In the wake of the global market reaction to the UK’s vote to leave the European Union, investors have redoubled their focus on China’s economy and particularly the banking system. “Brexit is the noise, but China is the story,” one senior investment banker commented last week, referring to the fact that the level of demand from China’s economy remains a major concern. We looked at the political situation in China in a previous post for the National Interest.

Following the UK’s vote on Brexit, the International Monetary Fund issued an extraordinary statement, saying that among the globally systemically important banks, Germany’s Deutsche Bank is the leading contributor to global systemic risk, followed by HSBC in the UK and Credit Suisse. Investors fear that China’s banks pose similar risks to the world economy, one reason why the international financial media are constantly speculating about possible financial contagion originating from China.

And yet such fears are largely unfounded. The first thing for investors to consider when we think about Chinese banks and the broader Chinese economy is that most companies and financial institutions are arms of the state. Although the Chinese government does tolerate a certain degree of speculative activity along the periphery of the economy, including areas such as real estate development and nonbank financial companies, the most important commercial and financial institutions are all tightly controlled by the government, which in turn is under the power of the Chinese Communist Party (CCP).

While many Western countries try to enforce some degree of separation between politics and commerce, in China there is no such division. “In the west we have a division between church and state,” notes one long-time observer of China at a major Wall Street investment bank. “In China there is only the state.”