Subsuming Finance

According to Forbes Magazine’s Global 2000 ranking, the largest listed corporation by assets in the world today is the Industrial and Commercial Bank of China (ICBC), a state-owned Chinese bank. ICBC is followed in the ranking by another state-owned Chinese bank (Agricultural Bank of China), then another one (China Construction Bank), and then another (Bank of China). Ranked fifth is Wall Street’s very own JPMorgan Chase. It is well-established that China’s economy is highly financialized, and that its banking sector – the largest in the world at this point – is mostly under government control. And yet, since Xi Jinping’s accession to the leadership in 2012, the CCP has acted as if its authority over high finance is still inadequate. Since 2017 in particular, a revolution from above has seized China’s financial sector, resulting in a number of purges, arrests, the odd death penalty, ruthless rectification of the most dubious segments of capital markets, and – most significantly – institutional reordering at the very top, shifting operational leadership over the financial landscape from government bodies to the CCP’s Central Committee.

The vigour with which Beijing has disciplined finance over the past six years was not foreordained. Ever since former premier Zhu Rongji overhauled China’s financial architecture in the 1990s, the major levers of the financial system were supposed to be firmly in the grip of central authorities. The largest financial institutions – whether commercial banks, investment banks, insurance companies or asset managers – are state-controlled. This typically involves majority share ownership on the part of government-affiliated entities. Executive appointments in these financial corporations are made by various party committees; the Central Committee’s Central Organization Department (COD) is responsible for confirming the selection of the heads of the most significant institutions. The chairman of the board of ICBC, for example, is the equivalent of a vice minister in China’s system of political ranks – a respectable standing, but still one notch below the three hundred or so positions that claim full ministerial rank in the current cadre hierarchy. Chinese stock exchanges are not for-profit corporations as they are in Western countries, but subordinate bodies of the China Securities Regulatory Commission (CSRC). The top issuers and acquirers of bonds happen to be the Ministry of Finance, state-owned banks, state enterprises and local authorities’ funding vehicles. Additionally, capital controls drastically curb the circulation of money flows across China’s borders – notwithstanding the ability of the privileged to circumvent them on occasion.

And yet, as is often the case in China, nominal concentration of power in a one-party system does not preclude organizational fragmentation, dispersal of authority and even, occasionally, outright disorder. All of this and more became apparent in the financial realm during Xi’s first term as party secretary, from 2012 to 2017. By that time, the financialization of the Chinese economy was accelerating. On the one hand, this was the result of bureaucratic decisions, in particular the establishment of a shareholding state framework in the pre-Xi years. This institutional setup involves a multiplicity of state-affiliated holding entities tasked with managing, allocating and ultimately growing the financial assets placed under their supervision by central and local governments.

On the other hand, repercussions of the 2008 global financial crisis unleashed dynamics of rapid financial expansion that surpassed the intentions of China’s central authorities. Stimulus by way of local investments in infrastructure and property, initially dictated by Beijing, led to the rapid buildup of debt in local government financing vehicles. These funding platforms raised capital not only through bank loans but also, increasingly, via ‘wealth management products’, ‘trust products’ and other high-return, high-risk shadow banking instruments.

This latter development came to a head in the mid-2010s, with the collapse of a number of investment instruments that left small-scale investors unable to redeem their savings. At the same time, a whole industry of internet-based ‘fintech’ platforms had grafted itself onto the Chinese shadow banking boom, the shadiest of which ran pyramid schemes under the guise of providing peer-to-peer (P2P) finance.

As the reliability of non-bank credit seemed to falter, vast amounts of funds were displaced, during the first half of 2015, into the stock markets of Shanghai and Shenzhen as an alternative money-making opportunity. Predictably enough, frothy valuations and a short-lived equity mania ensued, followed by an abrupt fall. Though government agencies ordered state-owned entities to buy stocks as a means to prop up the market, it emerged that the CSRC and the central bank had at one point been working at cross-purposes, implementing contradictory measures to address financial volatility. A botched yuan devaluation by the central bank in August 2015, enacted in the aftermath of the stock market rout, triggered significant capital flight that lasted well into 2016 – only partly stemmed by stricter enforcement of capital controls.

