Regulators Flesh Out Rules on Financing Guarantee

China’s regulators on Monday unveiled a series of rules to regulate financing guarantee companies, spelling out detailed measures to implement a general regulation on the industry.

The four complementary rules are the first batch of regulations issued by the China Banking and Insurance Regulatory Commission (CBIRC), the newly merged regulatory body created as part of a sweeping overhaul aimed at curbing financial risk in the banking and insurance industries.

The new rules, jointly drafted by the CBIRC and several other ministerial agencies, reflected that the regulator has started to act on President Xi Jinping’s calls to improve coordination of financial regulation and fix regulatory loopholes.

The rules specify the implementation of a general regulation issued by the State Council on the financing guarantee industry that went into effect last October, fleshing out detailed requirements on financing guarantee companies’ business operation, capital adequacy and business with banks.

The October guidelines set general requirements on the qualification and business scope of financial guarantee companies, in a bid to further control financial risks while promoting financing to micro-enterprises and the agriculture sector. For instance, the guidelines prohibited financing guarantee firms from accepting money deposits in any form, conducting entrusted-loan or entrusted-investment.

Financial guarantee companies provide creditors with guaranteed payment of interest and principal in the event that the debt issuer is unable to meet its financial obligations.

The CBIRC’s newly released rules detailed regulations on financing guarantee business. For instance, all financial guarantee companies must have proper license before they can register with the industrial and commercial administration. Local supervision authorities shall be responsible to issue the licenses to eligible financial guarantee companies.

The rules also include requirements for the assets ratio and guarantee liabilities of financial guarantee companies. The guarantee liabilities balance shall not exceed 10 times of the net assets of a financial guarantee company.

The core assets of a financial guarantee company should be no less than 20% of the company’s total assets minus account receivable payment so that the company can have adequate solvency, according to the rules.

The new rules also clarified local governments’ responsibility in supervising local financial institutions under the framework set by central government regulators.

When implementing the rules, local authorities should follow the principles, with stricter specific policies and measures, but not looser, the CBIRC said.