Caixin
Sep 14, 2020 07:56 PM
FINANCE

China Creates New Rules for Financial Holding Companies, Ant Group Now Included

The Beijing headquarters of the People's Bank of China.
The Beijing headquarters of the People's Bank of China.

Are you a Chinese company outside the finance industry that owns two or more financial institutions?

Well, the central government just decided that you are going to have to get registered as a financial holding company to comply with a slate of new rules.

The new rules (link in Chinese), released Sunday by the State Council — China’s cabinet — and the People’s Bank of China (PBOC), aim to bring nonfinancial companies, including Ant Group Co. Ltd., into the financial fold.

At a Monday briefing about the new rules, PBOC Deputy Governor Pan Gongsheng noted that “some nonfinancial companies have expanded blindly, causing risks to mount.”

The rules — set to take effect on Nov. 1 — require such companies to have at least 5 billion yuan ($731 million) in registered capital to qualify to be licensed as financial holding companies. Nonfinancial companies that control commercial banks with assets in excess of 500 billion yuan must be registered as financial holding firms, according to the rules.

Pan said that the rules create a basic policy framework to regulate financial holding companies, and more detailed and specific rules will be needed to oversee things like consolidated financial statements, asset management and connected transactions.

Over the years, a number of companies have taken control of financial companies, creating a group of corporations that have the characteristics of financial holding companies, Pan said. They include companies like Citic Group Corp., China Everbright Group Ltd. and Ant Group. However, China has yet to include financial holding companies as a whole in its regulation, creating a regulatory gray area that has given rise to troubled firms like Tomorrow Holding Co. Ltd. and Anbang Insurance Group Co. Ltd.

The PBOC said in a Sunday statement (link in Chinese) that it would be helpful to integrate financial resources and enhance operational stability and competitiveness by having financial holding companies with clear ownership structures and well-established risk isolation mechanisms act as controlling shareholders. “In the long run, the rules will help all kinds of institutions to compete in an orderly manner … and prevent systematic financial risks,” the central bank said.

Fintech giants such as Ant Group, which is set to list in Hong Kong and Shanghai, and Tencent Holdings Ltd. are subject to be regulated under the new rules, industry insiders said. Ant Group holds a wide variety of financial licenses, covering areas such as banking, funds, insurance, third-party payment and securities.

 Read more 
Cover Story: How Ant Grew Into an Elephant-Sized Behemoth

Financial holding companies generally face complex risks, including systematic risks, high leverage ratios and risks from connected transactions. As such, regulators often focus their supervision on consolidated financial statements and capital.

The rules also touch on how information gets shared among companies under the same financial holding company. The rules stipulate that these companies should not infringe on the rights of clients, must obtain their clients’ consent and clarify risk-bearing entities when they share client information and technology systems.

Yuan Kang, an associate professor at the law school of Wuhan University, has said that internet finance companies should set up a data isolation mechanism between their various businesses, otherwise they risk harming client interests. Yuan added that financial holding companies should also fully explain how they share data internally and disclose the relationship among their various entities to avoid inappropriate connected transactions.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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