China has announced plans to regulate financial institutions that have unlicensed operations outside their home base, indicating 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 it indicated a more accommodative monetary environment next year to shore up the slowing economy.
The policy will have a greater impact on the operations and business expansion of smaller regional banks than big national lenders, because the former’s home base is often narrower.
“This is in line with the campaign of stricter financial oversight. The city banks would be more exposed,” said senior analyst Gai Xinzhe 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 found in a study last year.
Smaller lenders have been using shadow-loan instruments to diversify 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 will also 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outside China but has not been approved by the domestic or foreign regulatory authorities after communication shall be withdrawn in a safe and orderly manner.”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 year’s grace to banks until December next year 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 last year, total borrowing had ballooned to about 265.85 per cent of the size of the economy.