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Editorial: Penetrating the Fog Hiding Financial Corruption

The financial sector has become one of the major focuses of authorities’ anti-graft campaign.

During its latest plenary meeting, addressed by President Xi Jinping two weeks ago, the Central Commission for Discipline Inspection said it will focus on corruption in key areas or segments in the selection of officials, approvals and supervision, and resources development, as well as financing and loan issuances.

In its key meeting last week, the Communist Party’s Commission for Political and Legal Affairs, which oversees the country’s judicial and public security work, said it is going to initiate special campaigns to crack down on crime in financial areas and capital markets, targeting illegal fundraising, internet-based pyramid schemes and insider trading. Financial crimes are closely related to financial corruption. It is like two sides of the same coin — power abuse and business irregularities are often entangled.

Financial corruption threatens financial security and order. Big-business predators often collude with officials within regulatory bodies, who trade their power for business interests. Corruption in the financial sector is like corruption in other areas — it is a result of a lack of effective supervision of power. However, in a country that is still going through transition and upgrading, the imperfect market framework, the lack of market entity independence and an immature regulatory system have provided a hotbed for financial corruption.

Graft-busting in the financial sector should not be simply treated as a Whac-A-Mole game. In addition to smashing corrupt “tigers and flies,” authorities should improve the regulatory framework through reform, strengthen the joint forces of various regulatory bodies, and close the blind spots in different regulatory systems. They also need to solve the problem of “who’s going to regulate the regulators” in order to push the anti-graft efforts through. The ability to break through any barriers or guises is a benchmark to measure whether a system to fight financial corruption is mature or not.

The financial regulators have recently been talking about a so-called “piercing through” when dealing with regulatory violations. It is similar to anti-corruption efforts in the financial sector — authorities must go through various guises and expose the essence of power abuse for personal gains. In recent years, new financial technology and products have been cropping up, which have provided new guises for some people to hide their illegal deals with power. The unlawful deeds have become more difficult to discern and track, and sometimes the illegal gains can be transferred quickly and even whitewashed quickly. However, authorities should not be afraid to confront crimes in this area just because of their complexity.

Corruption in the financial sector can be split into two categories. The first is breaches during financial transactions, such as banks’ illegal issuing of loans, insider trading and channeling of interest at securities markets. Several executives at banking institutions have fallen to these violations in recent years. The second is corruption at the regulatory bodies. Officials at the China Securities Regulatory Commission (CSRC), including Zhang Yujun and Yao Gang, and China Banking Regulatory Commission (CBRC) official Yang Jiacai, have come under investigation for abusing their power. Xiang Junbo, former chief of the China Insurance Regulatory Commission (CIRC), has become the first top official of one of the country’s financial regulatory bodies to be put under probe while still in office. The central discipline watchdog accused him of abusing supervisory power and approval power.

Fighting financial corruption is closely related to the government’s efforts to prevent financial risks. If financial services are considered the lifeblood of a modern economy, financial corruption is like leukemia, which twists the allocation of resources, harming the government’s reputation and disrupting business rules. Financial corruption may trigger a crisis at a certain link of the business chain, spreading quickly and impacting the real economy, even disturbing social stability. During an economic transitional period, debts build up with local governments, enterprises and residents, and financial corruption cases can be a catalyzer that magnifies financial risks. Without containing financial corruption, financial risks will not be effectively resolved.

The anti-corruption efforts in the financial sector have recently been heating up. The efforts should also watch for the right points to hit. The latest corruption cases indicated that the chiefs of financial institutions often had excessive power and few limits, and the existing framework had little power to check the chiefs’ power. Some officials at regulatory bodies, such as those at the CSRC’s securities issuance examination committee, have become corrupt one after another because of the unchecked approval power. For financial institutions, corporate governance structures should be strengthened, with management of corruption risks being one of their top goals. For financial regulators, approving power must be clearly defined and limited, and a better systemic design should be in place to enhance transparency and inside and outside supervision.

The CBRC and CIRC have recently changed their chief officials of their respective discipline inspection teams. The moves are considered a signal for authorities to step up financial corruption-busting. However, besides assigning tough corruption-busters, it is more important to design sound frameworks to prevent corruption from happening.

To improve the anti-corruption system, the financial regulators must find their right roles. For a while, some regulators possessed huge power, and companies scrambled to seek favors from them. On the other hand, the financial sector was full of irregularities, while few officials tried to take charge. Even some public interests were hurt — they had nowhere to complain. Some regulators chose to do something or not to do something based on the illegal deal behind the scenes. Other officials turned a blind eye to some companies’ questionable business moves, branding the moves as financial innovations — with power-money deals being discovered afterward. It is worth a thorough rethinking.

Under the country’s current regulation system, real financial innovations are still in short supply. Real financial innovations should not be stopped to wait for the improvement of regulatory frameworks. The authorities should distinguish innovations that meet the need of the market development with “innovations” that were aimed only at reducing transaction cost and were covered up by abuses of power. The regulatory loopholes should be plugged as soon as possible.

Xi’s chief economic adviser, Liu He, said at the World Economic Forum in Davos, Switzerland, last week that the country will fight three major wars, including preventing major financial risks. This will help with the ongoing anti-corruption efforts in the financial sector. Only when the authorities, as they promised, put out new measures in reform and opening-up that “go beyond the expectations of the international communities” can financial risks and corruption be effectively prevented or controlled, and high-quality economic growth can have a solid foundation.

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