China vows tighter rules to clip wings of big finance firms
Central bank chief says government mulling fresh regulations to rein in excessive risk taking and speculation at financial conglomerates and holding companies
The Chinese government is working on new rules to control the country’s big financial firms and holding companies to curb the massive risks generated by the conglomerates’ speculative investing, China’s central bank officials and senior political advisers said.
Zhou Xiaochuan, China’s veteran central bank governor, said on Friday that China’s financial holding groups covering the banking, securities, trust investment and insurance sectors were threatening financial stability through their risk taking and Beijing was in the early stages of making “some basic rules” to deal with the problem.
The rules will require more transparency from financial conglomerates, Zhou said at a press conference on the sidelines of the National People’s Congress in Beijing.
Pan Gongsheng, one of Zhou’s deputies, said at the same event that China’s regulation of such groups was currently “blank” and the authorities were finding ways to close loopholes.
A former senior official at China’s central bank, Hu Xiaolian, said at the press conference that regulators were taking a variety of approaches to defuse risks at companies with high levels of debt.
This confirmed a report by the South China Morning Post on Thursday saying that Beijing was employing various strategies to tackle the issue at Tomorrow Holdings, Anbang Insurance, HNA, Dalian Wanda Group and CEFC Holdings.
Hu, who served as deputy governor at the People’s Bank of China from 2005 to 2015, said China was targeting individual enterprises to prevent “lone wolves” turning into “packs of wolves”, as firms create new units or shift focus to pursue more speculative ventures.
“Some insurance companies became asset investment companies. Some turned real business into finance,” said Hu, who is now chairman of the Export-Import Bank of China. “Once the risks from these companies are exposed, it delivers ripple effects across the market, financial institutes and industries.”
She said the big conglomerates often had high leverage ratios through unrestrained borrowing and poor corporate governance, but were good at taking advantage of regulatory loopholes. Their weak balance sheets made it unlikely they would survive shifts in the market or in policy and regulation, she said.
“The authorities have taken different approaches to deal with these risks, not one cut all ways,” Hu said.
“For those with high leverage, [we] ask them to reduce debt loads; for those operating outside their main business, guide them to return to their main business. If there are any illegal activities, the judiciary department will be involved. And in some extreme cases, regulators could take over the company,” Hu said.
The Post reported on Thursday that Tomorrow Holdings, controlled by the Chinese tycoon Xiao Jianhua, is instructed to divest another 150 billion yuan (US$23.7 billion) this year to repay bank loans and this approach, named by Beijing as “self rescue”, has also been used to lower debt risks at Wanda and HNA.
A tougher approach was shown last month when China’s Insurance Regulatory Commission took over the insurance and investment conglomerate Anbang Group and removed its chairman Wu Xiaohui, who is now facing criminal charges.
“Wu is suspected of economic crimes … illegal operations at Anbang may have seriously endangered the company’s solvency abilities, prompting the government to take control of the insurer,” the commission said in a statement.
Anbang, with its flagship company Anbang Life Insurance, has been at the forefront of developing and promoting to retail investors short-term, high-yield insurance policies known as universal life insurance, which are similar to wealth management products. These have, in turn, fuelled a spending spree by the company in China and abroad in recent years.
Anbang emerged as China’s most eye-catching buyer of overseas assets after the US$1.95 billion acquisition of the Waldorf-Astoria hotel in New York in 2014.
But its overseas shopping spree was halted in June last year after Chinese financial regulators introduced a plethora of rules to contain financial risks and started investigating Wu and the company’s deals and funding.
“Our regulators are doing so called “de-mining” to protect the market against ‘black swans’ and ‘grey rhinos,’” said Hu. Grey rhinos is the financial term for big and neglected dangers, while black swans are unpredictable risks.
Hu said, however, that regulations need to be more efficient and targeted, with the ultimate goal of strengthening corporate governance.
“Giving approvals is not equal to regulation. We should let financial institutes contribute to the real economy, knowing where the bottom line and where the boundaries are,” said Hu.
This year’s Chinese government work report identifies the prevention of systemic risks as one of three critical battles China needs to win in the next few years, with the priority on financial risks.
A financial stability and development committee was established last year under the State Council to oversee the work of the country’s financial regulators.