The China Banking Regulatory Commission (CBRC) announced on Tuesday the issuance of a new regulation on the management of enterprise group finance companies.

The new rules, effective from September 1, will replace the existing regulation, which was introduced in 2000.

The revised regulation will lower the threshold for the launch of finance companies by enterprise groups in China. This will enable enterprises to open their own finance subsidiaries to enhance the efficiency of corporate fund management and financing.

For example, the new rule will reduce the required minimum total assets of all subsidiaries of enterprise groups that plan to set up their own finance companies from the present 8 billion yuan (US$966.1 million) to 5 billion yuan (US$603.8 million). The minimum required total turnover will be cut from 6 billion yuan (US$724.6 million) to 4 billion yuan (US$483.0 million) for two consecutive years.

There are currently about 6,000 enterprise groups in China, covering a wide range of industries. Many have expressed a desire to establish their own finance companies, said a spokesman for the CBRC on Tuesday.

The market entry threshold of the original regulation is so high that only a few of the largest industrial, energy and transportation corporations have been able to step over it.

The new rule is expected to change the situation and give a boost to enterprise groups as a whole, the spokesman said.

Wholly foreign-funded investment companies can also launch their own finance companies to give financial support to enterprises in which they have invested.

According to the CBRC, China now has 74 enterprise group finance companies, with total assets of around 450 billion yuan (US$54.3 billion).

A number of enterprise groups, including steel company Shougang Group, coal giant Shenhua and electronics makers Lenovo and TCL, are waiting to form their own finance companies, market sources said.

Bo Fuheng, secretary-general of the China Association of Finance Companies, says he expects that between 20 to 30 corporations will be lining up for licenses in a couple of months. The policy support will be a major boost to business, he said.

The new regulation also adjusts the definition and business scope of such finance firms. It says that such companies should provide total management for the funds of enterprise groups, improve the application efficiency of such funds and lower overall corporate costs.

Apart from the day-to-day business of corporate finance, these subsidiaries can also apply to CBRC for a license to underwrite corporate bonds of other group subsidiaries and offer them loans and leasing services.

With the CBRC's approval, they may also issue their own corporate bonds, invest in other financial institutions and trade securities.

However, when offering more incentives, regulators will also keep a close eye on the risk management capability of applicants and risk control performance of approved finance companies.

The financial status of the parent companies and their creditworthiness will be the major criteria for regulators when reviewing applications to launch finance companies.

The parent companies will also be required to guarantee payment to clients in case of defaults by the finance companies.

Finance firms should also maintain a minimum capital adequacy ratio of 10 percent and the ratio of funds used for short-term securities investment to total assets should not exceed 40 percent.

(China Daily August 4, 2004)