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Promises from the Top: Rising Compliance Risks in China’s Financial Sector

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Promises from the Top: Rising Compliance Risks in China’s Financial Sector

by Richard Ip
May 2017

In a speech published in April 2017, Premier Li Keqiang vowed to crack down on irregularities and graft affecting the financial sector. He promised to “relentlessly” punish companies’ internal supervisors and company senior managers for wrongdoings, including collusion with other big players in the market.

  • We believe that, galvanized by Li’s speech, Chinese financial regulators and the Central Commission for Discipline Inspection – the most powerful anti-corruption body in China – will increase enforcement actions in the sector. The bank regulator has already imposed fines totaling CNY 40 million against several banks for various irregularities, including inadequate internal control, and has promised to conduct additional inspections. And the securities regulator has launched formal investigations into suspected stock market trading improprieties. In addition, the insurance regulator, following the arrest of its head Xiang Junbo for suspected corruption in early April, has promised to “tighten up supervision and rectify disorder in the insurance market.”
  • We expect this crackdown to also affect foreign companies.
    The Chinese government has shown increasing willingness in recent years to target foreign firms, including banning in 2015 a Western hedge fund account from trading on the Shenzhen Stock Exchange for allegedly “malicious” short-selling. Foreign investors may also be indirectly affected by actions against their local partners. A notable example is the arrests and management purge that targeted CITIC Securities, one of the biggest state-owned financial firms in China, for insider trading committed by several senior managers during the stock market turbulence in 2015. The enforcement actions against CITIC Securities are believed to have affected one of its foreign partners, who had a senior local employee investigated in relation to this matter.
  • Increased policing of the financial sector highlights the value of keeping up-to-date on regulatory affairs in China and conducting robust due diligence on local counterparties. An on-boarding background check on a local counterparty is an effective way to identify risks at an early stage. Foreign investors should also regularly monitor their counterparty’s activities through periodical media review and public records updates. When necessary, expert investigators should be brought in for enhanced investigations.

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