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China's softer approach to debt doesn't mean easy ride for banks


CHINA'S top regulators are signalling that they are not about to go soft on overseeing the nation's US$40 trillion financial industry, even as an economic slowdown gives them reason to relax their campaign against debt.

The Financial Stability and Development Committee (FSDC), headed by Vice-Premier Liu He, emphasised last week that that it will continue to crack down on wrongdoing and illegal financial institutions. That statement is backed up by record fines against market malpractice in recent months and stronger cooperation between law enforcement and financial regulators, pointing to determination to corral the sector's excesses.

While a recent easing of an ongoing anti-leverage campaign may have suggested a more relaxed posture by the government, regulators are showing that their years-long attack on risk taking and threats to the system remains in place; new capital rules governing an asset-swap programme also surprised investors last week with their toughness.

The financial stability committee, which sits at the apex of China's financial regulation system, is being bolstered by law enforcement, Ministry of Justice and Communist Party officials to strengthen its ability to swiftly crack down on financial industry fraud and criminal behaviour by executives and market participants, according to a person familiar with the matter.

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Liu Peiqian, Asia strategist at Natwest Markets in Singapore, said: "The signal is that there are ongoing policy tweaks, and the pace of debt-growth containment is stabilising, but it won't be an outright easing."

The involvement of different departments at the committee including law enforcement "will help with the cleanup of financial misconduct, which will do good to the economy and risk prevention".

Closer coordination between the committee and other arms of government, including law enforcement, is key to accomplishing its goal, said the person familiar with the changes, who declined to be identified given the sensitivity of the issue.

The People's Bank of China (PBOC), which acts as a secretariat for the FSDC, did not respond to a fax seeking comment on the changes.

Policy-makers have been easing other areas of their deleveraging campaign in a bid to spur lending. In the face of a credit slump and a slowing economy, and against the backdrop of a trade war with the US, officials have eased loan quotas, relaxed capital restrictions for some lenders, and issued new rules for the shadow-finance industry that proved less restrictive than expected by analysts.

However, a move in the opposite direction is the tightening of rules that govern how much capital asset management companies must hold for debt-to-equity swaps, said people familiar with the matter.

Asset management companies will be required to use a risk weighting of 250 per cent for holdings swapped from debt into equity in publicly traded companies, an increase from the previous 150 per cent threshold.

Wang Yifeng, a researcher at China Minsheng Banking Corp in Beijing, said: "The move shows the China Banking and Insurance Regulatory Commission is more prudent in the managing risks of debt swaps."

While policy-makers have urged banks and asset management companies to use debt-to-equity swaps as troubled corporations look for ways to reduce their loan obligations, the new capital rules signal that the financial companies will be constrained in assuming their risk.

The authorities have also been mounting an aggressive campaign to stamp out illicit behaviour in China's equity market. In March, fines totalling 5.5 billion yuan (S$1.12 billion) were dealt against a firm for manipulating stocks, setting a record for penalties for such an infringement.

That was only the latest of several billion-dollar penalties handed down by the China Securities Regulatory Commission, whose chairman said early last year that he would pursue market wrongdoing, whether it was "historical or current". BLOOMBERG

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