China unveils rules to clamp down on financial risk
China Banking Regulatory Commission (CBRC) sets out eight tasks for 2018 to prevent financial risks, UOB Kay Hian reports. This includes strengthening corporate governance, regulating shareholders of banks, ensuring adherence to credit policy, controlling interbank and shadow banking activities, ensuring proper recognition, and disposal of NPLs. The CBRC aims to eradicate the chaos in the financial system by introducing these key tasks for 2018.
UOB Kay Hian says shareholders of banks must meet the required qualifications. Source of funds have to be verified. Shareholders must utilise their own capital and cannot rely on debts to invest in banks. Shareholders cannot have stakes in multiple banks. They cannot hold shares of banks on behalf of hidden beneficiaries. They cannot utilise a bank's funds for investments in shares or to acquire companies.
Banks must not finance investments in the stock market. Banks must not lend to zombie companies that have lost the ability to repay. Banks must not circumvent restrictions to lend to local governments. Banks must not lend to backward industries that emit pollution. Banks must ensure that funds earmarked for rebuilding shanty areas, eradicating poverty and revitalising villages are not misappropriated. Banks cannot provide on-balance sheet or off-balance sheet financing for purchase of land for real estate development. Banks cannot finance property projects that do not have the required permits or that are inadequately capitalised. They cannot provide mortgages for those who have not met requirements for downpayments. Banks must ensure that consumption loans and credit card overdraft are not utilised for purchase of properties.
Banks cannot exceed a specified proportion for interbank business. Banks cannot hide origin of funds or avoid requirements on capital and provisions through collaboration with brokerages, insurers, trust companies and funds. They cannot hide the ultimate destination of investment, circumvent restriction on lending and leverage with multiple layers of interbank transactions. Banks should not accept guarantees from or provide guarantees to third-party financial institutions.
Wealth management businesses must be segregated from banks' other businesses. Wealth management products ( WMP) have to be individually managed, valued and accounted. Banks cannot operate a pool of funds for WMPs. Banks cannot invest in WMP that it originated. Banks cannot provide guarantee or repurchase agreement for nonstandard credit assets (NSCA) and equities. WMPs must not exceed the limit on investments in NSCA. WMP cannot invest in beneficiary rights through trust products.
Banks must not change classification of loans to hide NPLS. They cannot disguise deterioration in asset quality through restructuring, bridging loans, evergreening and repurchase agreements. Banks cannot illegally transfer NPLs to asset management plans (AMP) to move NPLs offbalance sheet. Banks cannot dispose performing loans and SMLs together with NPLs or package NPLs with repurchase agreements.
Banks are only allowed to act as intermediaries and cannot provide guarantees for entrusted loans. Borrowers have to utilise funds raised through entrusted loans in accordance to China's industrial policy and cannot invest in bonds, stocks and derivatives. Lenders cannot fund entrusted loans by borrowing from banks.
The China Securities Regulatory Commission has banned collective AMPs - investment pools managed by brokerages for up to 200 retail investors - from investing in entrusted loans, trust loans and other NSCA. The Asset Management Association of China has stopped registration for new collective AMPs targeting credit assets.