"Chinese leader Xi Jinping is bringing the country's financial sector to heel, one banker at a time.
For decades, China sought to learn from Western finance. Now it's purging many of the internationally experienced financiers who helped steer the country's economic rise, while ushering in a new generation of loyal functionaries willing to carry out Communist Party edicts and disavow capitalist excess.
Financial heavyweights sidelined or purged under Xi include a former Deutsche Bank rainmaker who helped some of China's largest companies go public; the longest-serving chairman of a leading Chinese asset manager; and several bankers who played influential roles in developing China's financial industry during the 1990s and 2000s.
The purges are being paired with other steps aimed at diluting pro-market instincts in China's financial industry and bringing it more squarely under Xi's control.
The Communist Party is curbing bankers' lavish pay packages, ramping up political study sessions and centralizing decision-making on financial affairs. The governor of China's central bank, a role helmed in recent decades by technocrats with international experience, has been downgraded in the party hierarchy.
Many economists and bankers fear the shake-up will damp the animal spirits that fueled China's rise.
China is also losing bankers and regulators with international experience and technical knowledge at a time when it faces complex financial risks that require sophisticated oversight, including how to work through trillions of dollars' worth of off-the-books local government debts and how to digest bad property-market loans on banks' balance sheets.
Xi believes the finance industry has focused too much on its own profits, and should serve the Communist Party and the nation rather than the interests of bankers and their clients. "Serving the real economy is the duty of finance," Xi told officials last year. "If finance is focused on self-circulation and self-expansion, it becomes water without source, a tree without roots, and a crisis will brew sooner or later."
Since 2022, Chinese authorities have opened investigations against more than 500 people in the financial sector, including at regulatory agencies, banks and insurance firms, according to a Wall Street Journal review of disclosures from the party's disciplinary agencies. Some had been retired for years. Before 2019, fewer than 10 officials in the financial sector were investigated each year, according to macroeconomic consulting firm Gavekal Dragonomics.
Fan Yifei, who went to graduate school at Columbia University and rose quickly to become the youngest vice governor at China's central bank at one point, disappeared in late 2022 when the party announced an investigation against him for unspecified misconduct. At the time, top central-bank officials said the probe was a reminder to show loyalty to Xi and implement the party's decisions on financial policy "without fail."
Months later, the party expelled Fan for alleged misconduct which authorities said included indulging in superstitious activities, taking bribes and improperly accepting invitations to meals and golf outings. Fan re-emerged in a state television documentary expressing remorse.
"Wanting to be an official and also get rich -- this was a very typical side of me," said Fan, who in October received a suspended death sentence, or de facto life imprisonment.
More recently, authorities have gone after Henry Xuejun Zhao, chairman of one of China's largest and prominent asset managers, Harvest Fund Management. Zhao, 58, said in a 2014 interview that "our generation has feelings for reforms." He resigned in August amid an unspecified investigation by Chinese authorities.
Experts who follow Xi's corruption purges say the campaign is often more about dismantling power networks and sending warnings about who is in charge. Replacements for purged bankers often have little experience in the West, and instead are promoted because of their political reliability.
"If you investigate a person's actions in the past 20 years, can you truly find anyone who is completely clean? Xi wants to make an example of this generation of bankers," said a former Chinese executive at a foreign bank.
The state-owned Industrial & Commercial Bank of China arranged for more than 70 cadres to attend corruption trials of two former ICBC bankers, to ensure that its employees are "fearful in their hearts and restrained in their actions," according to the party's top disciplinary commission.
Xi seems to believe that financial services have imposed a significant cost on China's development through the high fees that bankers charge, while not contributing much to society, said Han Lin, China head of the Asia Group, a business advisory firm, and a former deputy general manager of Wells Fargo's China arm. In the future, China's financial system will become more like a utility -- predictable and manageable, he said.
The Communist Party's top commissions overseeing financial policy and internal discipline didn't respond to requests for comment.
The latest moves are consistent with Xi's signature "common prosperity" campaign, which aims to shrink the gap between rich and poor.
Executives' pay at state-owned banks has been cut dramatically and capped at around $425,000, according to bankers. In 2018, executives at institutions such as China International Capital Corp., one of China's most international investment banks, took home as much as $4 million a year.
Some Chinese banking executives have been told to return past wages that were retroactively deemed excessive, people familiar with the matter say.
CICC, the investment bank, held a 10-hour webinar on Xi Jinping Thought -- a sweeping political doctrine for national rejuvenation -- in late 2023 attended by 8,400 workers. Another seven-hour online training session on a Sunday focused on "the spirit" of China's national Communist Party congress.
