October 14, 2021 Updated: October 14, 2021
Beijing's move against China’s financial sector will put
more downward pressure on Chinese assets The skyline of Pudong, the financial district of Shanghai, China, in this undated photo. (Philippe Lopez/AFP/Getty Images) News Analysis Xi Jinping’s investigation of financial institutions in China, and their
alleged chumminess with the largest private firms, will increase his political
power, but harm the country’s economic growth. After targeting the media, education, gaming, and technology sectors in
China, and wiping out billions of dollars in the process, the Chinese Communist
Party (CCP) is now girding itself against China’s financial firms. According to a Wall Street Journal exclusive
by Lingling Wei, Xi “is zeroing in on the ties that China’s state banks and
other financial stalwarts have developed with big private-sector players,
expanding his push to curb capitalist forces in the economy.” The move will further chill foreign investment in China and increase
centrifugal pressures fueling capital flight. Star investor Catherine Wood of Ark Invest warned
on Oct. 12 of a coming economic downturn in China that is becoming increasingly
obvious. Such a downturn could ripple through the world economy, weighing on
commodities, she warned. “I really do think that the policy makers in China are beginning to play
with fire,” Wood said. “We will look back at this period in six months and say,
‘Wasn’t it obvious there will be a major and unexpected slowdown in China?’” In 2020, Wood’s $19.7
billion Ark Innovation fund topped the performance charts of U.S. equity funds. Xi is launching major inspections, announced in September, of 25
state financial institutions that are central to China’s economy. According to the Journal’s sources,
the inspections will focus on the allegedly too-chummy relationships between
state-owned banks, financial regulators, and investment funds, and the biggest
private firms, especially those that the CCP has already targeted, including
China Evergrande Group, Didi Global Inc., and Ant Group. While money from state banks has helped
these groups beat foreign rivals, Xi is apparently still suspicious of the way
in which the investments have pushed forward powerful rivals in the form of
popular Chinese billionaires who are sometimes seen as too critical of the
state, or too much of a risk to Xi. “Do those investments represent the state’s interests or those of a few
individuals?” one of the Journal’s sources said.
“That’s a key question.” Targeting companies that have already run afoul of Beijing, or in the case
of Evergrande, of the market, risks the appearance of biased enforcement of the
law and a failure to apply governing principles in advance to mitigate risk,
rather than afterwards to compound failure. The confused approach of Xi to wanting both market principles that improve
growth, while at the same time targeting capitalism by name and promoting
failed communist principles, will only frighten away investors and worsen
China’s lackluster economy on a per capita basis, compared to Japan, South
Korea, and Taiwan. Xiconomics will make financial firms, regulators, and private firms
doubly-risk averse, decreasing economic efficiency and growth in China. The Journal’s sources
have said that starting this month, the Central Commission for Discipline
Inspection will be rifling through the files of the 25 state institutions, and
asking tough questions about their investments, lending, and regulatory
compliance, especially with respect to the targeted private firms. But there is also a political component. The head of Xi’s anticorruption
body said
on Sept. 26 that the inspectors will “thoroughly search for any political
deviations.” Criminal charges,
disciplinary hearings, slashed executive compensation, and market turmoil will
likely follow. Some Ministry of Finance officials have long wanted to cut
financial sector compensation anyway. “The financial-sector scrutiny comes as Beijing is also trying to address
the economy’s dependence on debt-fueled construction sprees, which is prompting
turmoil in China’s property sector,” according to Lingling
at the Journal. “By expanding his economic campaign, Mr. Xi risks unleashing
dynamics that could severely cut into growth in coming months.” She added, “One risk for Mr. Xi and China is that such broad scrutiny could
make the country’s financial system even less accessible for smaller private
companies already struggling with a lack of financing.” Lingling quoted analysts who say that many banks have begun decreasing
lending to private firms in response. This will lock up capital and decrease
China’s much-vaunted levels of economic growth, albeit growth that is often
girded through the building of ghost cities. Xi would like us to believe that his goals are to protect
China from its largest private firms that seek to “capture” the state’s
financial sector, thus decreasing the Party’s influence and control over the
economy. He wants us to believe that by targeting some of the biggest failing
firms, the investigators will minimize the moral
hazard of frequent bailouts. Evergrande, for example, owes over $305 billion in debt and on Oct.
11, missed
the third set of interest payments on dollar bonds. Additional Chinese firms
have also recently warned investors of upcoming defaults. Evergrande’s rival
Fantasia also missed a debt payment. The likelihood of more defaults in China’s $5 trillion property sector is
increasing worries among global investors of debt contagion to other sectors,
sending interest rate spreads of some high yield Chinese corporate debt to over
23 percent on Oct. 12. According to a Capital Economics note,
“Even following an orderly restructuring of the worst-affected developers with
minimal contagion to the financial system, construction activity would still
almost inevitably slow much further.” “They want to scare the market as a way of eliminating moral hazard,”
Michael Pettis, a financial expert at Peking University, told
the Financial Times. “Evergrande has the risk of spiralling out of control
because people are changing their behaviour to protect themselves, which is
perfectly rational. But as people do that systematically, it’s really
self-reinforcing and makes things worse,” he said. Targeting the financial sector in China is also a means for Xi to undermine
political rivals, including through further crumbling the power
base of Wang Qishan, who holds the largely ceremonial office of Vice
President. Two of Wang’s close associates have hit hard times recently, with
his longtime aide Dong Hong charged with accepting over $71
million in bribes, and another former aide, HNA Group Chairman Chen Feng,
declaring bankruptcy last year. In September, HNA disclosed that Chen was
detained for alleged criminal offenses. Xi’s recent targeting of non-state media
has also hit Wang, who is allied to the founder of the privately-owned Caixin
Media, and Jack Ma’s Alibaba Group Holding, which controls a private media
empire that includes shares of Caixin. “While serving as Mr. Xi’s antigraft czar during the leader’s first term,
Mr. Wang largely avoided investigating the financial sector, while he pursued
probes into other parts of the economy,” according
to Lingling. “But financial risks in China kept building up, in part because of
aggressive lending by state banks to some well-connected corporate highfliers.” Whatever the real reasons for Xi’s targeting of China’s financial sector,
the move will almost certainly increase his power on the mainland. Following
the playbook of his anti-corruption drive, which started in 2012, Xi can now
more thoroughly and selectively investigate and prosecute his billionaire
rivals for financial malfeasance. This can only help in his bid for more
totalitarian power within China. What it does for his dreams of increased
economic growth and more territorial control abroad is less certain. Investors,
and the world, should be nervous. Views expressed in this article are the opinions of the author and do not
necessarily reflect the views of The Epoch Times. 
No comments:
Post a Comment