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Caixin View: New Financial Conglomerate Supervision A Needed Fix To Lax Enforcement

The Chinese government’s plan to roll out new rules and set up a new regulatory structure later this year will likely fix the long-standing problem of weak supervision of powerful financial conglomerates, a welcome move.

Weak enforcement, rather than insufficient rules, has historically been the main problem with regulating these companies. To address the problem, the government will make the People’s Bank of China (PBOC) the sole regulator of financial holding companies and conglomerates to ensure strict enforcement of the new rules, Caixin has learned.

Financial conglomerates engage in more than one kind of financial service — like banking, insurance and securities — which in the past cut across the remits of multiple regulators. Many non-financial companies pushed into the financial sector in pursuit of cheap liquidity and opportunities to fund questionable acquisitions. Weak oversight aided by regulatory arbitrage -- playing watchdogs off against each other -- allowed these groups to flourish.

“For these financial holding companies, it is difficult to understand the (complex) structure of their assets and liabilities, so when risks manifest themselves, there could be a significant domino effect,”a senior regulatory source had previously told Caixin. Anbang Insurance Group Co. Ltd., whose former chairman is currently appealing an 18-year jail sentence, debt-ridden HNA Group Co. Ltd., and the mysterious Tomorrow Holdings, whose chairman is reportedly assisting authorities with their investigations, are all examples of such conglomerates.

The new regulations will build on a pilot scheme run by the PBOC that has been running since last December. Proper governance structures, capital adequacy ratios, and leverage limits are all likely to be part of the new rules, which will be enforced by the PBOC alone.

Until now, lack of adequate enforcement stymied efforts to control financial conglomerates. Existing rules stipulate that a bank shareholder may have either non-controlling stakes in up to two banks or a controlling stake in one. Shareholders in insurance and securities companies are not allowed to control more than one financial firm. Yet companies like Tomorrow, Anbang, and HNA were all still able to make multiple investments and acquisitions in the financial industry.

There's good reason to think enforcement will stricter under the PBOC. First, having just one agency in charge is an improvement over the 2002 attempt at regulating these conglomerates, which floundered over questions of divided supervision — although stronger legal backing, analogous to aspects of the 2010 Dodd-Frank act in the U.S., is also likely to be necessary to support the PBOC's enhanced role. Second, China's recently released blueprint for tackling risks in its sprawling financial system through 2020 puts strong emphasis on supervision of financial conglomerates. Third, the five financial companies in the PBOC pilot program are all controlled by non-financial companies: precisely the kind of companies previous attempts at supervision overlooked. And finally, under fierce regulatory pressure, several non-financial firms have already been moving to divest themselves of their stakes in financial services.

Weekly Roundup

Macro & Finance

China’s securities regulator issued highly anticipated guidelines for the China depositary receipts (CDRs) pilot program, paving the way for overseas-listed Chinese tech giants to trade shares on the domestic market. Six large Chinese money managers are rushing to set up equity funds that will raise as much as 300 billion yuan ($46.8 billion) to invest in CDR issues.

If the United States imposes tariffs and other trade barriers on Chinese products, it would jeopardize any progress the two sides have made to date to ease their trade tensions, Beijing said in a short statement on Sunday.

The Caixin China General Services Business Activity Index (Services PMI), which tracks services sector activity, stood at 52.9 in May, unchanged from April.

The People’s Bank of China (PBOC) is broadening the types of collateral it accepts for its medium-term liquidity management operations, aiming in particular to increase support for smaller firms, the agriculture sector and the green economy.

China will require banks that lend to the same company to share information about the borrower and jointly set a limit for the total credit the firm may receive, the latest move to rein in excessive financing as the government’s deleveraging campaign rages on.

The People’s Bank of China will work closely with law enforcement departments to crack down on irregularities in internet finance, underground banks and illegal foreign exchange trading, the central bank said Monday in a statement.

Companies

Chinese telecom company ZTE Corp. has reached a deal with the U.S. to pay a $1 billion fine to end crippling American sanctions against it, U.S. Commerce Secretary Wilbur Ross said Thursday morning.

The People’s Insurance Company (Group) of China (PICC), China’s oldest insurance company, gained final approval on Tuesday for a Chinese mainland listing after years of applications, a deal valued at about $2.4 billion.

Fan Bingbing, China's Angelina Jolie, has landed in hot water with China’s tax collectors over allegations she used business contracts to evade taxes. Shares in Chinese film studios bounced back slightly on Tuesday after plummeting a day earlier on the news that authorities were probing the industry for tax evasion.

The Chinese clinical-stage biopharmaceutical company CStone Pharmaceuticals Co. Ltd. announced that it paid $386 million to secure the exclusive rights to market three cancer drugs made by America’s Blueprint Medicines Corp. in the Greater China region.

Calendar

June 14: The National Bureau of Statistics releases industrial production, fixed asset investment, retail sales as well as real estate development and sales data for May

The People's Bank of China may release money supply and total social financing data for May next week

The Ministry of Commerce may release foreign direct investment (FDI) data for May next week

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