China’s financial holding companies regulations curtail systemic risk by bridging a regulatory gap and segregating financial and non-financial risks, said Fitch Ratings recently.
Enhanced regulatory oversight and internal controls may improve funding access for some, although there has been limited rating impact to date, the firm added.
The framework of China’s financial holding companies regulations continues to develop, with the latest rules regulating related-party risks came into effect in March 2023, Fitch observed.
The new measures mandate financial holding companies (FHC) to manage, disclose, and report group-wide related-party transactions, and requests pricing of related-party transactions to be based on market practice, Fitch noted.
The original FHC regulation published in 2020 provided an overarching framework, and required conglomerates holding multiple regulated financial institutions and meeting specific asset thresholds to set up FHCs.
“We expect more accompanying rules to follow in China, such as specific supervisory benchmarks on capital adequacy and/or leverage requirements,” Fitch said.
Uncertainties remain regarding regulators’ management of contagious effects within an FHC and potential moral hazard, the firm noted.
The FHC structure will also test the regulator’s capacity and capability to supervise, as it could potentially create mixed and complex financial groups over time, the firm added.
Fitch said it’s likely to continue its ‘see-through’ approach to assess shareholder support for financial institutions under state-owned FHCs.
“Our assessments of their standalone credit profiles have been unaffected by the new FHCs because we believe the rated subsidiaries’ business and risk profiles will not change significantly,” the credit rating agency said.
Some local government-owned financial platforms are preparing for an application, according to Fitch.
The more stringent regulatory oversight and internal controls could improve their risk profiles and enhance their funding access over peers in the long run, the firm noted.
Meanwhile, no private conglomerate has received a licence so far, said Fitch, adding that the restrictions on controlling shareholders’ equity investments could affect their balance-sheet management.