In some cases, Hong Kong-based senior managers at CICC and other Chinese banks have had to travel to mainland China to attend weekslong training sessions.
During one recent meeting in the bank's Hong Kong office, team managers criticized employees' "extravagant behavior," such as flying in business class, according to notes reviewed by the Journal.
Many Chinese financial professionals now speak of "the shame of being in finance," according to a July commencement speech at Shanghai Jiao Tong University that went viral.
When Deng Xiaoping launched his "Reform and Opening Up" program in the late 1970s, one of the first tasks was to create a viable financial industry that could raise capital for the country's modernization.
China eventually brought in Wall Street talent to help set up investment banks including CICC, a joint venture with Morgan Stanley, and to privatize some state enterprises. Party leaders' family members trained at Western banks. Chinese bankers who returned from working on Wall Street pioneered China's asset-backed securities industry.
Zhang Hongli, who also went by Lee Zhang, was an industry stalwart from the city of Harbin who earned advanced degrees in the U.S. and Canada. After holding executive positions at Schroders and Goldman Sachs, he joined Deutsche Bank in 2001, helping the German lender win roles on some of China's biggest initial public offerings, including the $19 billion IPO in 2006 of ICBC, which later became the world's largest bank by assets.
Zhang was a charismatic leader and had ambitions to rise up in China's political system, said a longtime colleague.
Zhang secured sinecures in state-affiliated organizations, and in 2003 joined the Chinese People's Political Consultative Conference, a government advisory body. He also became a consultant to Beijing's municipal government. "The fact that white-collar executives at foreign enterprises can enter the social and political arena is a sign of the growing strength of foreign companies in China," Zhang told a Chinese magazine at the time.
In 2010, he joined ICBC, which named him senior vice president. The appointment, according to state media, made him the first official from a foreign financial institution to become a top executive at a "big four" state bank.
He started aligning his public remarks with party priorities. "Financial talents must be pillars of the nation, identify with the 'China Dream' . . . and take up their responsibilities for 'overall national security,'" he wrote in a 2017 essay.
Zhang left ICBC in 2018, citing family reasons, before becoming co-chairman of Hopu Investments, a Chinese private-equity firm founded by another Goldman Sachs alumnus. He remained active in finance circles until late 2023, when authorities announced they were investigating Zhang.
The party expelled Zhang in May, accusing him of wide-ranging political and criminal misconduct, such as trading public power for private gain, cultivating political brokers and accepting "extremely large" bribes. He also allegedly read impolitic books and indulged in superstition, according to the party's top disciplinary commission.
In November, Zhang pleaded guilty to charges that he abused his powers as an ICBC executive and accepted bribes worth more than 177 million yuan -- or roughly $24.5 million -- in return for providing favors to others in loans, financing and job appointments. The court hasn't announced a verdict.
The older guard is often being replaced with officials with little international experience. CICC, which had Western-trained executives in senior management since its establishment in 1995, is led by a new chairman, Chen Liang, who spent his career at homegrown Chinese brokerages.
In late July, China's securities regulator replaced one of its vice chairmen, Fang Xinghai, a Stanford-educated economist and World Bank alumnus regarded by foreign investors as an advocate for market-style reforms. Fang, who had reached retirement age, was succeeded by Li Ming, an official previously in charge of the regulator's efforts to curb insider trading and other misconduct.
The party has exerted more control over China's central bank, with its two most recent governors -- both Western-trained economists -- not holding full membership of the party's elite Central Committee, a departure from precedent that dated to the late 1970s.
Chinese regulators have increasingly issued "window guidance," or largely verbal instructions, to local financial institutions, according to strategists and economists at these firms. Such guidance has included telling fund managers to refrain from offering products that invest in global markets to wealthy Chinese customers.
Being "red," or politically loyal, is now considered more important for Chinese financial professionals than being competent, said Zhiwu Chen, a finance professor at the University of Hong Kong and former adviser to China's securities regulator.
"If you are not loyal enough to the party, your professional sophistication will not be of any value," Chen said. "If anything, it may be of negative value, because you may use your talent and sophisticated skills to try to hurt the party."" [1]
"Democracy" in a country is when bankers rule the country for their own benefit, not when the country rules the bankers, as is the case in China. It seems that by controlling the bankers, the Chinese will create a true welfare state, while the bankers ruling Lithuania, declaring a welfare state, are creating wealth only for themselves.
1. Beijing Reins In Financial Sector --- Xi uses purges and pay cuts in campaign against capitalist excess. Feng, Rebecca; Chun Han Wong. Wall Street Journal, Eastern edition; New York, N.Y.. 15 Jan 2025: A1.
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