These financial travails of the 2010s allow us to make sense of the CCP recasting its relation to finance from 2017 onwards. This political shift was signalled by a Politburo study session on ‘safeguarding national financial security’ in April 2017, which anticipated a National Financial Work Conference convened in July of the same year. At both events, Xi Jinping stressed the imperative of addressing financial risk, declaring that ‘financial security is an important part of national security’. Regarding the CCP’s specific role in finance, he called for ‘strengthening party leadership over financial work’ and ‘upholding the centralized and unified leadership of the Central Committee’. These carefully calibrated dictums have since been pored over in cadre study groups and been reiterated countless times in the official media.

At the institutional level, the 2017 conference decided to set up a Financial Stability and Development Commission (FSDC) under the State Council (China’s central government). Housed in, but not subordinated to, the central bank, the FSDC was entrusted with ‘top-level design’ (dingceng sheji 顶层设计) – a phrase closely associated with the Xi era – in financial matters. Most of all, it aimed to more effectively orchestrate the work of the financial regulatory agencies and the central bank, whose uncoordinated action had reportedly aggravated the stock market crisis of 2015. Vice premier Liu He, Xi’s right-hand man on economic affairs at the time, ran the FSDC from 2018 to its dissolution in 2023.

As Xi embarked on his second term as general secretary after the CCP’s Nineteenth Congress in October 2017, Beijing’s dealings with the world of finance became less peaceable. On the anti-corruption front, CCP disciplinary organs intensified investigations and arrests in the sector. In 2018, a central bank party official went so far as to state that a ‘league of cats and rats’ was undermining the sector (the ‘cats’ referred to regulators, colluding with criminal financier ‘rats’). Among notable anti-corruption catches: the head of the insurance regulator, Xiang Junbo, arrested in 2017; the head of the securities regulator, Liu Shiyu, arrested in 2019; the chairman of Huarong, a state-controlled financial giant, Lai Xiaomin, arrested in 2018 and executed in 2021; two former chairmen of Hengfeng Bank, Jiang Xiyun and Cai Guohua, sentenced to death with a two-year reprieve in 2019 and 2020 respectively; the president of China Merchants Bank, Tian Huiyu, and a central bank deputy governor, Fan Yifei, arrested in 2022; and most recently the former chairman of Bank of China, Liu Liange, arrested in 2023.

The most arduous financial battle of Xi’s second term, however, took place on a different front, in the forceful if selective campaign of debt reduction led by Guo Shuqing. From 2018 to 2023, Guo was simultaneously party secretary of the central bank and head of the China Banking and Insurance Regulatory Commission (CBIRC) – by no means a typical double posting. At the CBIRC, he unleashed a ‘regulatory windstorm’ against the least favoured segments of shadow banking. His actions succeeded in bringing about a partial reversal of financialization in wealth management products and peer-to-peer lending platforms, the latter of which were declared defunct in late 2020. Later, Guo would play a central role in the humbling of Alibaba founder Jack Ma’s financial ambitions, with a cancelled stock market listing for Ma’s Ant Group in October 2020, followed by a partial state takeover of its lending business and, finally, the termination of Ma’s control over the group, announced earlier this year.

Yet despite the aims of the 2017 National Financial Work Conference, China’s financial landscape could hardly be described as stable by the start of Xi’s third term as general secretary in late 2022. The foregrounding of risk control and ‘national financial security’ did not succeed, any more than the creation of the FSDC, in preventing new heights of corporate debt from being reached in the troubled real estate sector – a fragility identified by Guo in a 2020 article as the greatest looming threat to the financial system. Three failing banks – Baoshang, Jinzhou and Hengfeng – also had to be rescued by the central state in 2019. This was followed by a regulatory takeover of one futures company, two trust companies, two securities brokers and four insurers in July 2020.

These persistent financial tremors may explain why, in a dramatic move in March 2023, the FSDC was abolished and its functions transferred to a newly created Central Financial Commission (CFC) located not in the State Council but in the CCP’s Central Committee. This typical instance of state-to-party substitution (yi dang dai zheng 以党代政) from the FSDC to the CFC looks like the logical upshot of Xi’s 2017 call to magnify party authority in the financial sector – the CFC’s existence serving explicitly to ‘strengthen the Central Committee’s centralized and unified leadership over financial work’ according to party documentation.

The CFC is to have its own office inside the Central Committee, which it will share with a companion Central Financial Work Commission (CFWC) – also announced in March. The CFWC is tasked with handling party matters (from cadre evaluation to ideological dissemination) while leaving operational leadership over the financial sector to the CFC. On the same occasion, on the government side, the CBIRC was transformed into an enlarged National Administration of Financial Regulation, which, according to the Chinese media, is planning 3,000 inspections of financial institutions this year.

