Economy Jul 18

China seizes control of nine financial firms

Regulators take over three brokerages, four insurance companies and two trusts linked to Tomorrow Holdings, which authorities claimed had violated laws and may pose a risk to the financial system

China seizes control of nine financial firms
People walk by the office of the China Securities Regulatory Commission. Regulators have taken a 'zero tolerance' approach to firms they believe may pose a risk to the wider community. File photo by AFP. 

(ATF) Chinese authorities seized control of a group of nine small and medium-sized financial companies on Friday that have connections to the same holding company.

The crackdown is part of a 'zero tolerance' policy that regulators are taking to prevent financial problems from expanding into the country's troubled economy.

The China Securities Regulatory Commission (CSRC) announced on July 17, 2020 that it had it seized control of three brokerages – Guosheng Securities and Guosheng Futures, plus New Times Securities.

It said the firms had concealed shareholder information and violated other rules, so they opted to seize control of the companies – for one year – to prevent "risk spillover".

Meanwhile, the China Banking and Insurance Regulatory Commission (CBIRC) seized control of four insurance companies and two trusts. It also said that business violations led to the takeover of these firms – Tianan Property Insurance Co of China, Huaxia Life Insurance Co, Tianan Life Insurance Co and Yi'an P&C Insurance Co, plus New Times Trust Co and New China Trust Co.

The CBIRC said seizing control of individual "high-risk" companies would not threaten the well-being of the insurance industry.

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These nine firms have ownership links to Tomorrow Holdings Co Ltd. Officials said they were targeted because of the government crackdown on systemic risks posed by financial conglomerates, according to records shown on the national business registration system.

On Saturday, the Chinese conglomerate questioned the regulators' move to take over its financial assets.

In a statement published on the company's official WeChat account, Tomorrow Holdings said it had been actively dealing with asset disposals, and that so far none of its financial institutions has faced liquidity risks or group protests from investors. It said regulators had made it difficult to dispose of assets and alleged that they had exaggerated risks.

Xiao Jianhua, owner of the Beijing-based group, returned to the mainland China in early 2017 to fully cooperate with investigations, according to the statement.

"With tight regulation limiting the firms' business development, each institution still managed to operate normally," the statement said. "However, they were flagrantly announced to be taken over. What is the purpose of that?"

Tomorrow Holdings questioned the motives of the regulators.

"The regulators have been pushing hard on the takeovers, so some of them can become corporate executives to delay their retirement. How much trade-off of fortune and power is behind this?" it said.

The announcements by the securities watchdog and banking and insurance regulator came a day after China's state assets regulator vowed to tighten scrutiny on high-risk areas such as finance and real estate in a bid to forestall systemic challenges.

In a previous takeover case involving Tomorrow, the central bank said the systemic risk posed by the group involved excessive borrowing and misuse of funds from the financial firms it owned.

During the takeover period, operations of the institutions will remain normal, regulators said.

Mergers encouraged

The securities regulator said later it was encouraging mergers and acquisitions among brokerages and mutual fund houses, the state-run China Securities Journal reported on Saturday.

The CSRC aims to solve the problem of competition among industry peers with the move, and the top securities watchdog supports launching employee stock ownership and equity incentive plans, the newspaper said.

"In order to achieve the effect of mergers and acquisitions and realise the coordinated development of parent companies and their subsidiaries, the CSRC supports the institutions setting up more flexible business scope on the premise of effectively managing unfair competition, preventing conflicts of interest and transferring interests," the newspaper said, citing a notice sent out by the regulator.

Early this month, Bloomberg reported that China's largest broker, Citic Securities Co, and smaller rival China Securities Co (CSC) had secured an informal agreement to merge, although the two companies said they were not aware of such a plan.

With reporting by Reuters

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