China begins era of strict supervision of financial holding companies

PBoC announces new regulations, says a financial holding company must meet several key conditions, including having registered capital of at least 5 billion yuan ($733 million)

China begins era of strict supervision of financial holding companies
People wear protective face masks following the coronavirus outbreak, at Lujiazui financial district in Shanghai in March. The PBoC has announced new regulations for financial holding companies, which musts be met by November. Photo: Aly Song/ Reuters.

(ATF) An era of strict supervision of financial holding companies has officially arrived in China following a series of announcements from central finance authorities. 

On Sunday September 13, the State Council announced a series of measures to regulate financial holding companies. The most significant measures is that all such companies will need approval by the central bank.

The news, published on the State Council's website, also clarified that applications on setting up a financial holding company must meet several major conditions – the paid-in registered capital must exceed 5 billion yuan (about US$733 million), and shall not be less than 50% of the total registered capital of the directly controlled financial institution.

The brief document also stated that entities are not allowed to use the words "financial holdings" or "financial group" in the company name.

The central bank notice, titled 'Trial Measures for the Supervision and Administration of Financial Holding Companies', detailed the conditions and procedures involved. This includes regulatory requirements for key issues such as shareholder qualifications, capital sources and use, capital adequacy requirements, equity structure, corporate governance, related transactions, risk management systems, and risk "firewall" systems.

Main purpose

The main purpose of financial holding companies is still to prevent financial risks, China Economic Information said.

An official at the central bank said financial holding companies are often large-scale, diversified in business, and highly related. They operate across institutions, markets, industries, and regions, which are related to national financial security and social public interest and are needed to implement market access.

At the same time, the establishment of a clear administrative license is an important part of the legal supervision of financial holding companies, which is “conducive to comprehensively promoting the operation of financial holding companies in compliance with laws and regulations, and preventing cross-contagion of risks.”

Financial Control Measures stipulate that regulatory officials will impose requirements on the qualifications of shareholders of financial holding companies in terms of core business, corporate governance, financial status, equity structure, and risk management and impose requirements on major shareholders, controlling shareholders and actual controllers.

This new move clearly prohibits ‘bad’ behaviour by shareholders controlling financial holding companies, and sets up a capital adequacy supervision system, requiring the capital held by a financial holding group to be commensurate with its asset scale and risk level.

The Financial Control Measures will come into effect on November 1 this year, however they are still referred to as ‘trial’ measures in the official documents, which gives regulators some "wiggle room" in terms of amending details.

Citic Securities published a brief statement saying it welcomes the measures, which are implemented to increase the stability of the financial system.

'Loophole in regulations'

Financial holding companies have not been included in the supervisory framework, and there is a loophole in regulations," Pan Gongsheng, PBOC's vice governor, told a briefing in Beijing on Monday.

Pan named the state-owned CITIC Group, China Everbright Group and China Merchants Group as eligible financial holding entities, as well as local government-backed Shanghai International Group, Beijing Financial Holdings Group, and the fintech giant Ant Financial. Jack Ma's Ant Financial, now renamed Ant Group, is seeking dual listings in Hong Kong and Shanghai.

Pan criticised a small number of firms, including Tomorrow Holdings, Anbang Group and CEFC China Energy Co, for expanding into the financial sector using a complex web of shareholding structures, and falsifying capital injections and misusing funds from financial institutions.

The new regulation will put up a firewall between the industrial sector and the financial sector, to "prevent cross-institution, cross-market, and cross-sector contagion risks," Pan said.

Aside from the stipulation that companies have at least 5 billion yuan in capital, financial holding companies that hold banking units will need to have at least 500 billion yuan in total assets. Those that do not have banking units should have at least 100 billion yuan.

While the new regulation will take effect on November 1, companies will be given a one-year grace period, Pan said.

If financial holding firms fail to meet the new rules, the PBoC can force a share sale. The PBoC may also propose anti-trust investigation to the State Council against financial holdings if they affect financial stability or violate fair competition.

Pan also noted that China has issued rules on capital and financing management for key real estate companies, a move aimed at enhancing regulation and transparency of real estate financing.

With reporting by Reuters