What makes a successful company? If you are a customer, a successful business is one that sells you goods or services that you want at a price you can afford. If you are an employee, a good company offers a stimulating workplace that pays you well. If you are a shareholder, it delivers you handsome returns through capital gains or solid dividends. And if you are an economist, a successful company is one with a return on capital that comfortably exceeds its capital cost.
To all these definitions, add another. If you are a mainland Chinese regulator, a successful company is one that focuses first and foremost on “party building”.
Companies that prioritise party building do not just perform well, Liu told a press conference last week, they are “unbeatable”. In contrast, companies that perform badly are those that fail to pay due attention to the party’s policy directives and to the leading role played in business development by party members.
In this case, however, such a dismissive attitude could be a mistake. Liu’s appointment to the CSRC comes at a time when the authorities are once again attempting to get a grip on the mainland’s financial system, and in particular to rein in the runaway credit creation engine of China’s shadow financial markets.
The scale of the challenge is daunting. Formal bank lending in January came in below expectations at a relatively modest 2 trillion yuan (HK$2.25 trillion). However, the authorities’ broadest measure of aggregate financing for the month touched 3.7 trillion yuan, well ahead of analysts’ forecasts.
But it is likely even that figure fails to capture much new credit creation, because it does not include local government borrowing or much bank-financed lending disguised as “wealth management products”. In recent years, banks have worked with trust companies and the subsidiaries of brokers and asset managers to create complex off-balance-sheet networks, which typically resemble bowls of noodles if you actually try to chart them, in order to channel savers’ money to high yield, high risk borrowers.
The scale of this lending is hard to assess, but in the middle of last year the CSRC estimated the value of outstanding products to be about 60 trillion yuan (HK$67 trillion). At the end of December, the People’s Bank of China put the banking system’s exposure to off-balance-sheet wealth management products at 26 trillion yuan, up 30 per cent from a year earlier.
The key, of course, is effective enforcement. And this is why it would be a mistake to ignore Liu’s statement about “party building”.
Read between the lines of the new securities regulator’s comments, and the message is that if successful companies – whether state-owned or private – are those which put their loyalty to the Communist Party above everything else and emphasise decision-making by party committee rather than by the board, then these companies will be less likely to attract the censure of regulators.
In other words, it looks very much as if the latest crackdown on excessive borrowing will be applied selectively. And while reducing financial risk will no doubt be one aim, it will be a secondary objective to tightening the party’s control over the corporate world.
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years