China's banks embrace Communist Party committees in risk crackdown

Shengjing Bank Co

27/06/2018 09:37

By Matthew Miller
    BEIJING, June 27 (Reuters) - China's listed mid-tier and
regional banks will face added pressure to curb risky activities
following the formal establishment of Communist Party Committees
at the lenders, bankers and analysts say.
    China's 40 listed banks have announced changes to their
articles of association to add the committees, with 26 making
announcements after the start of the year.
    Many specified that the organizations would be consulted
before corporate strategy is agreed upon.
    While party committees have been set up across state-backed
listed firms, their official establishment at banks comes as
President Xi Jinping has targeted the industry and prioritised
cutting financial risk.
    "Tighter party discipline doubtless will provide added teeth
to the financial crackdown, increasing personal accountability
of financial managers," said James Stent, a former external
supervisor at China Everbright Bank  601818.SS  and independent
director at China Minsheng Banking Corp  600016.SS .
    In their proposals, many banks stipulated the creation of
in-house discipline inspection committees - organizations
responsible for overseeing the conduct and punishment of
Communist Party members.
    Under Xi, China has been revitalising the party's role in
Chinese institutions and society.
    China Construction Bank Corp's  601939.SS   0939.HK 
discipline inspection committee announced in April a campaign to
root out corrupt credit practices, focusing on branch business
operations, loan and risk management, and internal compliance. 
    Xu Jia'ai, head of discipline inspection at China's central
bank, this year warned that a "lack of strict party governance"
had contributed to major risks in the financial system,
including weak supervision and illegal fundraising.
    The China Banking and Insurance Regulatory Commission
(CBIRC) is demanding that institutions take greater
responsibility for loans, guarantees and investments.
    Last month, officials from the regulator admonished bankers
at a meeting in Beijing to "steadily rectify market chaos" and
clamp down on "illegal activities." Those violating the law
would be met with "severe penalties," according to a notice on
the regulator's website.
    "The message was clear," said one executive who attended the
meeting. "Bankers will be held personally responsible."
    The regulator last month also launched a nationwide
inspection of financial institutions, led by trust firms, to
clean up the channelling of deposits into higher-yield, riskier
investments.  urn:newsml:reuters.com:*:nL5N1T101O
    The CBIRC has begun ramping up punishments, handing out in
December a $109 million penalty - its biggest ever - to China
Guangfa Bank  GDDVB.UL  after a branch fabricated guarantees for
1 billion yuan in bonds that later went bust.  urn:newsml:reuters.com:*:nL3N1O83N7
    
    BRUNT OF CRACKDOWN
    Earlier this decade, mid-tier and regional banks were the
lenders that most aggressively expanded their balance sheets via
the shadow banking system to compete against bigger rivals.
    At Shengjing Bank Co  2066.HK , whose assets more than
doubled over the last three years to 1 trillion yuan ($151.62
billion), financial investments categorized as receivables –
typically shadow loan products - represented more than 20
percent of the total at the end of last year. 
    At Shanghai Pudong Development Bank Co  600000.SS , which
shrank its shadow loan book by about one-third last year,
loan-like credit assets still amounted to 581.7 billion yuan at
the end of 2017.
    Analysts have warned those institutions could bear the brunt
of any crackdown by party committees as the government rolls out
new measures to raise risk management standards.
    At China Zheshang Bank  2016.HK , a Hangzhou-based regional
lender which also saw its total assets more than double between
2014 and 2017, the Party committee will not only "strengthen its
leadership and supervision" in the selection and discipline of
personnel, but also participate in bank strategy.
    "The Bank should listen to the opinions of the Zheshang Bank
Party Committee before discussing and deciding on major issues,"
the bank's amended articles of association stated, according to
a May filing with the Hong Kong Stock Exchange.
    The formalisation of the party committees has split
investors and governance experts. While few welcome the
Communist Party's tightening grip, some argue that bringing
their workings into the light will make companies more
transparent. 
    But others fear a further loss of investor influence, said
Fraser Howie, an independent China market analyst and author.
    "The Party is outside shareholder control," Howie said. "To
the extent the Party is exercising control of what a listed
company is doing, to that extent shareholders are having their
rights diluted or usurped."

($1 = 6.5955 Chinese yuan renminbi)

 (Reporting By Matthew Miller; Editing by Philip McClellan)
 ((matthew.miller1@thomsonreuters.com;))