Regulatory frameworkKey policies
What are the principal governmental and regulatory policies that govern the banking sector?
The Banking Regulation Law of the People’s Republic of China (PRC) (the Banking Regulation Law) and the Law of the PRC on Commercial Banks (the Law on Commercial Banks) are the principal governmental and regulatory policies that govern the Chinese banking sector.
With the Banking Regulation Law and the Law on Commercial Banks as the core, China has established a preliminarily legal system to supervise and regulate the banking sector in its process of legalisation.
Recently, compared with the 2000s when the Banking Regulation Law was issued and the 2010s when the Law on Commercial Banks was published, China’s regulatory authorities, by their issuance of new regulations and regulatory documents, increasingly emphasise the principle of ‘functional regulation’ in the banking sector.
Another law to note is the Law of the PRC on the People’s Bank of China (the Law on the People’s Bank of China), a primary legislation concerning the status and functions of the People’s Bank of China (as the central bank). This legislation sheds light on types of business that shall be governed by the People’s Bank of China, and establishes the division and cooperation principle between the People’s Bank of China and the banking regulatory authorities under the State Council.Regulated institutions
What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?
Do the rules vary depending on the size or complexity of the banking institution?
See www.lexology.com/gtdt.Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The Banking Regulation Law sets forth the main objective for regulating the banking industry, which is to promote the lawful and stable operation and to safeguard the public confidence. As primary legislation, it provides clauses concerning responsibilities of the banking authorities, measures for supervision and liabilities for violation.
The Law on Commercial Banks is formulated to protect the lawful rights and interests of, and to regulate the behaviour of, commercial banks. Pursuant to this legislation, commercial banks shall act under the principles of safety, liquidity and efficiency, and operate with autonomy and assume responsibilities for their own risks as well as profits and losses, and exercise self-restraint. With these principles at its core, this legislation further provides clauses on:
- establishment and organisation;
- protection of depositors;
- basic rules for loans and other businesses;
- financial affairs and accounting;
- supervision and management;
- takeover and termination; and
- legal liabilities.
The Law on the People’s Bank of China explains what activities in the banking industry shall be governed or supervised by the People’s Bank of China. Specifically, the People’s Bank of China shall be mainly in charge of, among others:
- formulating and implementing monetary policies;
- issuing yuan and managing its circulation;
- supervising the inter-bank lending market and inter-bank bond market;
- exercising control of foreign exchange and supervising the inter-bank foreign exchange market; and
- providing guidance and making plans for anti-money laundering.
Which regulatory authorities are primarily responsible for overseeing banks?
The China Banking and Insurance Regulatory Commission is the banking regulatory authority under the stewardship of the State Council, which in turn is primarily responsible for overseeing banks.
In 2018, central government decided not to run the China Banking and Insurance Regulatory Commission. Instead, the China Banking and Insurance Regulatory Commission was reorganised to:
- strengthen reform in the financial supervision system;
- to solve such problems as cross-supervision and a supervision vacuum;
- to intensify comprehensive supervision; and
- to optimise allocation of supervision resources.
The main responsibilities of the China Banking and Insurance Regulatory Commission include:
- supervision of the banking and insurance sector in accordance with laws and regulations;
- protection of legal rights and interests of financial consumers;
- maintenance of legal and stable operation of the banking and insurance sector;
- protect against financial risks; and
- safeguarding financial stability.
The responsibility for preparing drafts of material laws and regulations and basic rules for prudent supervision in the banking and insurance sector, which was previously undertaken by the China Banking and Insurance Regulatory Commission, is now falling into the hands of the People’s Bank of China.Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
Pursuant to the Regulations on Deposit Insurance, deposit insurance refers to the system whereby the insured financial institutions pay insurance premiums to the deposit insurance funds management institution to form the deposit insurance funds, and the deposit insurance funds management institution pays back the insured deposits to depositors and takes necessary measures to maintain the safety of both the deposits and the deposit insurance funds. The aforesaid deposit insurance covers both yuan deposits and foreign currency deposits, and for each depositor, their deposits will be covered and insured to the extent of 500,000 yuan in relation to a single insured financial institution.Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
Generally, transactions between a commercial bank and its affiliates shall comply with principles of good faith and fairness, and further, shall not be conducted on terms more favourable than those applicable to similar transactions with non-affiliated parties.
Moreover, there are certain restrictions or prohibitions regarding affiliated transactions. Specifically, commercial banks shall not:
- extend any loans to an affiliate without being secured or guaranteed;
- provide any loan or credit with a pledge of their own equity or shares; and
- provide any security or guarantee for any financing activity of an affiliate (except to the extent that such affiliate provides as counter-security bank deposit certificates and governmental bonds sufficiently), etc.
