Beijing's Tightening Grip on Financial System Reflects Economic Concerns

The Chinese government's recent move to exert tighter control over its financial system has garnered attention from analysts who see it as a response to growing economic challenges and a divergence from more mature financial markets. The change in the country's approach is seen as both a centralization of resources and a means to expedite decision-making to address immediate issues like a slump in the property market and high levels of local debt. However, these measures also raise questions about whether the world's second-largest economy remains an attractive destination for substantial investments.

The high-level meeting, led by President Xi Jinping, resulted in a pledge to "comprehensively enhance the Communist Party's leadership in financial work," emphasizing its critical role in risk control and prevention. This shift was underscored by a change in the conference's name, previously known as the "National Financial Work Conference" since its inception in 1997, it was held this year as the "Central Financial Work Conference." The altered nomenclature signifies more direct party supervision over financial matters.

According to researchers Wang Zichen and Jia Yuxuan from the Center for China and Globalization, "The transition... is an apparent elevation in its status because 'central' denotes the Party, and the Party leads all." This highlights a fundamental difference in the motivation of China's financial institutions compared to their Western counterparts. While Western firms typically prioritize shareholder value, those in China place party prerogatives at the forefront, even if such priorities run counter to their own interests.

Chen Zhiwu, Chair Professor of Finance at the University of Hong Kong, noted that the tighter party control over finance merely formalizes a practice that has been in place for the past decade. He highlighted that the revised Chinese Constitution of 2018 mandates that the Party must control everything, making financial sectors no exception to this rule.

This conference marked the first central-level gathering on finance following the establishment of the Central Financial Commission in March. This party organ now serves as the country's top financial regulator alongside the State Council.

Despite the absence of commitments to market reform in the recent statement, there has been previous rhetoric about opening up the financial sector and encouraging foreign financial institutions to expand their operations in China. Notably, the phrase "giving full play to the decisive role of the market in the allocation of financial resources," present in the 2017 meeting, was not included in the recent transcripts.

The focus in the recent meeting was on supporting state-owned financial institutions, with an emphasis on five designated areas: technology and innovation, the green economy, inclusive financing, elderly care, and the digital economy. Concerns have been raised about whether China remains an attractive investment destination, and an exodus from China's capital market has been observed in recent months as investor confidence wanes.

Larry Hu, Chief China Economist at Macquarie, believes that this shift reflects China's overall policy changes, particularly since the onset of the US-China trade war. He noted, "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, emphasized that the centralization of power is likely driven by China's challenging economic situation. She stated, "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, observed that Beijing seems to be seeking a balance where market forces play a significant role while maintaining a strong grip on the financial system. However, striking that balance may prove challenging. Ding Shuang, Chief Greater China Economist at Standard Chartered Bank, commented, "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."

By fLEXI tEAM