Corporate group finance company
On April 29, 2024, the State Administration of Financial Supervision issued the Guiding Opinions on Promoting the Standardized and Healthy Development of Financial Companies of Enterprise Groups and Improving the Quality and Efficiency of Supervision (Jin Gui [2024] No. 7, hereinafter referred to as the "Guiding Opinions").
The "Guiding Opinions" continue the policy idea of strong supervision and strict supervision of financial companies by the regulatory authorities in recent years, and its main contents and impacts include: First, the examination of the qualifications of medium and low-rated financial companies to engage in business such as acceptance bills and interbank lending may be stricter. The "Guiding Opinions" requires: "prudently check the application for qualification of business with spillover risks, such as acceptance bills and interbank lending." "The second is to emphasize the attributes of financial services within the financial company to prevent it from becoming a platform for the precipitation and idling of funds of enterprise groups. The Guiding Opinions emphasize that financial companies "should not become profit-making centers for enterprise groups, and it is strictly forbidden to over-raise funds in the interbank market, so as to prevent alienation from becoming channels and tools for external financing of enterprise groups". Third, focus on the business risks of financial companies, and focus on the prevention and control of risks in the fields of credit risk, liquidity risk, and business risk outside the group. Among them, the Guiding Opinions once again emphasize the prevention of excessive interbank financing and maturity mismatch of assets and liabilities by financial companies.
In recent years, the liquidation progress of high-risk financial companies has accelerated, and it is expected that the disposal of risk institutions will continue in the future, and we should pay attention to the impact of changes in the operating conditions of the affiliated enterprise groups on the financial companies and the business risk exposure of the financial companies themselves. As of April 29, 2024, according to the information disclosed by the State Administration of Financial Regulation, a total of 5 financial companies were approved for dissolution, 3 were merged, and 2 were approved for bankruptcy in 2023, and the number of financial companies cleared in that year increased by 5 compared with 2022. As of April 29, 2024, there were about 242 corporate group finance companies, of which about 227 finance companies belonged to groups that had issued bonds and had entity ratings. Of the above-mentioned conglomerates, 6 are rated AA- and below, 4 are rated C, and 3 have a negative outlook.
On April 29, 2024, the State Administration of Financial Supervision (SAFS) issued the Guiding Opinions on Promoting the Standardized and Healthy Development of Financial Companies of Enterprise Groups and Improving the Quality and Efficiency of Supervision (Jin Gui [2024] No. 7, hereinafter referred to as the "Guiding Opinions") and distributed it to answer questions from reporters[1]. The Guiding Opinions are divided into 5 parts and 20 articles, further improving the regulatory system for financial companies, and clarifying the requirements for strengthening and improving the supervision of financial companies. 1. Financial Companies Continue to Strictly Supervise and Strengthen Business Penetrating Supervision The "Guiding Opinions" continue the policy ideas of the regulatory authorities in recent years to strengthen and strictly supervise financial companies, and continue to promote the improvement of the supervision system of financial companies. Since 2022, the regulatory authorities have revised or issued new regulatory policies for financial companies every year. In October 2022, the former China Banking and Insurance Regulatory Commission (CBIRC) revised and issued the Administrative Measures for Financial Companies of Enterprise Groups (Decree No. 6 of 2022 of the former CBIRC, hereinafter referred to as the "Administrative Measures"), and in June 2023, the State Administration of Financial Supervision issued the Measures for the Supervision and Rating of Financial Companies of Enterprise Groups (Jin Gui [2023] No. 1, hereinafter referred to as the "Rating Measures"), which covers the market access, business scope, regulatory index system, corporate governance, regulatory classification, risk disposal and other aspects.
The "Guiding Opinions" require that the penetrating supervision of the functional positioning and business operation of financial companies be strengthened. The "Guiding Opinions" proposed: "To strengthen penetrating supervision, we should not only look at the asset side, but also look at the liability side, and thoroughly examine the abnormal situations such as the excess of key indicators such as the liabilities and bill business outside the group, the sharp decline in the deposits of member units, and the serious mismatch of assets and liabilities, and take regulatory measures such as suspending business and controlling the scale when necessary; "The relevant requirements are mainly reflected in: First, the review of the qualifications of medium and low-rated financial companies to engage in business such as acceptance bills and interbank lending may be more stringent. The "Guiding Opinions" requires: "prudently check the application for qualification of business with spillover risks, such as acceptance bills and interbank lending." According to the requirements of the Rating Measures, from the perspective of the scope of business of financial companies[2], only level 1 and level 2 finance companies can carry out basic business and all special businesses, while 3A-level finance companies need to be approved before they can carry out special businesses such as acceptance bills and interbank lending, while finance companies with 3B level and below cannot apply for relevant business qualifications. It is expected that in the future, the regulatory authorities will focus on the special business access qualifications of triple-A financial companies.
