With new regulations and mandates, is the party over for China’s finance sector?

“Everyone, from the top brass to people like us in middle ranks, earn less than before,” said a credit manager with Bank of China, one of the country’s “big four” state-owned banks, lamenting the loss of the staggering bonuses that she used to bag in the industry’s heyday.

China’s financial sector is always beholden to the government … No businesses in any country can operate in a vacuum

Li Xuenan

Pay cuts, first imposed on executives of state-owned financial institutions in 2010 by the banking regulator and now an industry-wide practice, appear to be a preview of what’s in store for China’s fast-changing financial landscape.

Under President Xi Jinping’s ambitions to make China into a “financial superpower” – a goal first laid out at October’s twice-a-decade central financial work conference – its 461-trillion-yuan (US$63.8 trillion) financial industry, largely controlled by the government, is undergoing profound changes that challenge the capitalist principle of putting profit-seeking first and rewrite the rules by which foreign players do business in the Chinese market.

“Banks may leave some with the impression that they are straying away from market norms, but China’s financial sector is always beholden to the government,” said Li Xuenan, a finance professor with the Cheung Kong Graduate School of Business (CKGSB) in Beijing. “No businesses in any country can operate in a vacuum.”

In statements from the conference and subsequent meetings on the financial system, the Chinese leadership instructed state-owned banks not to put profit-seeking first and squeeze lucrative interest spreads while encouraging them to fend off risk, serve national strategies and tailor services to businesses and sectors they would have snubbed in the past.

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“Circumstances and mindsets have evolved,” Li said, “to the point that Beijing is convinced the greater good outweighs the interest of banks.”

While dedicating substantial time in statements to criticising inadequacies in the Western financial model, the leadership also vowed to build “a modern corporate system with Chinese characteristics” via a list of dos and don’ts which are expected to become a new regulatory mantra.

“It is essential to remain committed to honesty and trustworthiness instead of crossing the line, to seek interest without compromising moral principles or putting profit before everything, to be prudent and cautious in work instead of seeking instant success and quick profits,” said Xi, as quoted by state news agency Xinhua.

“[They should] uphold fundamental principles and break new ground instead of diverting funds out of the real economy, and be compliant with laws and regulations instead of conducting illegal activities.”


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The Wall Street philosophy was once held up as a model for Chinese lenders and investment banks.

Beijing brought in foreign strategic investors like Citibank and HSBC when it began to revamp the state banking sector at the start of the new millennium. Many Chinese banks set up boards of directors to improve corporate governance, floated their shares in Hong Kong and invited Western bankers to sit on their boards.

Wall Street investment banks also gained wider access to China’s capital market following sweeping financial liberalisation measures.

In 2020, the Chinese authorities loosened the shackles on the finance industry and effectively scrapped all foreign ownership limits, providing space for firms like Morgan Stanley and Goldman Sachs to establish or expand their presence.

But Beijing’s distrust of the Wall Street way has been on the rise after a deep analysis of Western financial markets precipitated by the global financial crisis in 2008 and the Occupy Wall Street movement in 2011. Particular focus was placed on the role of overleveraged speculation in creating the conditions for a crisis.

Eventually, authorities came to a conclusion – the financial industry, if unchecked and allowed to act only in their self-interest, would cause a calamity that would embroil the whole economy.

This rethinking of values has not meant a wholesale dismantling of the banking system, however. Political leaders have merely determined that Chinese banks must be remoulded to pursue national directives rather than profits alone.

“With the current state of the economy, it does require a whole-of-government effort, banks involved, to steer the country back to the growth path,” said Bala Ramasamy, a professor at the China Europe International Business School in Shanghai.

“China’s financial system isn’t entirely market-based. SOE banks dominate the scene and they benefit greatly from their dominance partly ensured by Beijing’s policies,” he said.

“Therefore, whenever needed, [these banks] are used as tools to carry out stimulus policies or other national plans.”

Beijing has outlined five realms that domestic banks, big and small, must spare no effort to serve: science and technology, the green economy, inclusive finance, care for the elderly and the digital economy. The People’s Bank of China (PBOC), the country’s central bank, is playing the role of conduit for these mandates as Beijing whips banks into line.
Speaking at a press conference during this year’s parliamentary meetings, known colloquially as the “two sessions”, PBOC governor Pan Gongsheng said China has room for “more interest rate and reserve requirement ratio cuts, relending tools and lowering financing costs” to aid commercial lenders in serving those bedrock demands.

China’s financial watchdogs have in turn designed a wide range of metrics to assess the performance of commercial banks, including analysis of their proportions of low-interest loans for small businesses.

Financial institutions must promote innovation based on the needs of the real economy, and proactively integrate corporate strategies into national ones

Yang Chengzhang

Yang Chengzhang, a member of the Chinese People’s Political Consultative Conference – the country’s top political advisory body – suggested creating systemic development and appraisal standards.

