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China curbing banks' unlicensed ops outside their home base

Move shows that policymakers are not relaxing their efforts to fend off financial risks


CHINA announced plans to regulate financial institutions that have unlicensed operations outside their home base, indicating that policymakers are not relaxing their efforts to fend off financial risks as the world's second-biggest economy faces headwinds.

Lenders, including rural cooperatives and policy banks, will need to apply for a licence to operate units outside their home base or will have to wind down the businesses, the China Banking and Insurance Regulatory Commission said in a statement on Saturday. The new rules also prohibit banks from setting up non-operational units in regions where they have no branches.

The move shows that the central leadership still aims to curb financial risks, even though they indicated a more accommodative monetary environment in 2019 to shore up the slowing economy. The policy will have a greater impact on the operation and business expansion of smaller regional banks than big national lenders, because the former's home base is often narrower.

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"This is in line with the campaign of stricter financial oversight. The city banks would be more exposed," said Gai Xinzhe, senior analyst at Sino-Ocean Capital in Beijing. "They would find it very difficult to circumvent regulation via their old practice such as setting up shadow-loan instruments in Beijing and Shanghai."

Regional banks in China's rust-belt provinces are driving the rapid expansion of shadow banking in the country, fuelling a web of informal lending that poses wider risks to the financial system, UBS Group AG found in a study last year. Smaller lenders have been using shadow-loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a wider spectrum of Chinese corporate risk in the event of a default, according to the report.

"Medium-sized and small financial institutions should stick to their positioning, ploughing through their local market and providing quality financial services to the agricultural sector and small and micro-sided businesses," the commission said in the statement.

In the meantime, overseas expansion of all banks also will be scrutinised. "Banks setting up overseas operations must obtain approvals from both domestic and overseas regulators," according to the statement. "Any business organisation that has been established outside the territory of the People's Republic of China but has not been approved by the domestic or foreign regulatory authorities after communication shall be withdrawn in a safe and orderly manner." The regulator has granted a one-year grace period to banks until next December for the rules to apply.

China has issued a number of directives on everything from excessive borrowing to speculation in equities to address risks in its financial system. By the end of 2017, total borrowing had ballooned to about 265.85 per cent of the size of the economy. BLOOMBERG