Finance Archives - MacroPolo Finance Archives - MacroPolo

Finance

Financial sector reforms are ultimately about improving capital allocation efficiency. Beijing plans to achieve this through more competition, deregulation, and capital account liberalization. But the risk associated with throwing open capital markets has led to retreat on some of these reforms.

Still, China has liberalized the deposit rate to make its banking sector more competitive. This allows banks to compete for funds by offering higher interest rates. Beijing has also been encouraging both foreign capital inflows and incentives to foster

Chinese investments abroad. This requires giving foreign investors more freedom to invest in the China market, while also reducing administrative barriers for Chinese to invest abroad.

Finally, although reforming the exchange rate regime to one that is more market-based was Beijing’s intent, its actions have backfired and led to some reversal of what had once been a liberalizing course. Recent experience with capital outflows tied to currency volatility has made the government more cautious about Chinese investing abroad.

DateTitleDescription
01/5/18Notice on Regulating Cooperation between Banks and Trust Companies; Measures on Regulating Commercial Bank Entrust LoansBeijing further tightens the screws on shadow banking
Notice on Regulating Cooperation between Banks and Trust Companies; Measures on Regulating Commercial Bank Entrust Loans

关于规范银信类业务的通知; 商业银行委托贷款管理办法

AGENCY

China Banking Regulatory Commission

TAKEAWAYS
  • The new policy will slow the expansion of a significant portion of shadow banking activities.
  • Users of affected shadow banking products are likely to have difficulty rolling over their debt, which may cause financial disruption.
  • Without eliminating the underlying demand for shadow banking borrowing, this policy alone will likely only be effective in the short term.
SUMMARY

As part of Beijing’s effort to contain financial risks, China’s banking regulator tightened regulation on two major shadow banking products: trust loans and entrust loans. At the end of 2017, outstanding trust loans and entrust loans stood at 22.5 trillion yuan ($3.5 trillion), accounting for more than half of shadow banking credit and about 27% of GDP.

Chinese banks have been using trust and entrust loans to evade regulations that forbid them to lend to certain sectors, such as local government financing vehicles and real estate developers. In addition, these products also help banks mask their credit exposure to appear safer than they actually are. It essentially works like this: the bank first lends the money to a third party, but later secretly instructs this third party to lend to the ultimate borrower through either a trust or entrust loan product. So on paper, it looks as if the third party made the lending decision and will shoulder all the risk in the event of a default. However, banks have already secretly backed this lending, making them ultimately responsible for any loss. This practice allows banks to maintain less capital reserve for the same amount of loan compared to when the lending is explicitly on the balance sheet.

The new policy intends to close these loopholes and strictly prohibit trust and entrust loan products. Under the regulation, entrusted loans can no longer be lent to restricted sectors, and banks are no longer allowed to provide loan guarantees. In the short run, these policies will significantly limit the ability of existing borrowers to tap into shadow financing. But this could also prove disruptive to the financial market because many debtors need to continue to borrow to be able to roll over their existing debt.

But tackling trust and entrust loans, however effective, is only closing one loophole: regulatory arbitrage. The more fundamental issue is how to discipline banks’ risk appetite and rein in credit hungry borrowers like local governments. Without addressing these deeper issues, banks are very likely to invent new loopholes over time to continue lending to high-risk borrowers. So while the new regulation represents a step in the right direction, it alone will not fully contain financial risks.

12/6/17Draft Regulation on Commercial Bank Liquidity Risks (for comment)Banking regulator announces new requirements to curb liquidity risk
Draft Regulation on Commercial Bank Liquidity Risks (for comment)

商业银行流动性风险管理办法 (征求意见稿)

AGENCY

China Banking Regulatory Commission

TAKEAWAYS
  • To reduce systemic financial risk, the use of inter-bank borrowing is discouraged.
  • Shadow banking activities will slow down as they are now subject to higher liquidity requirements.
SUMMARY

As Beijing continues the campaign to safeguard and de-risk China’s financial system, the China Banking Regulatory Commission (CBRC) revised rules on commercial banks’ liquidity risk management, which took effect in March 2018. In addition to updating the liquidity regulation so it complies with Basel III, a set of internationally accepted banking regulation measures, of which China is a member, the new rules also tackle key vulnerabilities.

