Over the past year, China’s once-flamboyant financial sector has been subject to strict oversight and rigorous regulatory compliance – a tightening of rules that has dampened moods and slammed shut pocketbooks that had been overflowing for decades.
While this change had already been in motion before the twice-a-decade central financial work conference was held, exactly one year ago – a meeting where President Xi Jinping set forth the goal to forge China into a “financial powerhouse” – weaker-than-expected growth for the world’s second-largest economy has complicated matters.
At banks and securities firms alike, pay cuts have been rampant. The industry has also seen occasional lay-offs – a rare phenomenon for a field worth 481 trillion yuan (US$67.4 trillion) and mostly consisting of state-owned institutions.
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At the same time, a structural overhaul has been gathering pace as more resources are diverted to bigger market players, with the smaller specimens consolidated through mergers and acquisitions.
“We had a big meeting and again they kept talking about the seriousness of the situation,” said a Shanghai-based analyst at a top Chinese investment bank on Monday. He spoke on the condition of anonymity.
For the analyst, the biggest change the industry has seen in the past year is much stricter regulatory supervision – though he said this is not necessarily a bad thing.
“It might be good news for the leading securities firms, because after all, the business has become more compliant,” he said.
But sometimes the supervision could become so broad that incentives to work are curtailed, he added. Changes to salary tables and non-market interventions like “window guidance” – where regulators instruct securities firms directly to refrain from selling – have been on the rise.
In the statement issued after last year’s conference, “outstanding financial and economic risks” were brought to the fore. Their prevention was deemed an “eternal theme” for China as it deals with a prolonged crisis in the property market and growing debt burdens for local governments, as well as greater turbulence in the geopolitical environment.
Controlling risks has not been limited to institutions; the list of officials and company executives under investigation for corruption was most recently updated on Sunday, with the addition of a deputy general manager at Bank of China named Guan Xiaohu.
The names on that list are the tip of the iceberg for personnel changes in the sector. Massive reshuffles in senior management have taken place over the last year, with many others transferred or forced to relinquish their posts.
The banking sector is the spine of China’s financial industry, accounting for over 90 per cent of overall assets as of the second quarter of 2024.
The country’s banks have experienced persistent profitability pressures due to tepid demand for retail loans and narrowing net interest margins, said Elaine Xu, director of Asia-Pacific Financial Institution at Fitch Ratings.
Weakness in property and local government-related exposures are weighing on domestic demand, Xu added, while government initiatives to bolster the economy are likely to cause further strain on margins.
Though tackling risks has been designated as a top priority, she said, there was a modest pickup of non-performing loans in residential mortgage loans due to weak incomes and declining property prices.
However, Xu added, the systems’ non-performing loans ratio stood at 1.6 per cent at the end of the second quarter – similar to the year before – thanks to active resolution and regulatory forbearance.
For many in the industry, sentiment took a positive turn near the end of September, when Beijing announced that it is mulling a large-scale stimulus to boost the economy – although few think the good old days are coming back.
“We do not expect a sharp rise in credit growth or a reversal of previously implemented financial reforms, as China authorities remain highly committed to maintaining general financial stability,” Xu said.
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