China cements party control over finance, clamping down on risk but making investors sweat
- At a top-level financial conference, China’s leadership reasserted the need for greater control by the Communist Party to mitigate systemic risk and keep institutions in line
- Move signals commitment to security, but undermines rhetoric of opening-up and welcoming foreign investment
Beijing’s tightened control over its financial system – affirmed at a twice-a-decade policymaking conference on Tuesday – is a reflection of rising concerns from top leaders on the country’s economic distress and a symbol of widening divergence from more developed financial markets, analysts said.
While the consequent centralisation of resources and immediacy of decision-making could help solve the country’s present headaches, which include a slump in the property market and high levels of local debt, it may also prompt worries over whether the world’s second-largest economy is a place worth heavy investment.
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Reflecting this shift in priorities, the meeting itself underwent a name change. Known as the National financial work conference since it was first convened in 1997, this year’s iteration was held as the central financial work conference.
The previous title indicated greater oversight from government organs like the State Council, China’s cabinet, while the new name signifies direct supervision by the party.
“The transition … is an apparent elevation in its status, because ‘central’ denotes the Party, and the Party leads all,” said Wang Zichen and Jia Yuxuan, researchers with the Center for China and Globalisation, a Beijing-based think tank.
Thus, operations of China’s financial institutions are driven by a different imperative compared to their Western counterparts, the analysts said in a note on Wednesday. Where Western firms maximise shareholder value as a first principle, those in China put party prerogatives in pole position – even if doing so runs counter to their own interests.
The bottom line is avoiding any systemic risks
“In China, where financial institutions, especially those state-run, are under predominant Party influence, the overarching objective is not mere financial gain but rather the fulfilment of a broader mandate,” the note read.
Chen Zhiwu, chair professor of finance at the University of Hong Kong, said tightening party control over finance is “simply a formal acknowledgement of the practice over the past 10 years.”
“No surprise here, as the revised Chinese Constitution of 2018 says the Party must control everything. So, the financial sectors cannot be an exception.”
Worries over heightened party control were deepened by the absence of promises for market reform in Tuesday’s statement, despite rhetoric regarding institutional opening in the financial sector and encouragement for foreign financial institutions to expand their operations in China.
Transcripts from Tuesday’s conference did not include the phrase “giving full play to the decisive role of the market in the allocation of financial resources”, which appeared at the 2017 meeting, though “promoting financial innovation within a market-oriented and law-based framework” was mentioned.
Particular mention was given to state-owned financial institutions and support for five designated areas was emphasised: technology and innovation, the green economy, inclusive financing, elderly care and the digital economy.
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Larry Hu, chief China economist at Macquarie, said this is a reflection of China’s overall shift in policy since the trade war with the US began.
“The general environment now is very different from that in 2017, and the security of the industrial chain has been given a high priority. Many areas are moving to focus on security, and finance is no exception.”
Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said the centralisation of power may be related to the difficult economic situation China is facing.
It is hard to have your cake and eat it too
“China is stuck with a suboptimal economic performance. Therefore, control is of the essence so that no loose ends would create any type of financial events. Thus all of these changes are also out of necessity, not only ideology.”
Zhu Tian, a professor of economics at the China Europe International Business School in Shanghai, said it seems Beijing wants to have market forces play an important role and to have better control over the financial system at the same time.
“But it is hard to have your cake and eat it too,” Zhu said.
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Preventing and resolving risks is an “eternal theme” for the Chinese government, Xi said, vowing to strengthen supervision on all fronts and coordinate financial openness with security.
“Of course, when talking about it in context, it feels like we need to pay more attention to financial security than openness,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
“It signals that Beijing would rather opt for a more steadfast financial openness rather than a quick one. The bottom line is avoiding any systemic risks.”
