Here is what Dr. Lee's insights probably mean for foreign businesses trying to work in China.
financial institutions, after battling for fair treatment in China for a
decade, are now fighting even more of a losing game. China's likely new premier Xi Jinping,
Dr. Li explains, is a so-called "princeling". This is a group from
established Communist Party families who are loyal to former Chinese
leader Jiang Zemin and who basically support China's status quo. Part of
that status quo is China's state owned enterprises (SOEs) including the
nation's biggest banks.
The princelings' relatives often have key jobs (paywall) in SOEs, including the banks, and derive great wealth from them. If China's economic slowdown continues, fortifying SOEs will be a priority for a new princeling-dominated leadership.
The new leaders will do all they can to protect China's broken banks.
The banks were used to finance China's massive economic stimulus in
2009-2010, including many questionable projects, and they remain an
important source of funding because China lacks a well-developed bond
market. That leaves them looking vulnerable
because of a likely pile-up of bad loans. They also sold sub-prime loan
derivatives, much like those that set off the US housing and financial
crisis, to retail investors, and will likely have to repay them if the
Ponzi-like vehicles implode.
What this protection could amount to
is that foreign banks interested in taking stakes in Chinese banks may
face trouble. Canada's Scotiabank announced a deal to buy a 20% stake in
Bank of Guangzhou 14 months ago and
to increase its existing holding in Bank of Xi'an, and is still waiting
for regulatory approval. Foreign banks in China wanting to open new
branches will likely find it slow going too. It would make them more
competitive with Chinese banks, whose depositors generally end up with
negative interest rates after inflation.
And foreign banks' share of the Chinese market is already tiny. Back in 2001, one of the promises China made upon acceding to the WTO
was to open up its banking sector to external competition. This has not
really happened. Institutions such as HSBC and Citigroup regularly play
up the importance of China to their businesses. In fact, foreign banks'
market share in China is just 2%, the smallest of any major emerging market.
Meanwhile, China could become more inward-looking and less likely to lift media repression. There are two media hardliners among the likely leadership line-up. One is Zhang Dejiang, who replaced the disgraced Bo Xilai as party secretary of Chongqing and who has earned the nickname "the iron fisted enforcer". Zhang clamped down on reporting of
the outbreak of the deadly SARS virus in southern China's Guangdong
province when he was party secretary there. (According to the Brookings
Institute, Zhang also studied economics in North Korea and is
the son of a former major general of the People's Liberation Army and a
"protege of Jiang Zemin"). The other is Liu Yunshan, whose current job
title is "director of the Communist party propaganda department". Liu
has been accused of blocking the liberal faction of the Communist Party's calls for political change from Chinese media. Dai Qing, a friend of detained Chinese Nobel laureate Liu Xiaobo, reportedly said of Liu Yunshan that "if it is he who will oversee ideology, there will no longer be any hope."