The China Banking Regulatory Commission (CBRC) yesterday issued a new regulation on the management of finance companies of enterprise groups.

The new rule, effective from September 1, will replace the present regulation on finance companies that was introduced in 2000.

It will lower the threshold for the launch of finance companies by enterprise groups in China. This will enable enterprises to open their own finance subsidiaries to enhance the efficiency of corporate fund management and financing services.

For example, the new rule will reduce the required minimum total assets of all subsidiaries of enterprise groups that plan to set up their own finance companies from the present 8 billion yuan (US$966.1 million) to 5 billion yuan (US$603.8 million) and the minimum total turnover from 6 billion yuan (US$724.6 million) to 4 billion yuan (US$483 million) for two consecutive years.

There are currently about 6,000 enterprise groups in China, covering a wide range of industries. Many have expressed a desire to establish their own finance companies, said a spokesman for CBRC, the finance firms' watchdog, yesterday.

The market entry threshold of the original regulation is too high and only a few big industrial, energy and transportation corporations have been able to meet the criteria, while most of the other companies and foreign-funded enterprises are kept out.

The new rule is expected to change the situation and boost the development of enterprise groups as a whole, the spokesman said.

Wholly foreign-funded investment companies can also launch their own finance companies to give financial support to enterprises in which they have invested.

According to CBRC statistics, China now has 74 finance companies launched by enterprise groups, with total assets of around 450 billion yuan (US$54.3 billion).

Given the supportive attitude of regulators to the development of business, it is expected that more licenses for finance companies will be issued from September and the pace will be much faster than before.

A number of enterprise groups, including steel company Shougang Group, coal giant Shenhua Group, Lenovo and TCL are waiting for the issue of such licenses to form their own finance companies, market sources said.

Bo Fuheng, secretary-general of the China Association of Finance Companies, says he expects that between 20 to 30 corporations would be lining up for the licenses in a couple of months.

The policy support will be a major boost to business, he said.

According to the new rule, adjustments will be made to the definition and business scope of such finance firms.

It is designated that such companies will aim to provide total management for the funds of enterprise groups, improve the application efficiency of such funds and lower overall corporate costs.

Apart from the daily corporate financing business, they can also apply to CBRC for a license to underwrite corporate bonds of group subsidiaries and offer them consumption loans and leasing services.

With CBRC's approval, they may also issue their own corporate bonds, invest in other financial institutions and trade securities.

However, when offering more incentives, regulators will also keep a close eye on the risk management capability of applicants and risk control of the finance companies afterwards.

The financial status of the parent companies and their credibility will be the major criteria for regulators when reviewing applications to launch finance companies.

The parent companies will also shoulder more liability to guarantee payment to clients in case of funding problems in the finance companies.

Finance firms should also guarantee a minimum 10 per cent asset adequacy and the ratio of funds used for short-term securities investment in their total assets should not exceed 40 per cent.

They are also prohibited from accepting deposits from the outside, according to the new regulation.

(China Daily August 4, 2004)