One of the measures CBRC added is part of the Basel III liquidity regulation measure called the “net stable funding ratio.” This isn’t likely to meaningfully affect bank operations, however, since China’s central bank has already been using this measure to evaluate banks. Another new measure, the “liquidity matching ratio,” could have a bigger impact, as it is designed to tackle China’s banking sector vulnerabilities. Specifically, the rule significantly tightens the screws on inter-bank borrowing and investment activities.

Inter-bank borrowing effectively increases the connections among banks. With large inter-bank exposure, risk at one bank can easily spill over to other banks. Therefore, CBRC is trying to discourage banks from using inter-bank borrowing as a source of funding, preferring banks to continue to rely on deposits from households and corporates for lending. For example, inter-bank borrowing with maturity less than three months is not allowed to be counted as a source of available cash, while retail deposits with the same maturity is only discounted by 30%.

In the meantime, compared to loans, banks are required to hold more cash to back their investments, which mostly refer to shadow banking instruments such as trust products. Previously, there was no such requirement. For assets with maturities of less than 12 months, banks need half the amount of the value of the loan in cash to back the investment. Since cash-like assets usually have lower yield, this measure has made shadow banking activities more costly and less profitable for banks.

11/17/17Guiding Opinion on Regulating Asset Management BusinessesBeijing to further tighten regulatory oversight of its shadow banking sector
Guiding Opinion on Regulating Asset Management Businesses

关于规范金融机构资产管理业务的指导意见

AGENCY

People’s Bank of China

TAKEAWAYS
  • Existing regulatory loopholes will be closed to address rising financial vulnerabilities.
  • The Chinese central bank has gained additional authority over financial regulation.
  • Certain loopholes are still left untouched, and uncertainties remain on implementation.
SUMMARY

According to the People’s Bank of China (PBOC), China’s shadow banking sector, which was non-existent a decade ago, has swelled to over 60 trillion yuan ($9 trillion) by the end of 2016. But regulators have been behind the curve on this problem for a variety of reasons, chief among them is the problem of regulatory capture. That is, the separate regulators that oversee the banking, securities, and insurance sectors tolerated lax regulation in order to support the respective industries they are supposed to supervise. Such an environment directly contributed to China’s rapid credit expansion in the past few years.

But Beijing has woken up to this problem. A new central financial stability commission has been created, which sits above the existing financial regulators, and it has made tackling shadow banking a top priority. The effort to consolidate financial regulatory oversight and enforcement is reflected in this latest policy, which marks the first shadow banking regulation jointly signed by all financial regulators. The main purpose of this policy is to reduce regulatory arbitrage. If properly implemented, this new policy should unify regulatory requirements and slow China’s credit expansion. (The Chinese policy document uses “asset management” rather than “shadow banking.” This is because the activities covered in this policy are usually carried out by the asset management divisions of financial firms, even though the nature of these activities are closer to shadow banking than typical asset management business.)

Moreover, the PBOC also modestly gained authority vis-a-vis the other financial regulators. As the entity in charge of managing the daily operations of the central finance commission, the Chinese central bank can now step in and punish any financial firm that violates the shadow banking regulation or has not done an adequate job in adhering to the new rules.

Even so, the enforcement of the shadow banking regulation will still need to be managed by each financial regulator to a large degree. And it remains unclear what the repercussions will be if the regulators continue to tolerate lax enforcement. In addition, since some financial activities and products, such as private equity funds and asset-backed securities, are not covered by this regulation, new loopholes may soon emerge to be exploited.

06/21/17Interim Measures on Managing the Mainland and Hong Kong Bond Market ConnectForeign investors can invest in China’s domestic bond market via Hong Kong
Interim Measures on Managing the Mainland and Hong Kong Bond Market Connect

内地与香港债券市场互联互通合作管理暂行办法

AGENCY

People’s Bank of China

TAKEAWAYS
  • The new bond connect between the mainland and Hong Kong will make it easier to invest in China’s domestic bond market.
  • This program, if successful over time, will make it more likely for China’s domestic bond market to be included in major global bond indices.
  • By opening up the domestic bond market, Beijing hopes to attract more foreign capital to help stabilize the exchange rate.
SUMMARY

Establishing this connect marks an important step in a series of actions that China has taken to open the domestic bond market—now the third-largest in the world—to foreign investors. The challenge will be whether this program can actually attract foreign capital into the domestic bond market—a main motivation behind the reform—which currently stands at less than 2%. If successful, however, this program could pave the way for China’s bond market to enter global bond indices.

