China’s latest corruption probe could spell trouble for the global banking industry

It’s not all smiles at China’s Minsheng Bank these days.
It’s not all smiles at China’s Minsheng Bank these days.
Image: Reuters/Stringer
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This post has been updated.

The abrupt resignation of the head of China’s Minsheng Bank amid a corruption probe could send a chill through some of the world’s largest financial institutions. Minsheng’s president, Mao Xiaofeng, resigned over the weekend citing “personal reasons” while Chinese media reported that Mao had been detained for questioning by the government’s anti-corruption agency. Shares in the lender fell as much as 9.25% in Shanghai. Late on Monday, the Bank of Beijing said that board member Lu Haijun was being investigated for possible serious disciplinary violations.

China’s corruption crackdown has reached deep into two sectors of the Chinese economy—petroleum and the military—and now it appears to be headed for the banking industry.

Analysts believe that Mao’s resignation, which Minsheng says has nothing to do with the bank’s operation, is the first of more to come. “Mao so far is the first top financial official to be investigated in the aftermath of Ling’s case, but I believe he will not be the last one as more senior banking officials and financial elites will be targeted,” Ma Guoxian, a professor of political economy at the Shanghai University of Finance and Economics, told the South China Morning Post.

In late 2012, the government banned state bank executives from spending lavishly on cars and homes, but flashy spending is likely not the issue plaguing Mao. The Beijing News reports he helped the wife of Ling Jihua, Hu Jintao’s presidential aide who is now being investigated, get a job at the bank. The wife of another recently-detained party official also worked at the bank, the paper reported. The Chinese financial magazine Caixin reports Mao was taken in for questioning in relation to the Ling Jihua case.

The idea that a private bank would give jobs and board seats to friends and family of powerful Chinese officials is not new—see the ongoing US investigation into hiring practices at some of the largest banks in the West. Mao’s resignation signals that Chinese officials may play ramp up their scrutiny of these hires as well.

Fang Fang, the bank executive closely linked with JP Morgan’s “sons and daughters” hiring program was arrested by Hong Kong’s anti-corruption regulator last year and is reportedly cooperating with a Hong Kong investigation.

On the mainland, the anti-corruption drive is seen by many as a methodical campaign by Xi to take out rival factions in the Communist Party. But the government’s domination of China’s banks, even those like Minsheng, China’s first privately owned bank which is known for being progressive, and nimble, means the entire industry is vulnerable.