Jul 27, 2019 05:51 AM

China Proposes Tighter Oversight of Financial Holding Companies

The People’s Bank of China proposed criteria and rules governing financial holding companies. Photo: VCG
The People’s Bank of China proposed criteria and rules governing financial holding companies. Photo: VCG

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

Certain nonfinancial companies 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 Friday. If adopted, the rules would require the companies to hold specified levels of capital, and regulators would scrutinize their ownership structures, related transactions, and sources of funding.

“Some financial holding companies, mainly those formed by investments of nonfinancial enterprises, have been expanding blindly into the financial industry,” China’s central bank 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 companies’ 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 more than 150 financial subsidiaries, a central bank official said in March last year. An additional 28 private businesses each had stakes in at least five financial units.

According to the proposed rules, criteria for financial holding companies also include banking assets exceeding 500 billion yuan ($73 billion), banking assets lower than specified but other financial assets of at least 100 billion yuan, or financial units, without a banking unit, having more than 100 billion yuan in assets.

The proposals also blacklist certain individuals from becoming major or controlling shareholders in financial holding companies, 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 Friday in a statement.

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