China’s Banking Regulator Says Communist Party Critical to Corporate Governance

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The China Banking and insurance Regulatory Commission (CBIRC) has highlighted the role of the Communist Party of China (CPC) in exercising corporate governance at the country’s smaller-scale financial institutions.

“The regulatory authorities have strengthened the leadership and development of the Communist Party as a key lever for the reform and development of small and medium-sized banking institutions,” said a CBIRC official to the People’s Daily – the flagship newspaper of the CPC.

“By the end of 2022, 95.7% of small and medium-sized banking and insurance institutions had completed party development.”

“At the same time, the performance of shareholder meetings, boards of directors, supervisory boards, executive teams and their members of banking and insurance institutions have been improved, and the operation of the boards of directors has been standardized.”

From 2020 to 2022, the China Banking and Insurance Regulatory Commission (CBIRC)

During the period from 2020 to 2022, CBIRC launched a three-year action plan to improve corporate governance in the banking and insurance sectors, focusing on issues such as major shareholder manipulation and internal controls. The move came following scandals in China’s regional banking sector, including a slew of bank runs and the state takeover of Inner Mongolia’s Baoshang Bank in May 2019.

“The governance of shareholder equity and related party transactions has improved significantly,” CBIRC said.

“In the past three years, more than 3,600 illegal and irregular shareholders have been expelled, and over 27 billion shares of illegal stock rights have been transferred. Illegal and irregular behaviors have been strictly punished, equity structures have been optimized, and a total of 20 provinces have issued 550 billion yuan in local government special bonds, supplementing the capital of more than 600 small and medium-sized banks, and promoting the disposal of 9.2 trillion yuan of non-performing assets.”

“The legitimate rights and interests of financial consumers, bank and insurance institution employees and other stakeholders have been effectively protected. The regulatory capacity of corporate governance has been significantly enhanced, and the regulatory system for corporate governance has been continuously improved.

“Since the three-year action plan was launched, the CBIRC has conducted two comprehensive evaluations of corporate governance for 1,800 banking and insurance institutions. At present, the problem rectification rate has reached 83.7%.

“At the same time, the performance of shareholder meetings, boards of directors, supervisory boards, executive teams and their members of banking and insurance institutions have been improved, and the operation of the boards of directors has been standardized.”

Chinese central bank blames Baoshang Bank’s poor corporate governance on lack of CPC oversight

In August 2020, a senior official from the People’s Bank of China (PBOC) pointed the finger of reproach at poor corporate governance and lack of effective oversight by CPC, following a string of potential bank runs and failings amongst the country’s smaller regional lenders in the first half of 2019. 

In an article written for PBOC’s official news site Zhou Xuedong (周学东), chair of the PBOC office and PBOC spokesman, said that “the background root cause of the risk of many small and medium banks lies in negligent corporate management, as well as associated financial corruption and crime.”

“This was a major event in Chinese financial history,” said Zhou of the Baoshang Bank takeover. “It’s worth heeding the cruel lesson about the failure of corporate governance that it highlights.

“For a long period of time, Baoshang Bank’s party committee was one only in appearance, and the so-called ‘core function of the party’ had long been replaced by the ‘core function of the chairman.’

“All major decisions of Baoshang Bank, including appointments and dismissals of key cadres, major arrangements, and major usage of funds, did not require the collective discussion or decisions of the party committee. Handling by the chairman became the norm.

“Because Baoshang Bank lacked the supervision and guidance of the party, it created a warped culture, and some party leaders and cadres used their power to pursue private profit.

“A fact worth noting is that as early as December 2015 Baoshang Bank publicly issued 6.5 billion yuan in ten-year tier-2 capital bonds The bond prospectus indicated that as of 30 June 2015 Baoshang Bank’s non-performing loan ratio was 1.60%, its provision coverage ratio was 168.68% and its capital adequacy ratio was 10.82%, while its owners’ equity was 24.3 billion yuan.

“A year and a half subsequently in May 2017, a special investigative team discovered that since 2005 Baoshang Bank’s accounts for major shareholders had accumulated to as high as 150 billion yuan, and that annual interest was as high as 10 billion yuan, with no means to repay the principal or pay interest…the level of insolvency exceeded the imagination.”