(Bloomberg) -- Bankers in China are being told to rectify their mindsets, clean up their “hedonistic” lifestyles and stop copying Western ways.

The directives, part of a 3,500-word commentary last week from the country’s top anti-graft watchdog, is just the latest sign that President Xi Jinping’s campaign to tighten the Communist Party’s grip on the financial system has a long way to go.

As the National People’s Congress kicks off this weekend, Xi is poised to further entrench control by reviving a powerful committee to coordinate economic and financial policy and installing close allies to oversee it all.

That comes on the heels of the sudden disappearance of one of China’s top investment bankers and follows the downfall of dozens of officials over the past 18 months in the most sweeping corruption crackdown on financial sector ever. In its warning last week, China’s Central Commission for Discipline Inspection said bankers should abandon pretensions of being the “financial elite.”

“All of these development speak to one thing: the Communist Party will govern everything, including economic and financial work,” said Shen Meng, a director of Beijing-based investment bank Chanson & Co. “Policy makers are placing the finance industry at the heart of the economy as a lubricant for its smooth development, and if the economy goes sour, the sector is mainly to blame.”

This is a critical moment for Xi as he seeks to reign in risks in the $60 trillion financial sector — imposing stricter controls on capital outflow, controlling debt levels and ruling out risky practices — while he tries to restore growth and manage the economic fallout of spiraling ties with the US. Aiming criticism at the industry may well provide Xi with convenient cover if that doesn’t go smoothly.

The National People’s Congress — where top leaders will assess the government’s past performance and outline policies for the year ahead — offers Xi his first opportunity to shake up state institutions since he secured a precedent-breaking third term at the party’s twice-a-decade congress.

China’s top leaders have typically used the first parliament meeting after a congress to reorganize critical government organs. In 2018, Xi carried out the most extensive overhaul in decades in a revamp that solidified his control over key functions.

‘Broker Butcher’

Authorities are considering reviving the long-disbanded Central Financial Work Commission to allow the ruling Communist Party to assert more control, according to people familiar with the matter. The commission is set to be headed by Ding Xuexiang, Xi’s chief of staff, one of the people said. He Lifeng, who is expected to become China’s new vice premier, is also being considered for the role of party secretary at the People’s Bank of China, according to the Wall Street Journal.

As part of changing of the guard, the nation’s securities regulator is poised to get a new chairman nicknamed “the broker butcher,” people familiar with the matter said earlier. Wu Qing, a vice mayor of Shanghai, earned his reputation cracking down on wayward traders while at the regulator in the mid-2000s, shuttering 31 firms.

At the same time, the financial industry has been rocked by the disappearance of Bao Fan — who oversaw some of the nation’s biggest tech deals over the past decade. Bao is cooperating in an unspecified probe by Chinese authorities according to China Renaissance Holdings Ltd., the investment bank he heads up. The Wall Street Journal reported on Thursday that the banker had been detained as part of a corruption probe. 

Then this week, after an investigation that started last year, China’s top prosecutor charged Tian Huiyu, the former president of China Merchants Bank Co., over allegedly taking “huge” bribes, the abuse of power and insider trading.

That turmoil is giving global investors another reason to be cautious about the longer-term prospects for China’s markets. The rip-roaring rally on China’s reopening has stalled with key benchmarks in Hong Kong falling as much as 15% since in January. China’s technology stocks have lost up to a combined $263 billion in market value in the same time.

One recent encouraging development — a landmark deal by the US and China to end an impasse over access to audit papers of Chinese firms listed in New York — is also being questioned as authorities in Beijing have put pressure on its state-owned corporate giants to end ties with the Big Four global accounting firms.

“Investors are stuck between a rock and a hard place,” said Diana Choyleva, chief economist at Enodo Economics, a London-based research firm focused on China. “Liquidity developments favor Chinese equities, but Xi Jinping remains wedded to an economic model which means the Party has ultimate control over every aspect of the economy,” and China remains at risk of falling foul of US sanctions against Russia, she said.

Keeping a tight lid on capital outflows also remains a priority for authorities trying to prevent China’s wealth leaving the country as they get the economy back on its feet. Beijing has accelerated its crackdown on Macau’s high-rolling gamblers on concerns about the city’s role in funneling money abroad, with the enclave passing a new law that gives the government greater oversight over casinos and authorities jailing flamboyant former industry tycoon Alvin Chau earlier this year.

That effort is shining a spotlight on China’s brokerage industry too. China Securities Regulatory Commission has repeatedly vowed this year to tighten supervision of illegal cross-border brokerage services since it asked two such firms to rectify their business activities.

On top of that, officials have put pressure on foreign and domestic banks to rein in pay in the sector as part of Xi’s “common prosperity” push.

Financial Opening

The tightening comes even as authorities have pledged to continue opening up to foreign banks. Wall Street giants such as Goldman Sachs Group Inc. and Morgan Stanley, fund managers and insurers are expanding after being allowed to take full control over ventures in China. The nation has opened its doors in part to attract fresh capital and to instill more discipline in its financial market.

Clean up efforts will proceed as China develops its pension fund system and seeks to draw more liquidity into its markets, according to William Ma, GROW Investment Group’s chief investment officer. “From a global investors perspective, per our communication with Chinese regulators, there are continued efforts in the financial market opening up,” and more policy announcements are expected after political meetings in March, he said.

One key figure, Guo Shuqing, the party chief of People’s Bank of China and head of the China Banking and Insurance Regulatory Commission, is expected to retire after spearheading a crackdown on leverage in the real estate sector, reining in the shadow banking sector and peer-to-peer lending. He will leave a big hole to fill as Xi places his associates in key roles, concentrating economic policy decision-making in fewer hands.

“I can’t imagine anyone else has the inclination, reputation, or understanding of the system to replicate what he’s done,” Dinny McMahon, director of markets research at Trivium, said of Guo. Recent new measures governing bank disclosures of non-performing loans and capital risk may suggest Guo may be trying to ensure his replacement continues to improve risk management, he said.

But it’s a delicate balance for Xi — reducing risks without spooking markets in order to buffer an economy that may yet be subject to more pain as the US and its allies increasingly embrace strategic competition with China.

“Policy makers are attaching great importance to safeguarding the red line and preventing systemic financial risks,” said Shen at Chanson. “It’s particularly crucial at a time when the domestic economy is still suffering and China faces mounting pressure on geopolitical front.”

--With assistance from Jing Li, Phoebe Sedgman and April Ma.

©2023 Bloomberg L.P.