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Financial sector back in the party’s grip

By Nora Sausmikat
Nora Sausmikat, Leiterin China Desk der Umwelt- und Menschenrechtsorganisation Urgewald e.V.
Nora Sausmikat heads the China desk at Urgewald.

Even in the run-up to this year’s National People’s Congress (two sesions/liang Hui), there was eager speculation about what constitutional amendments would be forthcoming this time to further consolidate presidential power. Despite the multiple tensions in the country that drive thousands to the streets – such as the systemic banking crisis, the massive “white paper” protests that eventually won the relaxation of COVID policies, or the economic downturn – the two sessions came at an opportune time this time. At least from a financial perspective.

That’s because the World Bank is in the midst of a fundamental reform process (“Evolution Roadmap”) and, due to the sudden resignation of World Bank chief David Malpass, who was still nominated by Donald Trump, also in a nomination process. Biden’s nominee, Ajay Banga, a former Mastercard executive, is making trips around the world, including to China, over the next three weeks to drum up support. As recently as winter 2022, Trump-nominee Malpass and International Monetary Fund chief Kristalina Georgieva met with Li Keqiang and only reproaches hailed down. Now, as China rebuilds itself in financial regulation and de-escalation is urgently needed for the two adversaries, perhaps this trip is a building block of détente.

From a climatic point of view, however, this development is quite questionable.

New top staff

In the run-up to the NPC, the CP leadership still announced a restructuring in the financial sector. The plan was to replace the existing banking supervision with a new financial supervisory authority with expanded powers. The financial sector was to be placed further under central party supervision, and the State Council was to be further disempowered.

At the end of the NPC on Monday, however, it was announced that the expected replacement for the top central bank post with Xi loyalist Zhu Hexin will not take place. Zhu is chairman of the powerful financial conglomerate Citic Group Corp. Yi Gang will remain central bank chief – for now. Apparently a pragmatic decision for more expertise in this post. Nevertheless, the new post of party secretary of the People’s Bank of China will probably be taken over by He Lifeng.

As Urgewald reports, Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (CBIRC, located in the State Council), and Yi Gang, the current head of the central bank, were extremely innovative and intransigent in monetary policy and banking regulation. In 2021, for example, the “Catalogue of Green Bond Support Projects” was revised, from which “clean coal” projects were excluded. In addition, Chinese banks must publish their CO2 savings (carbon reduction tool) for their climate loans. A number of financial regulatory reforms have been implemented in recent years, including the establishment of a new regulatory coordination mechanism. The reforms are still ongoing, and several key banking laws are being revised.

China’s overarching policy framework for decarbonization calls for banks to strictly limit lending to so-called “dual high” industries. These are industries that consume a lot of energy and produce high carbon emissions.

Softening of green credit guidelines

However, the new personnel could mean a softening of the “green” credit guidelines. The focus of the central bank’s incoming party secretary, He Lifeng, has been on local infrastructure projects. A report published in February 2023 shows that the coal lobby is winning the day within China: 106 gigawatts of new coal-fired power capacity were approved in 2022 (compare that to 106 times Datteln IV in North Rhine-Westphalia). For many of these projects, approvals were fast-tracked, allowing construction to begin within months. Hundreds of brand-new coal-fired power plants will make it more difficult and more expensive to achieve China’s climate targets, as plant owners have an interest in protecting their assets and avoiding a rapid coal phase-out.

China’s energy regulator declared in early 2022 that no new coal-fired power plants would be permitted for the sole purpose of bulk power generation. However, the provinces where most new coal-fired power plant projects are underway hardly meet this requirement, as they are among those that rely on coal for most of the increase in their electricity demand.

To that end, President Xi is considering reinstating the Central Financial Work Commission (CFWC, 1998-2003). The CFWC would be headed by a member of China’s powerful seven-member Politburo Standing Committee, Li Qiang or Ding Xuexiang. Ding is chairman of the leadership group on climate change. He stands for both aggressive expansion of renewables globally and new sources of financing for fossil. The CFWC would have a “strong influence on the entire financial system, including appointments to key positions,” according to King’s College’s Xin Sun. The CFWC would be a purely partisan body.

Xi ties financial regulation more closely

In the coming years, bank regulation will be crucial not only for climate action but also for the new development offensive “Global Development Initiative”, the progress of the Belt and Road Initiative and the debt problem. The central bank People’s Bank of China (PBoC) as financial supervisor and the China Banking and Insurance Regulatory Commission located in the State Council, the China Securities Regulatory Commission with the Financial Stability and Development Committee, would be disempowered if the CFWC is re-established.

The Banking and Insurance Regulatory Commission (CBIRC), until now the top government agency regulating banking and finance, will in fact be dissolved altogether and absorbed into the newly established National Financial Regulatory Authority (NFRA), which will be a separate agency within the State Council. The NFRA will be responsible for supervising the entire financial industry. The highest financial regulatory body will thus be more closely tied to Xi Jinping’s decision-making power.

Potential new World Bank chief Banga’s trip to China and the decision to tie China’s financial regulation more closely to President Xi could produce synergy. Ajay Banga is a board member of Temasek, a global investor based in Singapore. Temasek Holdings also has stakes in two major Chinese banks, Bank of China (11.7 percent) and China Construction Bank (5.1 percent), and its stake in Bank of China is the second largest by a foreign company in one of China’s major banks.

Banks make the construction and profitability of power plants possible. Public banks can influence tariffs and incentivize the construction of renewable or fossil fuel power plants. Urgewald’s case study on Pakistan showed how the World Bank helped the government in Pakistan develop the largest coal mining area in the world without labeling the financing for this as fossil support.

China’s banks step in for the World Bank

The World Bank is facing fundamental reform – in part because it has failed to live up to its mandate of reducing poverty and meeting the Paris climate change targets. Urgewald research found that between 2016 and 2020, over $12 billion in direct financing was provided to fossil fuel projects in 38 countries.

China’s new financial regulatory personnel hint: If the World Bank more decisively exits coal, China’s banks could step in. In particular, if indirect support for fossil fuels via the World Bank were to continue, this could create a fatal “win-win” situation for global fossil fuel finance.

Nora Sausmikat has a habilitation in sinology and is head of the China desk at Urgewald, which does campaign work on the Asian Infrastructure Investment Bank and the Asian Development Bank. In addition to focusing on the two banks, she analyzes China’s global role, particularly in the areas of climate and human rights policy.

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