China sends top financial officials to clean up debt-laden provinces amid growing signs of economic risk
- Senior state bankers and financial regulators have been appointed vice-governors of at least 15 of China’s 31 provincial level governments
- Postings come amid signs of growing financial stress in China, including local government fiscal trouble and a slowing economy
China’s central government has dispatched senior state bankers and financial regulators to at least 15 of the country’s 31 provincial level governments to work as vice-governors over the past two years, as Beijing looks to shore up debt-laden local economies.
In September, Tan Jiong, a vice-president of the Industrial and Commercial Bank of China, was appointed vice-governor of Guizhou, one of the country’s poorest and most indebted provinces, with a mission to tackle government debt and rising defaults after a decade-long frenzy of construction investment.
On a recent visit to the Shanghai Stock Exchange, Tan told a group of institutional investors that the province faces a key challenge resolving its financial risks and promised Guizhou would honour its debts, according to an article published on the provincial government’s website.
Elsewhere, the former chief of the central bank’s monetary policy department, Li Bo, was appointed vice-mayor of Chongqing, a large municipality that is rapidly losing growth momentum. Ge Haijiao, the former president of China Everbright Bank, was also named as a vice-governor of Hebei, a province struggling to balance economic growth with requirements to reduce air pollution.
China has traditionally sent senior regulatory officials to provincial capitals only when there is an imminent financial risk. One prominent example was the appointment of Wang Qishan, then-president of China Construction Bank, as a vice-governor of Guangdong province in late 1997 to deal with a local banking collapse amid the Asian financial crisis. Wang showcased his skills and style, earning himself a reputation as a “firefighter” and problem solver that resulted in a series of promotions until he landed his current job as the China’s vice-president.
“The good thing is that [the officials] will be able to identify potential risks and stamp them out early at the local level and not let them spill over into other sectors and regions,” said Iris Pang, chief Greater China economist of ING Bank.
“We’ve seen some results, such as the size of the shadow banking continuing to contract over the past year or two, but [solving all local financial problems] will be a very long-term job.”
President Xi Jinping has designated cutting excessive financial risk one the government’s three main “battles” this year, along with poverty reduction and curbing pollution.
The International Monetary Fund warned in a report last week of several vulnerabilities in China’s financial system. Among them were liquidity and solvency issues facing small and medium-sized banks, risky links between banks and other financial institutions, and maturity mismatches between their assets and liabilities – all of which could amplify shocks.
“Policymakers urgently need to introduce a bank resolution regime, alongside measures to reform the asset management industry and its linkages to banks,” the IMF urged.
The central government is counting on the provincial appointments to support a coordinated effort to help troubled financial institutions. But the officials will have to overcome conflicts of interest that exacerbate many of the problems they face.
Local governments are often controlling shareholders in the hundreds of regional banks within their jurisdictions and frequently push them to fund projects – often of questionable quality – to boost the local economy. Local authorities are also sometimes the source of financial irregularities such as Ponzi schemes and loan sharking.
Given the size and complexity of problems facing the regions, it is unclear how successful the postings will be in taming the risks.
Liu Shengjun, head of the Shanghai-based China Financial Reform Institute, said it would be “unrealistic” to count on the newly-appointed provincial officials to solve all financial problems.
“The cause can’t be removed if there’s no institutional changes at the central government level,” he said.