Beijing: Chinese officials pledged to tighten supervision in the financial services industry, suggesting a recent regulatory onslaught on the private sector that sent shockwaves globally is not over yet.
The central bank will close loopholes in its financial technology regulation, and include all types of financial institutions, services and products into its prudential supervision framework, Chen Yulu, deputy governor of the People’s Bank of China, said at the China International Finance Annual Forum in Beijing Saturday. Authorities will also boost foreign exchange market supervision at macro and micro levels, he said without elaborating.
“We will enhance the effectiveness and professionalism of financial regulation, build all kinds of firewalls to resolutely prevent systemic risks,” Chen said.
The China Securities Regulatory Commission will improve its regulations for companies seeking overseas listings, and enhance channels for foreign investors to participate in China’s onshore securities futures market, Vice Chairman Fang Xinghai said at the same forum.
Investors have endured significant losses this year with the nation’s benchmark CSI 300 Index down about 16% from its February high, making it among the worst-performing major gauges in Asia this year.
China is moving to plug a gap that’s for decades allowed technology giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to sidestep restrictions on foreign investment. In July, regulators proposed rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review.
The securities regulator has communicated with foreign investors on the recent plunge in overseas-listed Chinese stocks, triggered by a spate of surprise crackdowns on industries from private tutoring to Internet platforms, Fang said. The investors believed they have under-allocated Chinese assets, he said.
Extreme easing policies by central banks in major developed economies over the pandemic have led to increasing financial fragility globally, said Zhou Liang, vice-chairman of the China Banking and Insurance Regulatory Commission, who was speaking on the same panel. The banking regulator will focus on preventing risks from foreign institutions’ “malicious” cross-border capital movement, he said.
Tighter rules on foreign investment
Officials in China’s financial capital of Shanghai are closing a route used for decades by companies operating in the technology sector to draw foreign investment.
Startups that have recently applied to Shanghai’s National Development and Reform Commission for permission to inject money into affiliated entities incorporated in places like the Cayman Islands are being turned away, according to people familiar with the matter. Such outbound direct investment is one common way Chinese companies have established and then put money into so-called variable interest entities - vehicles then used to attract foreign investment and list overseas.
Firms that approached Shanghai’s NDRC are being told the process for outbound investment into VIEs is being halted, the people said, asking not to be named speaking on a sensitive issue. The changes follow a directive from Beijing, one person said. Regulators are discussing tougher oversight of VIEs nationwide, though the rules have yet to be finalized, the people said. It’s unclear what these will mean for existing VIEs, many of which trade on exchanges in Hong Kong and New York.
If rolled out across the country, Shanghai’s restrictions would have far-reaching implications for Chinese upstarts already squeezed by a flurry of regulations targeting online companies in finance, education, ride-hailing, e-commerce and more. Offshore listings came under scrutiny after Didi Global Inc. forged ahead with its American float despite objections from officials worried about data leaks and national security.
The NDRC didn’t immediately respond to a request for comment.
China is moving to plug a gap that’s for decades allowed technology giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to sidestep restrictions on foreign investment. In July, regulators proposed rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review.
For years, companies registered in China that wanted to bring in foreign investors but couldn’t under local laws would go about setting up a VIE, an offshore shell company that was tied back to the parent by contractual agreements. The Chinese firm would then apply to regulators like the NDRC for approval to invest in the offshore entity, a sign-off required under the country’s strict controls on capital outflows.
VIEs operate in a legal grey zone, leading some to suggest the additional oversight could bestow a level of legitimacy on a structure that’s been a perennial worry for global investors, depending on how Beijing treats existing entities.