“A new evaluation system should focus on business transformation to improve quality and efficiency of financial services. Financial institutions must promote innovation based on the needs of the real economy, and proactively integrate corporate strategies into national ones,” said Yang, also chief economist of Shenwan Hongyuan Securities.

Executives of state-owned financial institutions and local cadres have thus far indicated they are fully on board with the party line.

Ge Haijiao, Bank of China chairman, said during the two sessions that the state-owned institution had already designated loan types to fund scientific breakthroughs and emerging strategic sectors.

He claimed the bank’s tech-related credit balance was 1.5 trillion yuan (US$207.5 billion) at the end of last year, and that the balance for inclusive loans had also risen 40 per cent year on year to 1.7 trillion yuan.

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Leading investment bank China International Capital Corporation also vowed to align with national imperatives, with chairman Chen Liang telling state media it would channel more capital into technological innovation and small and medium-sized businesses.

A district manager with Zhejiang Tailong Commercial Bank, a mid-sized outfit with high exposure to small and medium-sized enterprises in the Yangtze River Delta, said local regulators began apprising them on inclusive finance services since 2022.

“There is a quarterly ranking of all banks’ key performance indicators in this area,” the person said on condition of anonymity.

East China’s Zhejiang province announced a plan for its banks to pump more funding into the manufacturing sector last week, with the fulfilment of 400 billion yuan in new medium- to long-term loans among this year’s appraisal criteria.


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In an exhaustive set of documents released on March 15, the China Securities Regulatory Commission pledged to “correct and recalibrate” the role and orientation of investment banks.

While setting quantitative goals – cultivating two or three “world-class” investment banks by 2035, for instance – the securities watchdog warned the country’s financial workforce against exhibiting a laundry list of character defects. Behaviours on the no-no list include money worship, extravagance, sense of entitlement, seeking quick gains and “showing off wealth.”

The regulator also vowed to resolutely eliminate “erroneous views” within the sector, such as exceptionalism or elitism.

Some analysts have warned that Beijing’s top-down approach is the opposite of what is required to become a genuine financial superpower.

These administrative interventions will kill incentives and stifle competition

Chen Zhiwu

“No country in history has developed strong financial markets through administrative mandates and controls,” said Chen Zhiwu, a chair professor of finance at the University of Hong Kong.

“These administrative interventions will kill incentives and stifle competition. If Beijing wants to control lending and interest decisions, it will effectively make all banks nearly the same.”

All these changes will fundamentally alter the business pattern and profitability of Chinese financial institutions and affect their shareholders, including those from overseas.

Foreign strategic investors have largely sold their stakes in state-owned banks, even though a few foreign directors continue to sit on the boards of big Chinese lenders. According to its annual report, Bank of China had four independent directors from Hong Kong and abroad, while China Construction Bank had six.

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In terms of assets, foreign-funded banks only represent around 1 per cent of China’s banking sector, and foreign investors around 3 per cent of onshore equities or bonds.

Overseas sentiment appears to have turned on the viability of China’s financial sector as an investment destination. In July, Goldman Sachs downgraded ratings for some Chinese banks in a report and raised questions over broader issues like exposure to the country’s volatile property market and debt-burdened local financial vehicles.

The once-lucrative banking sector – likened to a profit machine at the peak of its prestige – now seems beset with challenges.

“Chinese banks are literally at 30 per cent of their book value,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis. “They have their own problems to worry about, in terms of net interest margin and cost to income, with interest rates coming down. I think [their] situation is worsening.”

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This, she said, would make fulfilling national objectives difficult. “The government wants banks to support the economy, but banks are increasingly wary. Banks may be uncertain when they are told to loan money to some projects or businesses, because they don’t know whether those are the right choices financially.”

The combined net profits of the six major state banks – Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Postal Savings Bank of China – rose only 2.1 per cent last year according to their annual reports, compared to around 6 per cent growth in 2022 and about 11 per cent in 2021. Their combined revenue dropped 4.4 per cent year on year in 2023.

Problems in the financial world could have broader implications for China’s investment prospects. Banking stocks account for about one-tenth of the country’s A-share market capitalisation.

Large outflows of portfolio investment were observed in China’s capital market last year and a Bank of America survey in December noted that Chinese stocks, including those of some banks, remained “unloved” among global funds.

“Foreign investors have taken note of non-market changes by selling China’s bank shares and making their prices very low,” said Chen of HKU.

“With these banks assuming non-financial responsibilities, bank shareholders are paying a price.”

Li of CKGSB said foreign investors may need to accept these changes were being done for the sake of the economy.

“In a nutshell, Beijing wants support from banks to shore up growth. When the Chinese economy is back on a solid footing, banks are also well-positioned to benefit,” Li said.

However, she added, China still needed to take some cues from the West in areas like investment banking to stay competitive.

“[Adopting] ‘Chinese characteristics’ can go hand in hand with learning from the West.”

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