President Xi Jinping cemented his position in 2017 as China’s most powerful leader since Mao Zedong. As a result, the country’s regulators are whipping its state-owned enterprises and privately run businesses into line behind his signature policies with renewed vigour.
Xi’s key policy goals include reducing risk in China’s financial system, massively increasing investment along ancient trade routes, and the acquisition of technology.
China's financial regulators – including the People's Bank of China (PBoC), China's Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) – collectively leapt into action in September after detecting a new threat to financial stability. They jointly issued a public notice banning unauthorised initial coin offerings as illegal fundraising activities.
A more coordinated approach is welcome.
When Chinese stock markets crashed in mid-2015, financial watchdogs with overlapping jurisdictions issued contradictory guidance. Their aim was to stem financial contagion but they arguably exacerbated the panic.
This chaotic approach could not be allowed to continue as linkages between markets deepen and proliferate, and as China continues to open up to foreign investors.
The potential growth of China’s markets underscores the critical nature of a unified approach to regulation. Citigroup’s economists estimate that China’s financial markets will match those of the US in size by 2025.
Unity is becoming more likely as China’s financial regulators gradually coalesce into a super regulator. China on November 8 established a Financial Stability and Development Commission (FSDC) under the State Council to coordinate development policies and ensure financial stability.
ALONG THE BELT & ROAD
Xi's most effective means of boosting Chinese influence along trade routes is spurring China’s state-run policy banks, China Development Bank, Export-Import Bank of China and the Agricultural Development Bank of China, to lend to infrastructure projects in the 60 or so countries covered by the Belt and Road blueprint
But the banks' enormous size and policy-led approach to extending loans already pose a systemic risk to China's finances. The three policy banks’ assets have grown rapidly to about 31.3% of GDP in 2016, or Rmb23.3 trillion ($3.52 trillion), from 19.2% of GDP five years earlier.
So Xi is laying down the ground rules before their balance sheets balloon any further.
The CBRC proclaimed new rules in mid-November to mitigate contingent liabilities from their lending to social projects with low economic returns and in higher-risk countries, such as in the developing economies along the Belt and Road.
China should look to rigorously enforce these rules, which dictate that the policy banks must strengthen capital management, corporate governance, and risk controls.
Other countries’ financial regulators are watching China's pursuit of national goals warily. Some will be more effective than others at putting up a fight where China's goals conflict with their own.
In Hong Kong – which has ambitions to help China’s companies find the necessary funding as they expand along the Belt and Road and to host its high-tech companies’ shares – securities watchdog the Securities and Futures Commission (SFC) has been muzzled.
The Hong Kong stock exchange is eager to allow dual-class shares as soon as 2018, which would allow Chinese entrepreneurs who list their companies in Hong Kong to retain critical voting power even after selling most of their firms’ economic value.
In this race to the bottom, in terms of corporate governance, the US took the lead long ago. The SFC blocked an earlier attempt by Hong Kong’s bourse to catch up in 2015.
This year the city’s government has told the SFC to get behind the move – that at least is according to one well placed person familiar with the matter.
As Chinese retail investor money floods down the pipes of the Shanghai- Hong Kong Stock Connect, the SFC’s role of rooting out corruption at Hong Kong-listed companies has become more important. For example, it is investigating a complex web of cross-shareholdings among 50 Hong Kong-listed companies, dubbed the ‘Enigma Network’, which may have been manipulated to prompt a stock market crash in Hong Kong on June 27.
However, the SFC is largely toothless when it comes to holding mainland company directors to account. Cooperation between the SFC and its Chinese equivalent, the CSRC, has been largely to the benefit of the CSRC, say people familiar with their work.
Instead, the SFC has to rely on beating up the financial advisers that helped to bring these contentious companies to the Hong Kong market with their initial public offerings.
It has said it is investigating 15 financial firms for failing in their duties as sponsors: the senior underwriting banks that vouch for the quality of the company and its filings before it goes public.
Market watchdogs further afield may be tougher for China to tame. American, European, and Australian regulators are snarling at Chinese companies because of their recent and voracious appetite for hi-tech assets.
In the US, the Committee on Foreign Investment in the United States (Cfius) refused to approve Ant Financial's acquisition of MoneyGram and the two parties pulled the deal on Tuesday.
China must realise that some compromise is necessary to achieve reciprocity in Belt and Road countries, which may well be wary of overweening Chinese influence in their economies, and from the US, which is still the world’s largest economy.
And, already, we are seeing some give and take.
After a meeting between the US and Chinese state leaders in November, China’s vice minister of finance, Zhu Guangyao, said China would remove all equity ownership limits in many financial sectors after three years.
China will find cooperation may help avoid dogfights in 2018.