The Impact of Ongoing Anti-Corruption Drives in China on Financial Sector Stability and Reform Momentum

China’s anti-corruption campaigns, now in their 13th year, have reshaped the financial sector’s landscape, with profound implications for stability, regulatory credibility, and market modernization. While high-profile investigations have curbed systemic graft and improved governance, they have also introduced new uncertainties that complicate investor sentiment and policy predictability.

Investor Confidence: A Double-Edged Sword

The 2024 anti-corruption drive targeted 90 financial-sector executives, with 70% of cases involving banks, including the investigation of former China Construction Bank vice-president Zhang Gengsheng and ex-China Securities Regulatory Commission head Yi Huiman [1]. These actions align with a broader strategy to eliminate rent-seeking behaviors that distort market access and investment flows. According to a report by China Financial Network, such measures have improved total factor productivity (TFP) in state-owned energy firms by 2.5%, driven by enhanced investment efficiency and corporate governance [4].

However, the same campaigns have sown caution among investors. The 2024 U.S. Department of State’s Investment Climate Statements notes that regulatory unpredictability—exemplified by raids on foreign consultancies and stringent data-sharing restrictions—has contributed to a 13.7% decline in foreign direct investment (FDI) in 2023 [1]. Multinational corporations, particularly those from countries with high perceived corruption, face heightened legal risks, as seen in the case of a U.S. electronics firm under internal investigation for alleged improper sales practices in China [1].

Regulatory Credibility and Systemic Reforms

The anti-corruption campaign’s “case-based reform” strategy—mapping corruption networks and implementing institutional safeguards—has bolstered the credibility of regulatory bodies like the Central Commission for Discipline Inspection (CCDI) and the People’s Bank of China (PBoC) [1]. For instance, the China Securities Regulatory Commission (CSRC) imposed a 4-billion-yuan fine on Evergrande for fraudulent bond issuance, signaling a shift toward stricter enforcement [3].

Yet, the political dimensions of these efforts remain contentious. The OECD Economic Outlook highlights that while fiscal transparency has improved, the centralization of power under Xi Jinping’s “comprehensive security” agenda has shifted policy priorities away from market liberalization [1]. This duality—between enhanced governance and political control—creates ambiguity for investors. A 2024 study in ScienceDirect found that while anti-corruption measures reduced public perceptions of graft, they also dampened local officials’ incentives to stimulate growth through informal “grease-the-wheels” practices [2].

Market Modernization: Progress Amid Structural Headwinds

Post-2024 reforms, including the 20th CPC Central Committee’s resolution on deepening market-oriented policies, aim to balance self-reliance with openness. Initiatives such as a 10-trillion-yuan debt package for local governments and mortgage rate cuts reflect efforts to stabilize the real estate sector, which accounts for 30% of GDP [2]. However, structural challenges persist: an aging population, low productivity growth, and the real estate crisis continue to weigh on economic momentum.

The OECD projects China’s GDP growth to slow to 4.7% in 2025, constrained by U.S. tariffs and a prolonged property sector adjustment [1]. Meanwhile, the push for self-reliance in semiconductors and advanced manufacturing has sparked global backlash, limiting export diversification [3]. Despite these hurdles, fiscal stimulus—such as a 1-percentage-point increase in the budget deficit—signals a commitment to supporting consumption and innovation [1].

Conclusion: Navigating Uncertainty

China’s anti-corruption campaigns have undeniably strengthened financial sector governance, curbing systemic risks and improving fiscal sustainability. Yet, the interplay between political control, regulatory unpredictability, and structural economic challenges creates a complex environment for investors. While reforms like the Foreign Extortion Prevention Act and Corporate Transparency Act aim to address transnational corruption [1], the broader shift toward self-reliance and security-oriented policies may deter foreign capital.

For now, the financial sector’s stability hinges on the government’s ability to reconcile its dual goals: eradicating corruption while fostering a predictable, market-friendly environment. Until then, investor confidence will remain a barometer of China’s evolving balance between political priorities and economic pragmatism.

Source:
[1] China Financial Network, new playbook hits corrupt bankers [https://chinapolicy.substack.com/p/new-playbook-hits-corrupt-bankers]
[2] ScienceDirect, Anti-corruption and political trust: Evidence from China [https://www.sciencedirect.com/science/article/abs/pii/S0167268125001349]
[3] OECD Economic Outlook, Volume 2025 Issue 1 [https://www.oecd.org/en/publications/oecd-economic-outlook-volume-2025-issue-1_83363382-en/full-report/china_bb7827bc.html]