Anti-graft probes position Chinese banks in tight spot
A version of this article was first published in FinanceAsia.
The recently announced results of anti-corruption investigations into the activity of major Chinese banks, have placed them between a rock and a hard place.
Evidence of corruption among top banking management and loans professionals is widespread, according to the Chinese government’s announcement on anti-corruption investigations, on February 24.
In particular, several cases were highlighted at leading Chinese state-owned policy bank, China Development Bank. In January 2021, Hu Huaibang, a former chairman of the bank was sentenced to life in prison due to corruption, and on January 26, the Chinese government announced that additionally, the bank’s former vice president, He Xinxiang, would be expelled from the Chinese Communist Party and stripped of all his posts due to corrupt behaviour. He is set to face trial on a currently unspecified date.
Alicia Garcia-Herrero, Asia Pacific chief economist of Natixis, told FinanceAsia of the difficult position that the heightened scrutiny brings to banks, given the government’s expectation of their support across economic stimulus plans, in the context of the ongoing pandemic.
“Li Keqiang (China’s prime minister) has asked banks to support stimulus, which basically means they should lend to the real economy,” she said, adding that this includes lending to the real estate sector – recently highlighted for being rife with dubious ongoings.
“It seems clear that real estate is to be protected in 2022 so that growth does not collapse. This means that banks need to help, but banks are really in a bind here as they will worry about potential new corruption cases. All in all, the anti-corruption campaign is having a toll on how effective policies can be to support the economy. It makes it harder,” she said.
Late last year, the default of several Chinese property developers, including China Evergrande Group, which is deemed to be the world’s most indebted with US$300 billion on its balance sheet, spurred Beijing to prevent China’s property market from imploding.
At the National People’s Congress in Beijing on March 11, Keqiang said, “We encourage banks to provide loan extension on a seamless basis for promising businesses. We also urge temporary cuts or exemptions of rentals and electricity bills where possible for these market entities, and capable local governments should also extend support.”
China aims to achieve approximately 5.5 percent GDP growth this year, Keqiang announced at the congress.
“To achieve this goal is not easy, and needs the support of a series of macro policies,” he said, announcing plans to roll out a series of supportive financial and pro-job measures.
A Fitch Ratings report on March 9 detailed that meeting China’s GDP growth target would prove very challenging, given the continued drag from a property slowdown and a less favourable global backdrop for exports. It noted that Chinese officials intend to provide more robust support for the Chinese economy, through means including the encouragement of banks to cut fees and lower interest rates for loans. “The government is also focussing more on the property market, which continues to face strains.”
This piles pressure on Chinese banks to lend, given the lower-than-expected amount of loans that were distributed in February. Chinese banks extended RMB1.23 trillion ($193 billion) in new yuan loans in the month, down sharply from RMB3.98 trillion in January and falling short of analysts’ expectations, according to data released by the People's Bank of China (PBOC).
Anti-corruption inspections
But compounding this lending pressure, are the findings of recently surfaced anti-graft inspections.
On February 24, the Chinese government announced its findings following investigation of 25 Chinese financial institutions, stock exchanges and financial regulators. For all investigated, evidence of possible corruption was found amongst the leadership, opening up the possibility of arrest.
The financial institutions probed included: China’s two main state-owned policy banks, China Development Bank and the Export-Import Bank of China (China Exim Bank); as well as the Big Four state-owned banks; Bank of China, ICBC, China Construction Bank, and Agricultural Bank of China.
Corruption risks were identified across major departments such as loans, according to results published for ICBC, China Construction Bank, Bank of China and Agricultural Bank of China. These were found to be most concentrated in China Development Bank, while China Exim Bank was found to have granted loans illegally.
For all six banks, the respective government announcements warned that the problems would spread further across their organisations if not addressed and each was reminded to adhere to the thoughts of Chinese President Xi Jinping.
ICBC and China Construction Bank were ordered to service the real economy and to deepen reform; Bank of China was told to do so plus to open high-quality services to international markets; the Agricultural Bank of China was told to revitalise rural regions; and China Development Bank was ordered to “unswervingly push” the “fight against corruption”, to service the real economy and raise the quality of development financial services in serving national strategy.
“Most foreign investors view corruption investigations in China with scepticism because many are heavily politicised,” Andrew Collier, managing director of Orient Capital Research, a Hong Kong financial research firm, told FA.
“Some investors may even view this as a positive, due to the potential for a clean-up of any bad practices that may have occurred,” he added.
Corporate governance and transparency in the Chinese banking industry is weak by international standards, as some banks may lean towards the letter rather than spirit of the rules, said an S&P Global Ratings report on August 9, 2021.
“However, from time to time, senior bank executives, even from big banks, are investigated for misconduct. As the financial sector continues to undergo rapid reforms, more grey areas will emerge, and improved self-governance standards above those set by regulators could lead to a more favourable assessment with some good track record,” said the S&P report.
Chinese regulators have imposed hefty financial penalties for misconduct since late-2017, it added: “This is another incentive for banks to further enhance their governance frameworks.”
While the report detailed that the transparency of Chinese banks is improving, “further checks and balances among stakeholders are a work-in-progress. Chinese banks, particularly the larger state-owned institutions, are required to balance commercial decisions with the government's broader economic and social objectives.”
In China, banks play an important role to facilitate local infrastructure development, largely led by government-related entities (GREs), under local and regional governments (LRGs), the S&P report explained.
However, doing so exposes them to transparency risks, given lack of clarity about how these GREs can fit into LRG fiscal policy. Loan classification may sometimes be subject to political influence and can understate the true size of distressed loans, the report added.