The second is to emphasize the attributes of financial services within financial companies to prevent them from becoming a platform for enterprise capital precipitation and idling. The Guiding Opinions emphasize the need to prevent financial companies from excessively participating in interbank financing business in many aspects. In addition to the above-mentioned qualifications for prudent gatekeeping, in terms of the functional positioning of financial companies, the Guiding Opinions emphasize that financial companies "should not become profit-making centers of enterprise groups, strictly prohibit excessive financing in the interbank market, and prevent alienation into channels and tools for external financing of enterprise groups". The third is to focus on the business risks of financial companies, focusing on the prevention and control of risks in the fields of credit risk, liquidity risk, and business risk outside the group. The "Guiding Opinions" proposes to strengthen risk prevention and control in four key areas, namely, preventing and controlling credit risk, keeping a close eye on liquidity risk, focusing on business risks outside the group, and strengthening information technology risk management. In terms of keeping a close eye on liquidity risks and focusing on risks outside the group, the Guiding Opinions once again emphasize the need to prevent financial companies from excessively engaging in interbank financing and maturity mismatch of assets and liabilities. Regarding the close monitoring of liquidity risks, the "Guiding Opinions" pointed out: "It is strictly forbidden to recycle short-term borrowing funds to issue loans. With regard to focusing on the risks of non-group business, the Guiding Opinions point out: "It is strictly forbidden to use interbank lending business as a tool for long-term capital integration in disguise, not to handle interbank business without credit line or beyond credit line, and strictly implement the requirements for authenticity review of trade background to prevent the use of bill business as an arbitrage tool." It is worth noting that at a press conference held by the State Council Information Office in April 2024, Zou Lan, director of the Monetary Policy Department of the People's Bank of China, proposed: "Some enterprises use the money raised from low-cost loans to buy financial management, deposit time, or re-lend to other enterprises. [3] The relevant requirements of the Guiding Opinions are also echoing the problem of capital idling of enterprises, and strengthening the monitoring and prevention of capital idling from multiple perspectives such as standardizing business access, functional positioning, and business risk prevention of financial companies. From the perspective of the overall operating performance of the financial company industry, excessive financing in the interbank market and aggravating the idling of corporate funds may be mainly reflected in the operation of a small number of financial companies, rather than the overall situation of the industry. According to the statistics of the Industry Development Report of Finance Companies of China Enterprise Groups (2023)[4], at the end of 2022, the balance of deposits of financial companies was 7.43 trillion yuan, accounting for 96.67% of the total liabilities, an increase of 1.03 percentage points, and the balance of interbank liabilities was 143.825 billion yuan, a year-on-year decrease of 23.12%.
2. Continue to promote the disposal of stock risks and consolidate shareholder responsibilities With the gradual improvement of the regulatory policy system, the progress of risk clearance of financial companies has accelerated in recent years. In the fourth quarter of 2022 central bank financial institution rating results[5], there are four D-rated institutions in the fourth quarter of 2022 central bank rating results, all of which are enterprise group finance companies. As of April 29, 2024, a total of 5 financial companies were approved for dissolution, 3 were merged, and 2 were approved for bankruptcy in 2023[6], and the number of financial companies cleared by the market increased by 5 compared with 2022.
It is expected that in the future, the financial company's chemical insurance and liquidation will continue, and the impact of changes in the operating conditions of the enterprise group to which the financial company belongs on the financial company and the impact of the financial company's own business risk exposure should be emphasized. The first is to pay attention to the operation and risk status of the enterprise group itself, and pay attention to the situation that the risk is transmitted to the financial company due to the fluctuation in the operation of the enterprise group to which it belongs. The "Guiding Opinions" requires: "Strengthen the analysis and judgment of the production, operation and risk status of enterprise groups, and organically combine the monitoring of enterprise groups with the supervision of financial companies." At the same time, it continues the access requirements for shareholder qualifications in the "Administrative Measures", proposing that "the qualifications of shareholders should be strictly reviewed, and it is strictly forbidden for enterprise groups to set up financial companies in disorderly cross-industry, with excessive leverage, serious untrustworthy behaviors and major violations of laws and regulations". For example, financial companies such as HNA Group Finance Co., Ltd., Tianjin Wushan Group Finance Co., Ltd., and Bohai Iron and Steel Group Finance Co., Ltd., which will be dissolved with the approval of the State Administration of Financial Supervision in 2023, are all affected by the deterioration of the operation of their group enterprises. As of April 29, 2024, there were about 242 corporate group finance companies, of which about 227 finance companies belonged to groups that had issued bonds and had entity ratings. Of these conglomerates, six are rated AA- and below, four are rated C and three have a negative outlook.
