Chinese cities to close local financial asset exchanges to defuse risks

FOUR Chinese provinces and cities are shutting down their financial asset exchanges as part of efforts to crack down on illegal fundraising and rising risks in local government finances.

Local financial regulators in China’s provinces of Hunan and Liaoning and cities of Xian and Chongqing said in statements posted on their websites on Monday (Mar 25) that they were canceling business licences for financial asset exchanges in their jurisdictions, in order to strengthen financial regulation and resolve financial risks.

They also urged retail investors to “identify and prevent relevant risks, choose legal investment channels, and resolutely resist all types of illegal financial activities”.

The loosely regulated exchanges had been set up over the years by local state-owned enterprises and were initially designed for local financial asset transactions. They have increasingly been used for sales of banned wealth management products and local government private debt in recent years.

China’s central bank and the top securities regulators have repeatedly vowed to crack down on such illegal activities and exchanges. State media said it expected more exchanges would be closed, citing policy sources.

The shutting down of these exchanges also comes as China steps up the Communist Party’s oversight of its US$61 trillion finance industry and strengthens efforts to reduce local government debt and other financial risks.

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The closure of these exchanges is the beginning of the end of all such markets, official newspaper Securities Times said, citing unnamed industry and regulatory sources. It also said China currently has almost 30 such exchanges.

In 2021, China launched a nationwide inspection of local financial asset exchanges, with a focus on their debt financing activities, after some platforms were found to be illegally facilitating financing for property developers.

For example, the wealth management unit of troubled developer China Evergrande Group partnered with local financial exchanges to issue investment products to individuals, Chinese financial magazine Caixin reported.

Cash-starved Chinese local government financing units also tapped the loosely regulated funding channel to directly court yield-hungry retail investors.

Both the People’s Bank of China and the China Securities Regulatory Commission (CSRC) vowed in 2023 to defuse financial exchange risks in an orderly manner. REUTERS