Xi increases grip on the financial sector, Beijing pushes Xinjiang's new Free Trade Zone & Wang Yi goes to Washington -- China Boss News 11.03.23

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What happened.

What a difference six years makes.

At the last National Financial Work Conference in 2017, impetus was on strengthening Party guidance in China’s financial sector and encouraging it to "serve the real economy," as well as on preventing financial risks and strengthening supervision while promoting sound financial development and deepening financial reforms.

This year’s National Financial Work Conference, which took place this week, however, will center on China’s spreading debt crisis and managing systemic risk.

 “At the moment, the most important thing is to resolve the debt problems. Of which the core is the fact that local governments are out of money. And the core reason for that is the downturn in the real estate market," one source familiar with the agenda told South China Morning Post.

Ironically, it was only a few weeks after the 2017 work conference when Xi Jinping uttered the words few will soon forget: “Housing is for living in, not for speculation.”

Afterwards, the government launched a $1.3 trillion real estate crackdown that began the meltdown authorities are so desperate to now stop.

Since then - Xi’s trade and tech wars, his zero-Covid policy, a doubling-down on Xinjiang, Hong Kong and steadfast alliances with several rogue-states - all of which have sent investors fleeing - have made economic recovery impossible.

That would be enough, but there are a couple of even sadder endings on China's development to report.

The first: Xi is likely to continue to feed the debt monster he also wants to starve, and spare none but himself in the process.

Last year, the local governments were required to take on new eye-watering levels of debt to bailout the property sector ahead of Xi's appointment to a third term in office.

Now those same local governments, who “typically have little experience in property development” and “are known for their sluggish financial performance,” are faced with paying back "a record 66 trillion yuan (US$9.23 trillion)" which is more than twice the amount they had in 2017, at 30.7 trillion yuan.

And Xi’s return to Mao-era mass mobilization governance will cost the country even more when local cadres, as they invariably do, compete for promotions with unsustainable food, technological, and employment "national security" ventures.

The second? In 2017, following General Secretary Xi’s “important statement on the financial matters,” Li Keqiang made his remarks on the more practical issues.

Then still Premier, Li would watch helplessly over the coming years as his genuine ability to manage China's economy was overruled and pushed aside.

Last week, that know-how was finally laid to rest together with Li’s lifeless body where they both will remain outlived, for a time yet, by Xi-thought and the Party.

Why it matters

Overhaul of the financial regulatory system

As the Financial Times reported last week, the Chinese Communist Party is nearly finished setting up an extraordinary watchdog - the Central Financial Commission (CFC)- with the power to plan and direct China's $61tn financial sector. Although, staffing for the CFC is still being worked out, the new body has already started operations.

The commission will give Chinese leader Xi Jinping direct control over China’s enormous financial sector at a time when the economy is wobbling under the weight of a real estate debt crisis.

The upshot is that Beijing "could act more quickly to close regulatory loopholes" that might increase systemic risk, experts told FT.

But the problems inherent in the Party’s close supervision of banking under the current leadership are likely to cancel out any benefits.

At around the same time as the establishment of the CFC, China also set up the new National Administration of Financial Regulation (NAFR) in a massive overhaul of financial governance.

The latter was created to replace the China Banking and Insurance Regulations Commissions, and is a political reform Beijing is using to centralize - that is to remove and/or dilute the autonomy of the regional and local financial sectors. With the NAFR, China consolidated ALL financial regulation, except in the securities sector, under a singular central authority.

The Central Financial Commission (CFC) - on the other hand - might be seen as a new tool to instill Party discipline in the financial sector. Top watchdog roles will almost certainly go to trusted members of China’s Communist Party hierarchy.

Again, these organizations are new, and it’s unclear how effective they will be - but we can still discuss the risks linked to their very clearly stated purposes.

Political and systemic risk

The most obvious risk in tying China's financial sector to the whims of one leader is that such a move will further loosen China’s banks from their judgement.

Take what’s been happening to the People’s Bank of China (PBOC), China’s central bank, for example. Although the PBOC was never truly politically independent, it did carve out some autonomy and had earned the trust of both local and foreign investors.

But in 2021, various branches and departmental heads began to receives visits from the Central Commission for Discipline Inspection (CCDI), the CCP’s most-feared anti-corruption investigator. Not long thereafter, the PBOC eased liquidity reserves in line with Beijing’s attempts to aid economic recovery. Those efforts, as the PBOC’s technocrats then knew, would fail miserably, and public confidence in the ability of regulators to save the system took a nosedive.

Then in 2022, the CCDI, removed the chief of monetary policy, Sun Guofeng, for “leaking” macroeconomic indicators that the Party considers national secrets, even though similar information is publicly-available in market economies. The inference is that the Party seeks to control its messaging on the economy and does not want independent analysis.

With just this one example, it is immediately apparent how Beijing, under Xi Jinping’s leadership, views autonomy and transparency - two foundational elements of the modern financial system - in China’s financial sector. It also seems that pressure and removal of some regulators wasn’t sufficient to make the changes Xi wanted, and, thus, the old system had to be replaced with something else.

In sum, Xi Jinping’s turn towards finance is an ominous sign. As South China Morning Post staff put it earlier this week:

“China is struggling with multiple financial challenges, with foreign investors pulling capital from China’s onshore stock exchanges amid slumping equity prices, while the yuan’s exchange rate against the US dollar has fallen to a 16-year low. Some US$75 billion of capital exited the country in September, the largest net outflow since 2016, Goldman Sachs said in a report earlier this month, using its own measure of cross-border currency flow. That came after a US$42 billion flight in August as the capital and current account suffered deficits.”

It’s hard to see how cutting financial institutions off from their business judgment and threatening their managers with invisible red lines and visits by Party whips will make China a better place for investment.

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