The bond connect has several advantages over existing programs like QFII. It doesn’t require foreign investors to apply for an investment quota nor does it impose restrictions on the amount of capital that can be withdrawn. Foreign investors can simply place orders through their Hong Kong trading account, with the Hong Kong Monetary Authority acting as their overseas custodian. There is also no aggregate quota for the amount of foreign capital inflows through this connect.

Although only bond instruments can be traded for now, the People’s Bank of China plans to extend the connect to cover more financial products, such as forward contracts and interest rate swaps.

09/8/16Administrative Measures for Significant Asset Restructuring of Listed CompaniesBeijing cracks down on “back-door listing” behavior
Administrative Measures for Significant Asset Restructuring of Listed Companies

上市公司重大资产重组管理办法(2016)

AGENCY

China Securities Regulatory Commission

TAKEAWAYS
  • Firms that choose to list publicly through the back-door listing approach are now effectively subject to the same requirements for formal initial public offerings (IPOs).
  • The new measure fixes a loophole that leads to over-valuation of poorly managed public firms.
SUMMARY

Back-door listing, or reverse takeover, refers to the strategy used by private companies to go public by circumventing the IPO process and acquiring already listed companies instead. This problem largely stems from the current cumbersome, tightly controlled, and slow IPO process, which has led impatient firms to buy out poor performing listed firms that are on the verge of delisting.

As the number of private companies that intend to go public far outstrip the number of listed firms willing to be acquired, listed firms that take the back-door approach are usually valued substantially higher than their fair market value. This means that even poorly performing firms could be acquired at a high price, and such firms are usually traded at a price that has little relationship to their fundamentals.

These poor performing listed firms are usually considered “shell companies,” meaning their most valuable asset is their status as a publicly listed firm. This can lead to significant mispricing of assets and can distort the functioning of the stock market and capital allocation. Since 2013, dozens of private companies have attempted to go public through this back-door listing approach, further reinforcing investors’ expectation that money-losing public firms will nonetheless be acquired at high prices.

As such, China’s securities regulator began tightening the screws on back-door listing, though has stopped short of banning it. The new rules stipulate that the shell company’s original controllers are prohibited from selling their shares within three years of the reverse takeover. Moreover, the shell company is prohibited from issuing new shares to finance the reverse takeover transaction, which is aimed at preventing speculators from capitalizing on the over-valuation.

In addition, the new measures contain better criteria for identifying back-door listing. If the acquiring company has taken over the shell company and transferred more assets than the shell company originally possessed, this is considered a back-door listing (value of the net asset, revenue, net profits, and equity transferred are all factors taken into account). Companies that do not qualify for going public and those already listed on the Growth Enterprise Market are not allowed to engage in back-door listing at all.

08/31/16Guiding Opinion on Establishing a Green Finance SystemChina launches first green finance framework and initiative
Guiding Opinion on Establishing a Green Finance System

关于构建绿色金融体系的指导意见

AGENCIES

People's Bank of China; Ministry of Finance; National Development and Reform Commission; Ministry of Environmental Protection; China Banking Regulatory Commission; China Securities Regulatory Commission; and China Insurance Regulatory Commission

TAKEAWAYS
  • Financing and taxation tools are deployed to both stimulate green development and punish polluters.
  • Businesses related to sustainable development will enjoy substantial boost and support.
  • Information disclosure, particularly related to the amount of financing actually going towards green projects, remains a real concern.
SUMMARY

As part of Beijing’s earnest efforts to push for cleaner and more efficient economic development, green finance is primarily aimed at lowering financing cost for environmental projects and technologies through various policy incentives, including interest subsidies and preferential taxes. The underlying intent is to broadly shape the behavior of the domestic financial system so that it allocates capital toward energy efficient and environmentally sound projects.

Under the green finance framework, borrowers are subject to more stringent information disclosure requirements in terms of the environment, which are listed in detail in this policy document. Firms that champion sustainability in both theory and practice will also enjoy preferential treatment in the initial public offering approval process. Although nascent, the framework also discusses developing tools and economy-wide incentives such as the establishment of an emissions trading system and pollution permits trading.

