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Will China’s Anticorruption Drive Hurt Its Financial Sector?

A crackdown by President Xi Jinping has ensnared top executives from two banks, and other takedowns at financial services firms could follow.

As Chinese President Xi Jinping’s anticorruption campaign picks up speed, financial services firms can’t escape its long reach. The recent resignation of the president of China Minsheng Banking Corp., the country’s biggest private sector retail lender, signals that more heads will roll, observers say. But China’s financial sector may suffer little collateral damage from the crackdown.

On January 27 investigators from the Communist Party’s Central Commission for Discipline Inspection showed up at Minsheng’s Beijing headquarters and took president Mao Xiaofeng away for questioning. They also appeared at the office of Lu Haijun, a director of Bank of Beijing, and detained him. Although it isn’t clear why Lu was targeted, the commission stated that Mao “was assisting” in the corruption investigation into Ling Jihua, a former top aide to ex-president Hu Jintao.

Minsheng is China’s 12th-largest bank by assets, with $615 billion as of last September. On January 31 it announced that Mao had resigned as president and as Communist Party secretary of the firm “for personal reasons” and that that had nothing to do with allegations against him.

“As far as the bank knows, the matter is of a personal nature and is unrelated to bank operations,” China’s official Xinhua News Agency quoted a spokesman as saying. Minsheng has appointed board chairman Hong Qi as its new acting president.

According to the Chinese media, Mao had put the wives of several senior Chinese officials on the bank’s payroll, and the women never showed up for work or did anything in return for their salaries. Most prominent among those named is Gu Liping, a former journalist and a volunteer for causes such as promoting youth entrepreneurship. Gu is the wife of Ling, who until December 31 was director of the United Front Work Department, the party’s powerful overseas propaganda unit.

“Mao’s detention is completely political and had nothing to do with mismanagement or his work at the bank,” says a Hong Kong–based banker who has close ties to Beijing and asked not to be identified. “Xi Jinping is going after powerful factions in the party, and the investigation of Ling and his friends essentially removes one of his factional rivals.”

Ling is known as head of the Shanxi Gang, a powerful group within the party that consists of dozens of senior officials and business executives, all of whom worked with Ling in Shanxi, where he was born, or rose up though the ranks alongside him at the start of the Communist Youth League of China, Hu’s power base.

Mao’s alleged wrongdoing — paying salaries to wives and mistresses of powerful politicians — isn’t unusual in China’s financial industry, says Victor Shih, an expert in the sector and an associate professor of political science at the University of California, San Diego. “It is common practice in China to employ people with some linkages to either influential or wealthy individuals in order to attract deposits either from the wealthy individuals or from government units these powerful people can influence or control.”

These “brokers” are sometimes on a bank’s payroll and receive additional bonuses for bringing in deposits, Shih notes. “If Mao was only guilty of hiring brokers who are relatives of officials, I don’t think he is doing anything unique at all,” he says. “A general ban on this practice would be disastrous for smaller banks, because they rely on brokers to remain liquid in some cases.”

As of February 4, Minsheng’s share price had fallen by about 13 percent since the scandal broke.

Mao, 42, the youngest-ever president of a listed Chinese bank, appears to be poised for a fall more spectacular than his swift rise to power. After earning a business administration degree from Hunan University in 1990 and pursuing graduate studies, he became a prominent student leader; in 1999 he took a job as an officer in the General Office of the Communist Youth League’s Beijing headquarters. Mao completed a master’s degree in public administration at Harvard University before joining Minsheng in 2002 as deputy chief of staff to the president. Last August, having served as head of retail banking, he was promoted to president and director.

Mao’s downfall spells short-term troubles for Minsheng, but the bank remains strong and well managed, according to analysts. “We expect Minsheng Bank’s core value to remain largely intact, given Mao only joined the senior management team in 2008,” says Victor Wang, a Hong Kong–based banking analyst with Credit Suisse Group. “His key focus before becoming president was on small and medium enterprise banking, which is under strict control due to asset quality concerns.”

Despite the scandal, Wang retains an outperform rating for Minsheng, believing that it remains a top-quality bank with a leading retail and small and medium enterprise business. In 2014 the firm posted an estimated 45.8 billion yuan ($7.3 billion) in net profit, and it may achieve 9 percent net profit growth this year, Wang says.

Analysts remain split on the wider impact of the so-called wives’ club scandal, however. China’s anticorruption drive has cut a wide swath through Communist Party ranks since President Xi launched it upon taking power two years ago.

Some 182,000 officials and business executives have found themselves in the dragnet, including more than 30 senior officials. Among them are Bo Xilai, a former member of the Central Politburo of the Communist Party of China and ex–party chief of Chongqing; Zhou Yongkang, once China’s security czar and a member of China’s ruling council, the Politburo Standing Committee; and Xu Caihou, a three-star general and former vice chairman of the Central Military Commission.

It’s possible that more bankers with ties to corrupt officials will be taken down, says the Hong Kong banker. “But that doesn’t mean that China’s financial industry is heading into turmoil due to the anticorruption campaign,” he contends. “It just means there may be more leadership changes coming. Anyone caught for alleged wrongdoing will simply be replaced.”

The message is clear, the banker says: Don’t get caught being corrupt. “But even more important is this — don’t get caught being too close to President Xi’s enemies.”

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