Big Shareholders Told to Offload Excessive Bank Stakes

China's banking regulator told shareholders using borrowed money to buy major stakes in commercial banks to offload their holdings within a year, as part of Beijing’s campaign to wring out risks in the nation’s financial markets.

The China Banking Regulatory Commission issued two sets of guidelines, providing details on how to implement rules released in January that stipulate an investor, along with its related parties, can hold a stake of 5% or higher in no more than two commercial banks. In addition, individual investors can’t own a controlling stake in more than one bank.

For shareholders using capital raised from financial products, such as the so-called universal life insurance products, the regulator required them to cut the holding below 5% within one year. Universal life insurance products are short-term policies that offer minimal life-insurance benefits but attract policyholders with their high yields. These policies became a major funding source for insurers like Anbang Insurance Group to fund their acquisitions.

The new regulations are aimed at fast expanding financial holding groups such as Anbang and Tomorrow Holdings Group, which gained control of multiple financial institutions through complicated transactions among affiliated firms.

Public documents show that Anbang holds more than 17% of Minsheng Bank and more than 10% of China Merchants Bank, two of the country’s top lenders. Anbang also owns a controlling 35% stake in Chengdu Rural Commercial Bank.

Tomorrow Holdings Group, controlled by tycoon Xiao Jianhua, holds stakes in six city commercial banks and a number of other financial institutions through various affiliated companies.

Regulators grew alarmed last year that some of China’s tycoons were hiding behind complicated ownership structures to own large stakes in numerous banks, creating risks to the country’s financial system.

Last month, the Chinese government seized control of Anbang Insurance Group and announced its founder and chairman Wu Xiaohui was being prosecuted for “economic crimes.”

Anbang and some other insurers have drawn regulatory attention for aggressively grabbing bank shares on the secondary market using funds raised from insurance policies and wealth management products.

Sources close to the matter told Caixin that Tomorrow Holdings is moving to offload some of its financial assets amid tightening regulatory scrutiny.

Last week, Liu Fushou, director of CBRC's regulation department said at a press briefing that the commission will conduct spot checks of commercial banks’ shareholding structures this year and strictly punish those violating the rules.

The guidelines also detail the reporting requirements for investors eyeing to take 1% up to 5% in a bank.

Shareholders and their related parties should report their holdings to the CBRC or it local bureaus through the bank within 10 working days once their holdings reach 1%, the rules state.

The rules also require the major shareholders of commercial banks, including those holding more than 1% but less than 5%, to explain the reason for their investment and disclose their source of funds, ownership structures and ultimate beneficiaries of the holdings.