Anti-corruption campaign hampers financial reforms – Sara Hsu

The anti-corruption campaign has hit China´s financial industry midships, and is now in the process of derailing the announced reforms, warns financial analyst Sara Hsu in the Diplomat, despite China´s inclusion into the IMF currency basket and the lifting of the deposit interest rate ceiling.

Sara Hsu:

The corruption crackdown in the financial industry may represent a large setback in the eyes of foreign financial specialists. Reforms appeared to be on track for some time, with the lifting of the deposit interest rate ceiling and China’s inclusion in the IMF benchmark SDR, enhancing the extent of marketization in the financial industry. However, the pervasive investigation and purge of rule violators underscores the presence of the Party and the State in this sector, and the shortcomings of the rule of law which would help to keep offensive activity in check.

Moreover, financial executives have found that they are being punished for financial practices that were condoned or only lightly punished during the stock market upswing. Equity swaps, for example, had been permitted in good times, but were soon criticized as conditions worsened. Margin lending was a practice that had been overlooked for some time, but under the threat of a stock slump and the later corruption crackdown, has now been vilified. Well-functioning markets struggle to arise under a regulatory business cycle that loosens or fails to enforce regulations in the upswing and strongly punishes market excesses in the downswing. The uncertainty and climate of fear and repression created by this type of crackdown is a market killer, ultimately working against the aims of China’s reform program.

The solution to halting the negative market sentiments caused by China’s ongoing corruption investigation into the financial industry is to swiftly wrap up the investigations with as little fallout as possible. The disappearances of top executives has had one of the most harmful impacts on the industry, and the practice must become more transparent if markets are to thrive.