Three main lessons can be drawn from the political vicissitudes of Chinese finance over the past decade. First, in contrast to the West, much of the stakes are located inside the public realm, that is inside the state writ large – encompassing party, government and state-owned corporations. While the taming of private capital-owner Jack Ma makes for good financial press headlines, this is a lopsided contest to begin with. For all the popularity of its Alipay app as a payments and lending platform, the assets of Ma’s Ant Group, on the eve of its cancelled listing, amounted to about 40 billion US dollars – less than 1% of ICBC’s 6 trillion. Greater rivalries are being played out across public bodies themselves, along horizontal lines (e.g., the central bank versus regulatory agencies) and vertical ones (e.g., State Council versus provincial governments). As a perceptive scholar of China’s political and economic hierarchies once put it: ‘China’s financial industry is a major battlefield for the most powerful political and economic actors who try to benefit from their control over state assets . . . The financial industry can therefore justifiably be treated as an integral part of the political system’.

A second lesson pertains to the evolving division of labour between party and government. The hierarchy of CCP committees parallels that of government offices without ever merging with it. Party channels – say, from the Central Committee to a provincial party committee, or from the central bank party committee to the ICBC party committee – maintain their own integrity beyond, or rather behind, administrative relationships embedded in the government machinery.

From this angle, a significant shift in the balance between government and party has taken place in the world of finance under Xi. This was announced at the National Financial Work Conference of 2017, eventually leading to the establishment of the party’s Central Financial Commission in March this year. This development represents a departure from the pre-existing framework in which ‘party affairs’ (dangwu 党务) in financial institutions – such as cadre selection and anti-corruption – were left to party organizations while the supervision of ‘professional business’ (yewu 业务) was reserved for government bodies. Now, by contrast, it is two new Central Committee commissions that will assume respective leadership over the two aspects.

By implication, this seems to confirm that in the present cycle of Chinese politics, the State Council is deemed unfit to take the lead on what is considered to be the nation’s highest-priority undertakings. This was further underlined this year when a new Central Science and Technology Commission was established in the Central Committee alongside the CFC and CFWC. Under Xi, ‘top-level design’ in key areas is best not left to the government. This might be cast in a negative light, suggesting that one of China’s two loci of power has become distrustful of the other. On the other hand, it could be pointed out that ‘partyfication’ of government missions and offices, if applied selectively, represents an effective way of upgrading the importance assigned to priority areas within the parameters of China’s political configuration. This latter reading is, unsurprisingly, the one favoured by the current leadership. In the words of Guo Shuqing: ‘In order to carry out financial work well, the most fundamental principle is to uphold the party’s centralized and unified leadership. This is the greatest strength of our system.’

The third and final lesson to be drawn is that ‘leading financial work’ in China, as the CCP likes to put it, is and will always be a Sisyphean task. Ever since the 1990s, once China’s current financial architecture had been moulded into shape by Zhu Rongji and his associates, Beijing has used its authority over financial institutions and financial circuitry as a means to influence developments in the wider political economy. The financial system was put at the service of broader ends – simultaneously economic and political. In the process, however, the character of the state itself was transformed, as both government and party embraced financial norms and logics and reconfigured themselves to keep up with the breathtaking material expansion of the sector.

The latest round of party-state reform, including but not limited to the creation of the CFC, reflects this process of restless organizational adaptation. For all the idiosyncrasies of each generation of political leadership, patterns of institutional reform echo each other from one cycle to the next. Centralization – shifting authority upwards from the cities and provinces to Beijing – and partyfication – transferring authority from the State Council to the Central Committee – may look like trademarks of the Xi era, yet Zhu Rongji himself resorted to both, especially as the Asian Financial Crisis of 1997 raised the spectre of looming financial risk.

From one generation to the next, the runaway growth of financial capital has been met with successive rounds of institutional reordering. These constitute iterative measures, of a political and administrative character, called upon to master a continuous dynamic of capital accumulation. As financial expansion within the Chinese political economy reaches new heights, Beijing’s response is becoming ever more forceful – if never quite sufficient to keep pace.

Read on: Victor Shih, ‘China’s Credit Conundrum’, NLR 115.