to reevaluate the monetary compensations of the executives at these institutions.

For a long time now, China’s Ministry of Finance has been demanding a reduction in the compensation for the financial sector, given the gap between the sector and other industries.

Zhao Leji, heading the anti-corruption body under Xi Jinping, stated that the officials and inspectors responsible for examining the 25 institutions will be thoroughly searching for any political deviations, as reported by the Wall Street Journal.

The scrutiny is also being seen as another action to keep in check the debt-fueled construction spree China has been on since the Great Recession of 2008.

However, a negative impact on the construction industry could have a domino effect on other key sectors, like steel and aluminium. The news of the crackdown has already made banks rethink their funding of projects for the private real estate players.

A few institutions, infamous for their closeness to Evergrande, would be under scanner to begin with, given the real estate developer is a case of one of the largest-ever defaults in China with more than $300 billion in liabilities.

Conglomerate Citic Group, known for creating the culture of a Chinese Wall Street, went as far as creating investment funds for firms like Evergrande.

In 2015, the defaulting real-estate entity received a $3 billion pledge from Citic and then these funds were sold as investment products to individual investors, promising a high rate of return while assuming timely loan payments from Evergrande.

As was the case of Mortgaged Backed Securities in 2008, any default by Evergrande and other such private players would jeopardise the investments of individuals. In totality, Citic Group has lent more than $10 billion to Evergrande, as per some reports.

Ironically, the fall of China’s real estate market can be compared to the housing market of the United States in 2008. Today, the financial institutions in China, most of them state-backed, are in the same trouble as the likes of Lehman, JP Morgan, Morgan Stanley amongst others were in 2008 before a rescue plan was put together.

In the reign of Xi Jinping, however, the scrutiny may not yield the same results as they did in America 13 years ago.