At the same time, the "Guiding Opinions" reiterates the responsibility of financial companies to shareholders for the disposal of subject risks, and requires: "Consolidate the main responsibility of financial companies for risk disposal, strengthen shareholder responsibility, urge enterprise groups to fulfill shareholder rescue obligations in accordance with the law, promote the implementation of local party committees and governments for risk disposal, improve the normalized risk disposal mechanism, and comprehensively use financial risk disposal measures such as group self-help, judicial reorganization, bankruptcy liquidation, etc., to reasonably grasp the timing and rhythm of risk disposal, and prevent the risk of risk disposal." At the same time, the "Guiding Opinions" also proposed: "timely and publicly disclose the information of shareholders who violate laws and regulations to the public, and if serious violations constitute crimes, assist in investigating criminal liability in accordance with the law, and realize market restraint and punishment of shareholders who have violated major laws and regulations." The second is to pay attention to the business operation of the financial company itself, and pay attention to the financial company with abnormal indicators or abnormal situations in its operation. From the perspective of the bill business in which finance companies are widely involved, according to the statistics of the bill information disclosure platform of the Shanghai Bills Exchange, at the end of April 2024, there were 251 registered financial companies (excluding companies that have been dissolved, merged and bankrupt). At the end of March 2024, the Shanghai Bills Exchange counted 1 financial company in the list of continuous overdue. In our December 2022 report, "Opportunities and Challenges in Building a Modern Financial Services System – Banking Outlook 2023"[7], we reminded the Shanghai Bills Exchange to count two financial companies on the list of those that are still overdue. Among them is Xinfengxiang Finance Co., Ltd., which was approved to enter bankruptcy proceedings in July 2023. It should be noted that there are also two companies with "finance" in their names on the list of persistent overdue companies disclosed by the Shanghai Bills Exchange, which are not licensed finance companies.
Note: [1] Source: Guiding Opinions on Promoting the Standardized and Healthy Development of Financial Companies of Enterprise Groups and Improving the Quality and Efficiency of Supervision issued by the State Administration of Financial Supervision and Administration, official website of the State Administration of Financial Supervision and Administration [EB/OL], 2024/04/29 [2024/04/29], https://www.cbirc.gov.cn/cn/view/pages/ItemDetail.html?docId=1160172& itemId=928. [2] Source: How to classify and grade financial companies?—— Commentary on the Measures for the Supervision and Rating of Financial Companies of Enterprise Groups, Industrial Research [EB/OL], 2023/06/27[2024/04/30], https://mp.weixin.qq.com/s/1ZVs-VCEcHQzV9JFd1WnMg. [3] Source: State Council Information Office held a press conference to introduce the financial operation and foreign exchange receipts and expenditures in the first quarter of 2024, Information Office of the State Council [EB/OL], 2024/04/18[2024/04/30], http://www.scio.gov.cn/live/2024/33806/tw/. [4] Source: Industry Development Report of Finance Companies of China Enterprise Group (2023), Book Database [EB/OL], 2023/08/01[2024/04/30], https://www.pishu.com.cn/skwx_ps/bookdetail? SiteID=14&ID=15232591. [5] Note: The results of the PBOC's rating for the second quarter of 2023 published in the China Financial Stability Report (2023) only disclose the situation of banking institutions, but do not indicate the situation of non-bank institutions. [6] Note: On January 18, 2023, the former China Banking and Insurance Regulatory Commission (CBIRC) approved Macrolink Holdings Co., Ltd. not to permit the company's bankruptcy reorganization, so the company was not included in the statistical standard. [7] Source: Opportunities and Challenges in Constructing a Modern Financial Service System: 2023 Banking Outlook, Industrial Research [EB/OL], 2022/12/10[2024/04/30], https://mp.weixin.qq.com/s/Bt_C8uVtktiyLmxh0DyvCA.
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