The People’s Bank of China (PBOC) says it will maintain strict regulation of financial holding companies, with an especial focus on entry standards, equity structures and corporate governance.
“In practice some financial holding companies have seen rampant growth, blindly expanding into the financial sector and using financial institutions as ‘ATM’s,'” said PBOC vice-governor Zhu Hexin (朱鹤新) on 24 November at a public event.
“Risk has continually accumulated and been exposed, yet the corresponding financial regulatory system remains imperfect.”
According to Zhu the focus for future regulation of financial holding companies in China will be “strictly controlling market entry, clarifying equity structures, improving corporate governance, strengthening regulation of the veracity of capital sources and regulation of capital adequacy ratios; regulation and control of affiliate transactions [and] improvement of ‘firewall’ systems.”
Financial holding companies first made their debut in China in 2002, when the State Council gave its approval to trials involving China Everbright Group, CITIC Group and Ping An Insurance.
China subsequently saw the emergence of a range of financial innovations as Beijing loosened regulation and licensing.
Certain large-scale financial institutions began to experiment with cross-sector operations, while non-financial companies made forays into the financial sector via takeovers and license purchases.
These developments have led to the emergence of two main types of financial holding companies in China. The first consists of financial institutions pursuing their main business in a particular sector while investing in or establishing financial institutions in other sectors, while the second consists of non-financial enterprises that invest in and control two or more types of financier institutions.
According to data from the China Finance 40 Forum there are currently almost sixty financial holding companies or similar platforms operating in China.
Financial holding companies hailing from the first category comprise the majority of such institutions, and are considered less risky given that they are license holders and subject to strict regulation.
Financial holding companies in the second category are considered a acute source of risk, however, given that some of them operate beyond the purview of strict regulation.
These institutions can be further broken down into five separate categories:
- Large-scale enterprise groups that invest in and control various financial institutions with the approval of the State Council, to support external opening and economic development. These include CITIC Group and China Everbright Group.
- Comprehensive financial asset investment and operating companies as approved for establishment by China’s local governments, that invest in brokerages, insurers and other financial institutions. These include Tianjin Taida Group (天津泰达集团) and Beijing Jinkong Group (北京金控集团).
- Asset operating companies that central state-owned enterprise group parent companies have invested in and established, that are responsible for the management of financial operations within the group. These include China Merchants Finance Holdings and Huaneng Capital Services Group (华能资本服务公司).
- Private enterprises and listed companies that have amassed control of multiple types of financial institutions via investment and takeovers, such as Fosun and Evergrande Group.
- Online tech giants that have reared comprehensive financial platforms, such as Ant Financial and Suning Yunshang (苏宁云商) .