Segregation of 3 financial branches should remain
By Sun Min (China Daily)
Updated: 2004-08-09 13:52

The time is still not ripe for China to call an end to segregated regulatory schemes of the banking, securities and insurance industries, according to a top Chinese government think-tank member.

Presently, the three are not allowed to interfere in each other's business, though rumours have been spreading recently that the authorities might lift the division and permit such cross-industry operations.

But this change, as Xia Bin sees it, is unlikely to occur in the near future.

For the time being, it is still inappropriate to allow such an integrated business model of the three financial branches, through which banks would be able to do insurance and securities businesses and vice versa.

"This is a future option, but now is not the right time to make the move," Xia said in an interview with China Daily.

Xia, director of the Financial Research Institute at the Development and Research Centre of the State Council and a former chief of the non-banking regulatory department of the central bank, has been closely following the pace of regulatory reform in China's financial market for years.

Some people have confused the two concepts, he said.

The fact that some financial conglomerates, which hold independent subsidiaries in banking, insurance and securities businesses, already exist in China does not mean that the regulatory schemes of the three have been unified.

Such subsidiaries, though put under one holding company, are separated from each other's business and supervised by three regulatory bodies and follow different laws and regulations.

This is different from the concept that a single entity can do banking, securities and insurance at the same time and be supervised by the same watchdog, which is yet to be introduced in China.

Whether China is ready to adopt the second business model for financial institutions depends on many factors, experts say, including the maturity and capacity of the financial market and regulatory system, the development of the market mechanism, the sufficiency of depositors and investors protection, as well as the risk control capability, internal control and ethics of the financial institutions.

China's top financial officials have said that the reform is unavoidable in the long term, but presently all the necessary conditions are not yet met.

"However, that does not mean we should just sit here and wait," said Xia. Instead, some steps should be taken to gradually upgrade the financial system and some transitional measures should be adopted.

Building more financial holding companies, through which the parent company can invest in and launch independent entities that practice different financial businesses separately, is a good and practical choice during the transitional period.

It can enhance the competitiveness of domestic financial enterprises to meet the mounting challenges after China's entry to the World Trade Organization while avoiding major shockwaves to the present regulatory scheme, said Xia.

For the past four years, Xia Bin has been active in promoting the development of such financial holding companies in China and relevant legislation efforts.

As early as 2001, as a central bank official, he had initiated a draft regulation on financial holding companies and urged the authorities to allow large banks with good management and capital strength to develop into financial conglomerates.

Such banks, already overloaded with delinquent loans left by the planned economy, have the narrowest sphere of business among all financial institutions.

"Why not let them invest in companies that have better profit prospects, such as fund management and insurance firms?" Xia asked.

But the draft was aborted for unknown reasons.

It was not known until recently that the ice has been melting on the regulatory aspect.

According to Article 43 of the new Commercial Banking Law, enacted on February 1, commercial banks are normally prohibited from doing trust and investment and securities business or investing in non-banking financial institutions and enterprises, but exceptions will be allowed.

That "exception" clause has made a major breakthrough from previous laws that were more stringent and given room for innovation on the investment channel later on.

A few months ago, Liu Mingkang, chairman of CBRC, also said that the commission would support commercial banks to take part in the launch of fund management companies.

Of course, a prerequisite to the development of the financial conglomerates is sufficient preparation on legislation and supervision, said Xia.

Unofficial statistics said that China has between 200 and 300 financial holding companies. These companies are either developed by financial institutions, such as CITIC, Ping'an and Everbright which were the result of special approvals of the authorities, or, industrial capital that penetrates into the financial sector, which includes Haier and New Hope Group. But so far, no Chinese law or regulation has explicitly clarified the definition of financial holding companies.

Only in a recently signed memorandum of work co-ordination between CBRC, China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), it is said that the supervision of financial holding companies will be based on the core business of such companies.

For example, CIRC will supervise those whose core business is insurance and CSRC will watch over those focusing on securities.

However, the role of such holding companies and their legal obligations remain uncovered and the co-ordination between the regulatory bodies deficient.

Such legal vacuums have actually increased financial risks, said Xia.

Some institutions have made use of the legal loopholes. Irregularities occur during the financial investments and affect the overall market stability.

Without effective supervision of risk control, information disclosure and fire wall construction in these institutions, it has been hard to prevent the problems and discipline the participants.

The enterprises themselves have to shoulder responsibility for the irregularities, but regulators are also to blame, said Xia.

CBRC, CIRC and CSRC have to sit together to bring a special regulation on the financial holding companies to clarify relevant liabilities, he said.

And this requires more concrete actions than paper work.

"We have lost some sheep now, but if we do not mend the fold, we will lose more," said Xia.

The issue is also arousing concern among other experts and officials.

Wu Xiaoling, vice-governor of the central bank, said in February that industrial capital entering financial businesses requires the State to bring out specific laws and regulations to watch over financial holding companies.

It is comparatively easier to regulate financial holding companies that are launched by financial institutions, she said. But supervision is more difficult when they are controlled by non-financial enterprises due to lack of a specific regulatory body.

Legal issues to be covered in the financial holding companies include the mode of operation, affiliated trade, information disclosure and the qualification of directors and senior executives.

Foreign companies are also expecting clearer policies so that they can launch their own financial holding companies in China. So far, none of them have been able to do so.

Joel Epstein, the country manager in China of American International Group (AIG), a leading US-based financial company, said the group is waiting for a change of law to allow for the application of building a financial holding company in China.

AIG already has two wholly-owned insurance subsidiaries in China and is launching a joint venture fund management company with China's Huatai Securities.

It also has plans to enter credit card and commercial banking, so having a holding company on top of all the financial branches can improve the efficiency and convenience of its operation.

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