China consults on rules for financial holding companies: sources

BEIJING (Reuters) – China’s central bank has started seeking internal feedback on draft rules regulating financial holding companies, targeting big-name conglomerates that hold multiple financial licenses, said two sources with direct knowledge of the matter.

Financial holding conglomerates subject to the rules will not only face new requirements on capital adequacy, but may also be forced to restructure and put part of their non-financial assets in a separate entity, the sources told Reuters on Monday, declining to be named due to the sensitivity of the matter.

To separate risk, the draft rules seek the creation of “firewall” between different units in one financial holding company, they said.

Presently China does not have any specific rules regulating financial holding companies. The new regulations being drafted by the People’s Bank of China, will be a major step toward curbing systemic financial risks.

They would also significantly increase compliance costs for financial holding conglomerates, some of which are strongly pushing back against the move during the consultation period, which is not open to the public, the sources said.

Chinese policymakers have previously warned about the opaque crossholding structures and “barbaric expansion” of financial holding companies, saying the control of multiple financial institutions by conglomerates and their ability to conduct business across different sectors could pose wider, systemic risks.

The PBOC, in its 2018 financial stability report released in November, named a few financial holding conglomerates on its watch, including HNA Group[HNAIRC.UL], Fosun International (HK:), China Evergrande Group (HK:), Ant Financial Services Group[ANTFIN.UL] , Tencent Holdings (HK:) and JD.com (O:).

In the draft rules would cap financial holding conglomerates’ non-financial assets at 20 percent of their total assets in a bid to limit their ability to channel resources from financial units to non-financial business divisions, the sources said.

But the restrictions may eventually be loosened or completely removed following the feedback gathered by the PBOC, the sources said.

The central bank is seeking to finalize and implement the rules early next year, the sources added.

The PBOC and the China Banking and Insurance Regulatory Commission did not immediately respond to requests for comment.

The PBOC has put five financial holding companies, including fintech giant Ant Financial, retail conglomerate Suning.com (SZ:) and state-owned China Merchants Group[CNMGP.UL] in a pilot scheme to test its ability to manage risks associated with such firms.

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