08/30/16Notice on the Management of Domestic Securities Investment by RMB Qualified Foreign Institutional InvestorsSecurities market opens up further to attract foreign investors
Notice on the Management of Domestic Securities Investment by RMB Qualified Foreign Institutional Investors

中国人民银行,国家外汇管理局关于人民币合格境外机构投资者境内证券投资管理有关问题的通知

AGENCIES

People's Bank of China; State Administration of Foreign Exchange

TAKEAWAYS
  • Foreign institutional investors can obtain investment quotas more easily.
  • Allowing more foreign investment in the securities market can help to drive more capital inflows and reduce borrowing costs.
SUMMARY

Authorities loosened controls on foreign investment in China’s domestic securities market. Previously, foreign investors needed to first apply for a quota to begin investing in China. Under the new policy, not only has the $5 billion investment ceiling been scrapped, foreign investors will now automatically obtain a quota based on the size of its assets under management.

In addition, the waiting period for a Qualified Foreign Institutional Investor to repatriate its funds is shortened to three months, from the previous one year. For overseas RMB investors, the restriction is further loosened.

08/16/16Joint Statement on the Shenzhen-Hong Kong Stock ConnectForeign investors can invest in Shenzhen stocks via Hong Kong
Joint Statement on the Shenzhen-Hong Kong Stock Connect

中国证监会与香港证监会共同签署深港通《联合公告》

AGENCIES

China Securities Regulatory Commission; Hong Kong Securities and Futures Commission

TAKEAWAYS
  • Having launched the Shanghai-Hong Kong stock connect, Beijing greenlights the much anticipated Shenzhen-Hong Kong stock connect.
  • The aggregate quota restriction has been lifted for Hong Kong and mainland investors as part of this new connect.
SUMMARY

With the establishment of this connect, foreign investors can now invest in more than 800 stocks on the Shenzhen exchange, including in the ChiNext index, which is composed of high-tech companies in emerging sectors. The stocks of any company with a market capitalization of at least 6 billion yuan (~$1 billion) can be purchased through this connect.

A daily net purchase limit will still be in place, with a quota of 13 billion yuan ($1.9 billion) for Hong Kong investors and 10.5 billion yuan ($1.6 billion) for mainland investors. However, there will no longer be an aggregate quota on the total amount of stocks investors can own (the existing aggregate quota for the Shanghai-Hong Kong connect has also been scrapped).

04/29/16Notice on National Implementation of the Macro-Prudential Management Policy for Cross-Border FinancingCentral bank eases control on cross-border financing for domestic companies
Notice on National Implementation of the Macro-Prudential Management Policy for Cross-Border Financing

中国人民银行关于在全国范围内实施全口径跨境融资宏观审慎管理的通知

AGENCY

People’s Bank of China

TAKEAWAYS
  • Chinese firms can now have an easier time borrowing from abroad.
  • The central bank is increasingly using the Macro-Prudential Assessment System (MPA) to manage the Chinese economy.
SUMMARY

Chinese companies can issue foreign debt without government approval, thereby facilitating cross-border financing and easing controls. Cross-border financing is now monitored by the MPA, which calculates and sets foreign debt limits for companies based on a risk-weighted methodology.

For instance, each individual entity’s foreign debt limit will be determined by its equity and macro parameters set by the central bank. By allowing firms to borrow more (less) during economic booms (slowdowns), the Chinese central bank hopes this change will enable it to better smooth economic fluctuation.

04/12/16Implementation Plan for Addressing Risks in Internet FinanceGovernment taps the brake on the expansion of Internet finance
Implementation Plan for Addressing Risks in Internet Finance

互联网金融风险专项整治工作实施方案

AGENCY

State Council

TAKEAWAYS
  • Facing a rapid build-up of risk in the Internet finance sector, Beijing begins to put a lid on its scope and to prohibit speculative investment on such platforms.
  • Third-party payment providers are now subject to the same capital reserve requirement as their rival banks.
SUMMARY

Although the government actively promoted the development of the fin-tech industry, its tremendous growth raised legitimate concerns about the largely unregulated sector. As of the end of November 2015, for example, more than 30% of the total P2P lending platforms didn’t meet regulatory standards, according to China’s banking regulator. In a bid to tackle the rapid build-up of financial vulnerabilities in the fast-growing Internet finance industry, the new regulation sought to tighten controls on P2P lending, crowdfunding, and third-party payments. All such businesses have proliferated as Internet financing raced ahead of regulators.

