Enterprise Group Finance Companies Subject to New Rules

The major incentive for enterprise groups to establish group finance companies has been, besides dis-intermediating other financial institutions and earning money from providing in-house services, the ability to set deposit and lending rates freely, outside the regime set by the PBOC.

The regulation of group finance companies has generally been based on establishing strict eligibility requirements, setting high capital requirements, restricting the scope of business, and seeking to ensure that services are confined to group companies. The New Procedures include details of requirements and restrictions relating to branching.

The New Procedures require that the parent company of a group seeking to establish a group finance company must have registered capital of at least Rmb800 million in the year prior to application. Total assets of consolidated group companies for the years prior to application cannot be lower than Rmb5 billion and the equity ratio must be at least 30%. For two consecutive years before application the operating revenues of consolidated group members must not be lower than Rmb4 million, and pre-tax income cannot be lower than Rmb200 million. The parent company must have a "core business".

Foreign-invested group finance companies must meet some slightly different criteria. The Rmb800 million registered capital requirement is the same. Net assets in the year prior to application must not be less than Rmb2 billion, and pre-tax income for the two consecutive years prior to application must not be lower than Rmb200 million.

For the group finance company itself, minimum registered capital is set at Rmb100 million. For companies engaging in foreign currency business, no less that US$5 million or other foreign currency equivalent must be paid in in convertible currency.

Capital funds should be raised primarily from group members, but many also can be accepted from qualified long-term investors (the minimal holding period is five years).

With the approval of the CBRC, group finance companies can set up branch offices and representative offices.

The working capital of group finance companies cannot be less than Rmb50 million.

Scope of Business

The scope of business provided to group finance companies is broader than that open to China's commercial banks under the PRC Commercial Banking Law(中华人民共和国商业银行法). It includes:

¡P providing asset management, financing advisory, and agency services to group members;

¡P providing payment services for members;

¡P insurance agency;

¡P providing guarantees for members;

¡P acting as intermediary for entrustment loans and investment between members;

¡P bills payment and discounting for members;

¡P handling internal settlements between members and designing inter-company settlement programmes;

¡P taking deposits from members;

¡P making loans and finance leases to members;

¡P interbank borrowing and lending; and

¡P other business approved by the CBRC.

Group finance companies may apply to the CBRC to issue bonds; underwrite bonds issued by group members; invest in financial institutions; invest in marketable securities; provide financing for sales of member products by offering consumer credit, buyers credit and finance leases. For these types of business, the CBRC requires that the companies meet more rigorous criteria. For example, to engage in finance leasing the company must have a minimum of Rmb500 million in registered capital. Group finance companies are not allowed to operate abroad or in the off-shore market.

The CBRC's prudential regulations include a minimum capital adequacy ratio of 10% and various liquidity and risk diversification requirements. Senior management personnel and the chairman of the board are subject to CBRC approval.

The previous regulation on group finance companies was promulgated in 2000. This revision breaks very little new ground. In their simultaneously fairly broad (product-wise) and restricted (market-wise) niche, Group Finance Companies-including foreign-invested ones-are developing at a moderate but steady pace. The CBRC apparently sees no great reason to alter the status quo.

Stephen M. Harner ([email protected]) is president of S.M. HARNER AND COMPANY, a Shanghai-based financial industry consultancy. Mr. Harner sits on the Board of Hangzhou City Commercial Bank as an independent director.