The Chinese banking regulator has issued a new directive targeting the misuse of non-financial subsidiaries by companies in the domestic trust sector.
The China Banking and Insurance Regulatory Commission (CBIRC) has “strictly banned trust companies from establishing new first-tier non-financial subsidiaries” following the issue of the “CBIRC Notice on Clearing up and Standardising the Non-financial Subsidiaries of Trust Companies” (中国银保监会办公厅关于清理规范信托公司非金融子公司业务的通知) on 30 July.
According to CBIRC the move is for the purpose of “correcting market malfeasance involving the non-financial subsidiaries of trust companies, preventing and resolving financial risk, driving trust companies to return to their original operations and changing their development model.”
A CBIRC official said that these risks include regulatory arbitrage and channel operations to conceal risk, as well as illicit affiliate transactions such as the transfer of funds and assets between parent companies and subsidiaries.
CBIRC said that in recent years some trust companies in China have used their own assets to directly or indirectly establish domestic first-tier non-financial subsidiaries to invest in privately offered shares.
“This type of company plays a definite positive role in servicing the real economy and strengthening strategic coordination with parent companies, but some companies have seen the proliferation of market malfeasance and the accumulation of risk during the process of undertaking operations, due to weak operations management and compliance awareness.”