When it comes to P2P platforms, the rules stipulate that they can operate only as intermediaries and are prohibited from pooling investment, issuing debt, or providing guarantees to lenders. P2P and crowdfunding platforms are also banned from providing services such as wealth management.

In addition, real estate firms need permission before they are allowed to get financing via P2P and crowdfunding sources. Finally, third-party payment providers must deposit clients’ funds to designated Chinese banks, which do not pay interest on those deposits, and are prohibited from using clients’ deposits to re-lend.

02/24/16Announcement of the People’s Bank of China [2016] No.3Inter-bank bond market opens up to foreign investors
Announcement of the People’s Bank of China [2016] No.3

中国人民银行公告〔2016〕第3号

AGENCY

People’s Bank of China

TAKEAWAYS
  • Liberalizing the bond market will increase the supply of capital, hence reducing the overall cost of borrowing.
  • Opening up this market also improves the chance of China entering global bond indices.
  • Pressure from continuing capital outflows likely forced authorities to respond by further loosening the financial system to attract more capital inflow.
SUMMARY

Foreign institutional investors can now access the Chinese bond market without having to register and get pre-approval for their investment plans. The Chinese government hopes that opening up such a market can attract long-term investors such as pension funds.

This move was in part motivated by the Chinese government’s desire to stabilize capital movements, as more inbound capital can help offset significant capital outflows in recent periods.

12/29/15Framework for the Macro Prudential Assessment SystemCentral bank adopts new system to monitor risks across financial system
Framework for the Macro Prudential Assessment System

宏观审慎政策框架

AGENCY

People’s Bank of China

TAKEAWAYS
  • The People’s Bank of China (PBOC) hopes to reduce loopholes and curb regulatory arbitrage opportunities by using the Macro Prudential Assessment (MPA) framework to broaden its oversight.
  • PBOC will tightly monitor deposit and lending rates to avoid large fluctuations as the interest rate is being liberalized.
SUMMARY
10/23/15Decision to Lower Deposit Interest Rate and Reserve Requirement RatioDeposit rate ceiling lifted, effectively liberalizing interest rates
Decision to Lower Deposit Interest Rate and Reserve Requirement Ratio

中国人民银行决定下调存贷款基准利率并降低存款准备金率

AGENCY

People’s Bank of China

TAKEAWAYS
  • By lifting the deposit rate ceiling, China has liberalized its interest rate regime.
  • This move increases competition in the banking sector by eliminating guaranteed net interest margin.
  • Smaller banks can compete for deposits by offering higher deposit rates.
SUMMARY

After first allowing banks to pay deposit interest rates of up to 1.1 times the benchmark rate in June 2012, the central bank quietly lifted its control on the deposit rate in an announcement buried inside a short note on cutting interest rates and the reserve requirement ratio. After a gradual process of more than three years, this move effectively liberalized China’s interest rate regime.

However, lifting the ceiling on the deposit rate is less consequential than the previous liberalization of the lending rate. Since a deposit insurance system was already in place, deposits in any bank should already be risk-free, so the variance of deposit rates across banks will be small. In addition, the central bank will continue to announce a benchmark deposit rate and will occasionally intervene when a bank offers a rate that significantly deviates from the benchmark.

One important consequence of the move is that the central bank now has to change the way it conducts monetary policy via introducing new benchmark interest rates.

08/11/15Announcement on Improving the Determination of RMB Central Parity against the US DollarCreating a more market-driven exchange rate regime
Announcement on Improving the Determination of RMB Central Parity against the US Dollar

中国人民银行关于完善人民币兑美元汇率中间价报价的声明

AGENCY

People’s Bank of China

TAKEAWAYS
  • The market will be a bigger factor in determining the RMB-USD exchange rate.
  • The reform is meant to stabilize the RMB exchange rate against a basket of currencies, including the Euro and the Japanese Yen.
SUMMARY

The Chinese central bank adjusted the way it calculates the daily RMB-USD reference rate to make it more market-determined. The key change is that the daily RMB-USD reference rate will be set by taking into consideration the movement of other major currencies, as well as the previous day’s RMB-USD closing rate. By intervening less in the currency market, Beijing had hoped its effort would lead to the inclusion of the RMB in the International Monetary Fund’s SDR basket. That goal was accomplished in 2016.

