Chinese regulators tighten grip on financial holding companies

September 14, 2020.

China’s central bank issued new regulations on capital requirements and corporate governance for financial holding companies in a bid to prevent systemic financial risks, citing gaps in its supervision of the nation’s financial sector. 

The People’s Bank of China said on Sunday that the regulations will take effect on Nov. 1 and require the financial holding companies, which have been proliferating in the financial sector, to have a registered paid capital of at least CNY 5 billion ($734.3 million), which cannot be less than half of the total registered capital of their controlled financial entities. 

Entities that control two or more different types of financial institutions in the country and hold banking units with assets of more than CNY 500 billion ($73.4 billion) or those without banking units but with financial assets of more than CNY 100 billion ($14.7 billion) will be considered financial holding companies. In addition, those with financial assets that make up 85% or more of their total assets will be considered for the license and subject to regulations. 

Under the new rules, the entities must also have the ability to continuously replenish the capital and have a structured organization and effective risk management, as well as internal control systems, the PBOC said. Applications must be submitted within 12 months after the rules take effect.

After getting approval, the name of the entity will have to clearly indicate that it is a financial holding company or else it won’t be able to engage in the relevant businesses, PBOC said. Any changes or amendments to the company like registered capital, major shareholders, mergers or name will have to be approved by the PBOC, the central bank said. 

With the new financial control measures on capital, behavior and risks, PBOC said it hopes to prevent and control risks in the sector and promote a sustained and healthy circulation between the economy and the financial industry. 

On Monday, Pan Gongsheng, the deputy governor of the PBOC, said in a briefing that some large financial institutions carried out cross-industry investments and formed financial groups, while some nonfinancial companies invested and operated many different types of financial institutions, forming companies with the characteristics of financial holding companies. As examples, Pan named , China Everbright Group, China Merchants Group, Shanghai International Group, Beijing Financial Holdings and , saying these companies would be eligible financial holding companies. 

Pan added that the regulations come as the number of financial holding companies has been increasing rapidly, playing an active role in serving economic development. 

However, some nonfinancial companies have blindly expanded into the financial industry and accumulated risks due to the lack of supervision in the sector, he said. 

This led to situations where nonfinancial companies expanded into the financial industry with complex organizational structures and hidden equity structures, as well as falsifying capital injections and misusing funds, he said, accusing firms by name, including Tomorrow, Huaxin and Anbang.