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China Proposes Tighter Oversight of Financial Holding Firms

If adopted, the rules would require the companies to hold specified levels of capital and undergo scrutiny. 

China Proposes Tighter Oversight of Financial Holding Firms
The People’s Bank of China (PBOC) logo is illuminated at night in the Luohu district of Shenzhen, China. (Photographer: Brent Lewin/Bloomberg)

(Bloomberg) -- China plans to start regulating large conglomerates that may pose systemic risks to the nation’s financial sector.

Certain non-financial firms or individuals with businesses that straddle at least two financial industries will be classified as “financial holding companies” and will need licenses from the People’s Bank of China to operate, the regulator said in proposals Friday. If adopted, the rules would require the companies to hold specified levels of capital and regulators would scrutinize their ownership structure, related transactions, and source of funding.

“Some financial holding companies, mainly those formed by investments of non-financial enterprises, have been expanding blindly into the financial industry,” the PBOC said. “There has been a regulatory vacuum, and risks are accumulating and being exposed continuously.”

The PBOC last year identified HNA Group Co., Fosun International Ltd., China Evergrande Group, and Tomorrow Holding Co. as “financial holding companies,” as well as internet giants such as Ant Financial. The firms’ growing role in the nation’s money flows and financial plumbing make them targets for authorities who’ve already shackled over-leveraged acquirers and reined in the sprawling shadow-banking system.

At the end of 2016, about 70 central-government owned enterprises had a total of over 150 financial subsidiaries, a central bank official said in March last year. Another 28 private firms each had stakes in at least five financial units.

Proposed Indicators

The PBOC proposes that the following firms be classified as “financial holding companies:
  • Banking assets exceed 500 billion yuan ($73 billion)
  • Banking assets lower than specified but other financial assets of at least 100 billion yuan
  • Financial units, without a banking unit, have more than 100 billion yuan in assets

The proposals also blacklist certain individuals from becoming major or controlling shareholders in financial holding firms, such as people who falsified capital injections or undertook illegal activities at financial entities. Companies that will be covered under the rules will need at least 5 billion yuan in capital, according to the proposals.

Public feedback is sought through Aug. 24.

Separately, the China Securities Regulatory Commission said it plans to “substantially” increase penalties for falsified corporate disclosures. The CSRC is revising laws to stiffen sentences and fines for listed companies, accounting firms, underwriters and other intermediaries that fail to carry out their responsibilities, the regulator said in a statement Friday.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net;Lucille Liu in Beijing at xliu621@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net;Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Jeanette Rodrigues, Marcus Wright

©2019 Bloomberg L.P.

With assistance from Bloomberg