This change in the exchange rate regime, while well-intentioned, initially set off considerable market volatility, as many market participants interpreted the move as a bid to stimulate growth through depreciation and braced for regional competitive devaluation. Capital outflows from China subsequently accelerated dramatically, prompting the central bank, ironically, to step up its intervention in the currency market.

07/18/15Guiding Opinion on Promoting the Healthy Development of Internet FinanceBeijing hopes to accelerate fin-tech development
Guiding Opinion on Promoting the Healthy Development of Internet Finance

关于促进互联网金融健康发展的指导意见

AGENCIES

People’s Bank of China; Ministry of Industry and Information Technology; Ministry of Public Security; Ministry of Finance

TAKEAWAYS
  • The government believes Internet finance can be an answer to the problem of insufficient financing for small and medium companies.
  • At the same time, the new rules are meant to supervise Internet financing to mitigate risk and prevent fraud.
SUMMARY

A key purpose of the new rules is to clarify institutional responsibilities among regulators for the nascent Internet finance sector. The policy also includes incentives, such as tax breaks and the expansion of fundraising channels, to encourage innovation in the fin-tech sector.

The division of responsibility is as follows: 1) The central bank (PBOC) will supervise online payments; 2) the banking regulator (CBRC) will oversee P2P lending; 3) the securities regulator (CSRC) will be in charge of crowdfunding and online fund sales; 4) the insurance regulator (CIRC) will cover online insurance sales. Moreover, to prevent fraud, Internet financing platforms are required to entrust the capital raised from lenders to qualified commercial banks.

06/22/15Guiding Opinion on Promoting the Development of Private BanksPrivate banks are greeted with a more open door
Guiding Opinion on Promoting the Development of Private Banks

关于促进民营银行发展的指导意见

AGENCY

China Banking Regulatory Commission

TAKEAWAYS
  • The central government opened its protected banking sector to private capital.
  • Introducing private capital should bring more competition among banks, which, theoretically, should lead to better services and lower financing cost.
  • One issue is that banking is already a crowded space so it is unclear how interested private capital will be in entering the sector.
SUMMARY

By opening up the banking industry to private capital, Beijing hopes it will allow for equal treatment of state and private capital, as well as reducing financing cost through increasing competition.

In addition, private banks are expected to fill the financing gap left by large state banks, particularly in terms of lending for small and medium-size enterprises.

03/20/15Official Reply of the State Council on Approving the Plan for Deepening the Reform of the Three Policy BanksPolicy banks receive capital injection with an eye to facilitating reforms
Official Reply of the State Council on Approving the Plan for Deepening the Reform of the Three Policy Banks

国务院关于同意国家开发银行/中国进出口银行/中国农业发展银行深化改革方案的批复

AGENCIES

State Council; People’s Bank of China

TAKEAWAYS
  • Policy banks now have more dry powder to provide low-cost financing for state projects.
  • These state banks will play a bigger role in China’s financial system.
  • Beijing intends for these banks to focus more exclusively on their original mandate of lending for national policy objectives and gradually exit commercial lending.
SUMMARY

In three separate announcements, the Chinese government decided to inject capital into the “big three” policy banks—China Development Bank (CDB), the Export-Import Bank of China Ex-Im, and the Agricultural Development Bank of China (ADB). The intent was twofold: to ensure the normal functions of these lending institutions to serve economic goals and an attempt to improve these institutions’ corporate governance, including controlling risk. However, the move in reality was heavy on providing capital and relatively light on changing corporate governance.

In fact, the policy banks badly needed additional liquidity, after they had rapidly expanded lending as a result of implementing Beijing’s economic stimulus in 2009. To ensure these banks had adequate capital and could continue providing credit, the central bank injected $48 billion and $45 billion to CDB and the Ex-Im Bank, respectively. In addition, the Ministry of Finance injected $24 billion into ADB.