For application of the above principles and restrictions, an ‘affiliate’ refers to, as the case may be, an affiliated natural person, an affiliated legal person and other affiliated organisations.
An affiliated natural person mainly includes, among others:
- employees of a commercial bank;
- natural persons who are major shareholders in a commercial bank;
- natural persons who are close relatives of employees or major shareholders of a commercial bank; and
- natural persons who are controlling shareholders, directors or senior managers of a legal person or other organisations affiliated with a commercial bank.
For the purpose of this definition, ‘major natural person shareholders’ means natural-person shareholders who hold or control more than 5 per cent of the shares or voting rights in a commercial bank.
An affiliated legal person or other affiliated organisations mainly include, among others, major shareholders of a commercial bank that are not natural persons, legal persons or other organisations controlled directly or indirectly by another enterprise that also controls a commercial bank, and legal persons or other organisations that are directly or indirectly controlled by or under joint control of any insider or major natural person shareholder in a commercial bank or any close relative of such insider or major natural person shareholder. For the purpose of this definition, ‘major non-natural person shareholders’ means the non-natural person shareholders who hold or control more than 5 per cent of the shares or voting rights in a commercial bank.
Pursuant to the Administrative Measures for Affiliated Transactions between Commercial Banks and their Insiders or Shareholders, affiliated transactions are classified as ‘general affiliated transactions’ and ‘material affiliated transactions’. ‘General affiliated transactions’ shall be filed or approved by the affiliated transactions committee of a commercial bank, and ‘material affiliated transactions’, after being reviewed by the affiliated transactions committee of a commercial bank, be approved by its board of directors.Regulatory challenges
What are the principal regulatory challenges facing the banking industry?
The regulators continue to vigorously reduce the business of high-risk shadow banks in order to prevent resurgence;
- the regulators continue to strengthen the supervision of asset quality, accelerate the disposal of non-performing assets, and improve the accuracy of asset classification; and
- the regulators are actively responding to the development of online finance, which promotes the rectification of online lending and other illegal activities.
Are banks subject to consumer protection rules?
Under the PRC legal regime, both Chinese-invested and foreign-invested banks shall comply with rules for the protection of financial consumers, the term of which is defined by regulators as any natural person that purchases or uses financial products and receives financial services.
The aim for financial consumer protection is not only to boost public confidence but also to prevent and mitigate risks and protect financial security and stability. To achieve the aforesaid, various governmental authorities (including the China Banking and Insurance Regulatory Commission, People’s Bank of China and local governmental authorities) may have to corporate closely with each other to promote effectively prudential supervision on the banking sector. On the other hand, banks may have to well understand and abide by laws and regulations regarding information disclosure, equal treatment and fair trading when doing business with consumers.
In recently years, suspect practices in China have drawn particular scrutiny. For example, with the rapid growth of internet finance, numerous online peer-to-peer lending platforms, equity-based crowdfunding platforms and other similar platforms raised funds illegally and engaged in businesses without authority approval, and some of these activities have severely infringed the rights and interests of, and caused damage to, consumers. The aforesaid phenomenon has attracted the attention of regulators since 2016, during which time, the State Council began to rectify such financial disorder strongly. In addition to on-site inspections and interviews initiated by the regulators, efforts were also made to improve legislation and the judicial system.Future changes
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
First, the legal and regulatory policy needs to change in order to tailor the needs of the authorities in supervising financial activity, combined with high-tech developments (eg, blockchain, the internet-of-things and artificial intelligence-related technology). For instance, the authorities have just issued a new regulation concerning supervision of internet lending activities in China. Recently, the authorities have also emphasised the importance of information protection during the provision of financial services. The authorities realise that they may have to achieve a balance in promoting financial development with high technology while maintaining stability and eliminating material risks in the financial industry. This is a great challenge for the authorities to meet, the outcome of such a test remaining uncertain.
Second, as a material step in supporting the development of the real economy, the authorities are making efforts in directing financial sectors to serve the demands of both small and medium-sized enterprises and the non-state-owned economy. Previously, the growth trajectories of China’s economy were affected by the theories of the planned economy and the state-owned economy. With the development of the market economy, however, the authorities realise the contribution that both small and medium-sized enterprises and the non-state-owned economy have made to improving social wealth and stability. In 2019, the authorities announced numerous measures promoting the non-state-owned economy, and, currently, the banking regulatory authorities under the State Council are preparing the draft measures for the supervision and improvement of financial services to small-and-micro enterprises. In light of all this, we are sure that in the near future the authorities will continue their efforts to promote the development of medium-sized enterprises and the non-state-owned economy.
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