Xi Jinping calls for stricter controls on China’s finances

In his decade as China’s top leader, Xi Jinping has asserted greater control over the country’s economy for himself and the Communist Party. Now Mr. Xi has moved to extend that power more powerfully than ever over China’s financial system.

The Communist Party has one detailed ideological statement On Friday, Qiushi, the party’s main official theoretical journal, made clear that it expected banks, pension funds, insurers and other financial organizations in China to follow Marxist principles and be obedient to Mr Xi.

The Qiushi paper, which has been closely studied by bankers and economists in China, could thwart Beijing’s efforts to demonstrate that the economy is open to investment even as it puts a heavier hand on business.

Barry Naughton, an economist at the University of California San Diego who has long studied China’s transition to a market economy, said the document was a signal that the financial sector would be subject to increasing scrutiny and forced to to serve government policy more actively.

“The financial sector is not expected to push for market-oriented reforms or even necessarily maximize profits,” he said. “As a program for the financial sector it is ambitious, disappointing and somewhat ominous.”

Western banks such as HSBC, BNP Paribas and JPMorgan Chase have significant operations in mainland China that fall under the purview of Beijing regulators. But some financial institutions have cut back. Citibank announced on October 9 that it sold its consumer wealth management business in mainland China to HSBC. Vanguard has ended its limited operations on the mainland.

China has long demanded that financial companies follow Beijing’s policies and the party’s principles. Yet for nearly four decades after Mao’s death in 1976, the party seemed to gradually lose its control over society, the economy and the banking system. Financial institutions were encouraged to innovate and pursue profits.

Mr Xi has largely reversed this liberalization. He and other leaders had called for tighter regulatory scrutiny at a financial policy conference in late October. The Qiushi essay underscored that this shift is now a reality as part of the party’s ideology.

That has made market-oriented economists increasingly nervous.

“Politics will certainly further dictate China’s finances, effectively bringing China even closer to pre-reform levels in 1978,” said Chen Zhiwu, a finance professor at the University of Hong Kong.

Some of the policy objectives outlined in the essay would not be unusual as regulatory objectives in the West. For example, it calls on banks to emphasize financial services for the “real economy,” which the party has long interpreted as ample financing for the country’s industrial base.

But it also calls for a strong role in the financial world for Mr Xi personally and for Marxist ideology in general. That follows a pattern that emerged for other sectors at the Chinese Communist Party’s national congress a year ago, but has so far been less apparent in the financial world.

The essay describes a speech Mr. Xi gave privately in late October at China’s Central Financial Work Conference, which meets once every five years to guide financial regulation.

But like the conference, the party declaration in Qiushi did not offer specific solutions to the country’s many financial problems. These include rising debts, widening budget deficits in local governments, the collapse of a major trust bank and the insolvency of real estate developers who were among the country’s largest borrowers.

Credit rating agency Moody’s announced on Tuesday that it lowered its credit outlook for the Chinese government to negative. It had previously given a stable outlook for the country’s credit rating, which remains at A1, near the top of the rating scale.

The official silence on what to do about China’s troubled finances and weak economic recovery coincides with a mysterious delay in a long-awaited meeting of a powerful party committee.

The financial working conference has been followed in recent years in the same year by the third plenum of the party’s Central Committee – where top officials set out the country’s economic policies for the next five years. But the plenum has yet to be scheduled and could be postponed until next year. The impending break with tradition has led to speculation about disorder in economic policymaking.

The Communist Party unit that issued the statement in Qiushi – the Central Financial Working Committee – is led by Vice Prime Minister He Lifeng. Mr. He has been a close associate of Mr. Xi since 1985, when the two men began working together in southeastern China’s Fujian province. Mr. He now has a leading role in setting economic and financial policy in China.

Qiushi is the main magazine that makes statements about China’s current ideology, known as Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. Friday’s statement said Mr. Xi’s speech at the financial conference “is a valuable ideological crystallization shaped by our party’s relentless exploration of the path of financial development with Chinese characteristics.”

Zhu Tian, ​​an economics professor at the China Europe International Business School in Shanghai, said the document should be interpreted primarily as a political statement, rather than a policy prescription. “Politics affects all major areas, and economic and financial issues are themselves political issues,” he said.

Indeed, the Communist Party’s control over finances is mentioned repeatedly in the Qiushi Statement. “We must firmly adhere to the centralized and unified leadership of the Party Central Committee in financial work, and uphold and strengthen the Party’s overall leadership in financial work,” the report said.

China’s top regulators have already started issuing statements endorsing the ideological position. That included a lengthy speech on Monday by Yi Huiman, secretary of the Communist Party and chairman of the China Securities Regulatory Commission, which oversees the country’s stock and futures markets.

Victor Shih, another specialist in Chinese economic policy at the University of California San Diego, said calls for financing to benefit society are also often heard in the West.

But as Chinese authorities take more responsibility for its finances, banks can continue to lend and companies can continue to lend on the assumption that the state will bail them out even if they make mistakes. Mr Shih warned that this “could continue to give rise to careless financial behavior for actors who see comfort in the centre’s absolute guarantee of stability.”

Olivia Wang contributed research from Hong Kong.