Moreover, the liabilities of the three banks are now officially backed by the Chinese central bank, which lowers their borrowing cost. As a result, policy banks now have more dry powder to support Beijing’s ambitious economic initiatives.

02/17/15Deposit Insurance Act (State Council No. 660)China launches its first deposit insurance system
Deposit Insurance Act (State Council No. 660)

存款保险条例(国务院令第660号)

AGENCY

State Council

TAKEAWAYS
  • Setting up a deposit insurance system is intended to create a more level playing field for smaller Chinese banks.
  • The move paves the way for deposit interest rate liberalization.
SUMMARY

The creation of a deposit insurance system is meant to protect savers in the event of bank failures, and in China’s case, it is a precondition for deposit rate liberalization. Without a deposit insurance program, Chinese savers generally prefer to deposit their savings in the largest banks, which inhibits the growth of smaller banks that do not get their share of deposits. With deposit insurance in place, it provides assurance to depositors about the soundness of a particular bank and is meant to prevent bank runs in the event of a crisis.

The rules stipulate that up to ¥500,000 ($80,000) of deposits will be insured by the premium paid by banks, which is meant to fully protect 99.63% of depositors, according to the central bank. The insurance premium is determined based on the riskiness of banks’ balance sheet, thus effectively punishing banks for taking on too much risk (if the insurance premium is set too low, it can actually encourage risk taking).

01/15/15Administrative Measures for the Issuance and Trading of Corporate BondsCorporate bond restrictions loosened to reduce borrowing cost
Administrative Measures for the Issuance and Trading of Corporate Bonds

公司债券发行与交易管理办法

AGENCY

China Securities Regulatory Commission

TAKEAWAYS
  • More Chinese companies will be able to issue bonds for financing rather than relying exclusively on bank loans.
  • This move, in principle, should diversify firms’ financing channels and grow the corporate bond market, which is currently less active.
SUMMARY

China‘s bond market consists of two sub-categories: 1) the corporate bond market in which bonds are traded through stock exchanges; 2) the interbank bond market in which bonds are traded among financial institutions. The corporate bond market, which is regulated by the China Securities Regulatory Commission, is much smaller than the central bank-regulated interbank bond market. This latest policy, therefore, is aimed at expanding the corporate bond market by relaxing existing restrictions.

According to the policy, all companies, except local government financing vehicles, are now allowed to issue and trade corporate bonds, whereas previously only brokerage and listed companies were permitted to do so. That’s because corporate bonds were initially created with the intent of meeting the financing needs of only listed companies.

In terms of the criteria for bond issuance, the policy stipulates that companies that have not defaulted on their debt and have average annual profits of no less than 1.5 times their interest payment in the past three years, combined with a AAA rating, can issue bonds to the public. Private placement of corporate bonds will also be allowed, as long as the bonds are sold to “qualified investors,” such as institutional investors and individuals with more than ¥3 million ($500,000) in financial assets.

In addition, corporate bonds can be traded not only via the two stock exchanges in Shanghai and Shenzhen, but also over-the-counter through the National Equities Exchange and Quotations system.

11/27/14Decision on Amending Regulations on the Administration of Foreign-Invested Banks in China (State Council No. 657)Regulations on foreign banks’ operations are slightly loosened
Decision on Amending Regulations on the Administration of Foreign-Invested Banks in China (State Council No. 657)

国务院关于修改《中华人民共和国外资银行管理条例》的决定(国务院令第657号)

AGENCY

State Council

TAKEAWAYS
  • Foreign banks can now more easily enter and expand in the China market.
  • Many more restrictions on foreign banks nonetheless remain intact, likely mitigating the impact of this action.
SUMMARY

Administrative changes in the new rules are aimed at making it easier for foreign banks to do business in China. According to the amendments, foreign banks are no longer required to transfer a specific amount of funding to their new Chinese branch, nor are they required to establish a representative office in China before setting up branches.

In addition, to be eligible for conducting local currency business, foreign banks only need to have operated in China for one year instead of the previous three years. Moreover, they no longer need to prove their profitability for two consecutive years. While this is a modest improvement in the ease of doing business for foreign banks, the majority of restrictions on foreign bank operations have not been lifted.