How the Party is Increasing Control of China’s Banks

Loyalty and politics are prioritized over profits, Daniel Koss writes

By Anh Cao

Daniel Koss, Associate Senior Lecturer at Harvard, is working on the Chinese Communist Party’s growing role in the financial sector, with two recent publications on this topic: His article “Discipline Inspections and the Transformation of Party Authority in China’s Banks,” was published by “China: an International Journal.” “Economic Governance in Xi Jinping’s ‘New Era’: New Vectors of Party Influence in China’s Financial Sector” came out as a Background Brief by the East Asian Institute at the National University of Singapore.  

In both pieces, Koss maps out how the Party’s inspection practices within the financial sector have evolved under President Xi Jinping’s directive. Beijing now uses a combination of modern regulatory methods and Party networks to exert control. According to Koss, anti-corruption inspectors are engaging in increasingly significant political interventions. The end result of this regulatory expansion is a significant change in banking practices, with leading bankers pledging allegiance to the Party’s guidance and aligning corporate structures with party hierarchies. Inspections are also driving changes in banks’ operations, from decision-making processes to credit allocation, prioritizing political objectives such as anti-poverty efforts and real economy investments over profit maximization. Both state-owned and private financial firms are impacted by this political agenda.

Below, a summary of Koss’ key points:

1. In October of 2022, Xi Jinping’s report to the 20th Party Congress highlighted his goal to strengthen the political and organizational capabilities of Party organs as “battle fortresses” across all sectors of society, explicitly singling out the financial sector. 
2. The finance sector is at the forefront of forging new roles for the Party in economic governance. To govern its economy, Beijing embraces state-of-the-art regulatory approaches and uses the leverage of ownership. Beijing also intervenes through a vector of influence that is less legible to outside observers, namely Party networks. 
3. The one million plus Communist Party members in China’s finance sector are instructed to help align banking business with Xi Jinping’s political commandments. Party authority is experienced as a combination of top-down instructions and bottom-up vigilance. 
4. After the massive stock market volatility in 2015, the same inspectors who conducted Xi Jinping’s anti-corruption campaign now have a broad mandate to trigger more impactful political activity among Party members in banks. The eighth round of inspections (in 2015) after the 18th PC of 2012 and the eighth round of inspections (in 2021) after the 19th PC of 2017 especially targeted banks. 
5. Inspections have enforced a new discourse within the banking sector. Bankers must vow their commitment to follow the Party’s guidance in everyday operations. They submit to the Party’s open-ended authority, sometimes through extravagant displays of loyalty. This new rhetoric is not empty talk but preempts resistance against Party involvement in business decisions-making.
6. Beyond creating new discourse, inspections also enforce formal institutional change. Corporate charters are being revised to enshrine the party committee’s prerogative to deliberate crucial decisions before they go to the board. Party and business hierarchies have been aligned. Career evaluation systems have built in new, strong incentives for bankers to distinguish themselves through innovative Party-building projects. 
7. These inspections also enforce politicized credit allocations. Politicized banks support Xi’s anti-poverty campaign, offer inclusive financing at the expense of profit maximization, and invest into the real economy rather than real estate. Financing targets villages rather than cities and follows the leadership’s geographic priorities for development. 
8. Politicized banking could indirectly result in unfair competition. But the goal of increased Party involvement is not mainly to subsidize China Inc. at the expense of foreigners. Rather, its goals are at least in part inclusive banking or environmental policies.
9. State-owned banks are leading the way in politicization. But private firms in the finance sector are also targeted by the transformative politicization agenda.
10. Foreign companies have to know how to deal with pressure to engage in Party-building. Governments could help by identifying and disseminating best practices.