China lays out contrasting vision for financial system, rejects ‘predatory’ Western outlook

In official publications and a broad regulatory overhaul, China has indicated scepticism of the Western approach to finance
Distaste for ‘monopolistic, predatory and vulnerable’ industry appears to be motive for strengthened oversight and Communist Party control

Banking & finance

Ji Siqiin Beijing

Published: 8:00pm, 6 Dec 2023

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After years spent emulating some Western practices in the construction of its financial system, China has begun to turn its back on an ideology recent articles have deemed an unacceptable source of risk and inequality – a change in perspective likely to have been a factor in this year’s regulatory overhaul.

The choice by official publications to highlight ideological cleavages and domestic policy goals indicate a different development path is planned for China’s finance industry compared to the United States or Europe.

Under the capitalist ideology and social system, finance capital reveals its monopolistic, predatory and vulnerable nature

Central Financial Commission

In an article published Friday in the Communist Party’s theoretical journal Qiushi, the newly formed Central Financial Commission declared China has “fully learned the lessons of Western financial development” and has answered “many major theoretical and practical issues that Western financial theory has never been able to solve”.

The commission also had strong words for the consequences it found that theory has wrought. “Under the capitalist ideology and social system, finance capital reveals its monopolistic, predatory and vulnerable nature,” it said. “It not only creates a huge gap between rich and poor, but also triggers recurring economic and financial crises.”

To control those perceived risks, enhancing the party’s leadership was top of the agenda at the twice-a-decade central financial work conference, held at the end of October.

“It is to be understood that the operations of Chinese financial institutions, under the guidance of the [Communist Party], are driven by a different imperative compared to their Western counterparts,” said Wang Zichen and Jia Yuxuan, researchers with the Beijing-based Centre for China and Globalisation think tank.

In the Western context, profitability, maximising returns for shareholders and adhering to regulatory requirements, is the primary objective of financial institutions, they said in a note last month. In contrast, they added, Chinese institutions hold as their prime directive the faithful execution of tasks assigned by the party.

Observers have noted President Xi Jinping has also taken a direct interest in finance, with a rare personal visit to the country’s central bank in late October and a trip to Shanghai’s futures exchange as part of an inspection tour of the city last week.

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Chinese President Xi Jinping visits Shanghai in first post-Covid trip

The added value of China’s financial industry accounted for 8 per cent of the national gross domestic product last year, higher than the 4.9 per cent average for Organisation for Economic Cooperation and Development member countries and approaching the level of the US and the United Kingdom, according to minutes distributed by the National People’s Congress.

Some of the country’s state-owned banks, such as the Industrial and Commercial Bank of China, have entered the world’s top 10 in terms of revenue. Five are included in the list of global systemically important banks as designated by the Bank for International Settlements.

When discussing financial problems in late October, lawmakers said the domestic industry’s competitiveness needs to improve and its support for the real economy – those sectors which produce or trade in goods and services – is inadequate, particularly when it comes to private firms.

In the Qiushi article, the top party finance organ made clear that domestic financial institutions must maintain a correct perspective on business, performance and risk.

“We must strike a fine balance between functionality and profitability,” it said, “but bear in mind that functionality always comes first.”

Financial inclusiveness, or letting the people share in the fruits of China’s finance, is a distinctive characteristic of the country’s system compared to those in the West, it added.

With security remaining a major area of focus given lingering tensions with Washington, Beijing’s state-backed garrison of financial players should better serve the real economy, buttress “weak links” and support strategic projects such as the Belt and Road Initiative and yuan internationalisation, the commission said.

In a Monday article from People’s Daily, the party’s official newspaper, central bank governor Pan Gongsheng said the party’s centralised and unified leadership over financial affairs is essential to solving institutional problems in finance.

Pan admitted neither the quality nor efficiency of financial services provided to the real economy are high, adding some enterprises manage a large share of financial resources inefficiently.

“Financial chaos and corruption persist, financial supervision and governance capabilities are weak, and there are still many hidden economic and financial risks,” he said.

“We must continuously enhance the party’s leadership of finance, so that such political and institutional advantages can be effectively transformed into a boost to financial governance.”