14 April, 2020
Regulators have further moved in the NPL market and the thresholds for qualified investors of NPL license holders have changed in the past few days.
On March 27, 2020, the China Banking and Insurance Regulatory Commission ("CBIRC") released a new version of the Implementation Measures of the China Banking and Insurance Regulatory Commission on Administrative Licensing for Non-bank Financial Institutions ("Implementation Measures"), which updated the thresholds for qualified investors in nationwide financial asset management companies ("nationwide AMCs"), the most important NPL license holders in China.
Given that the China-U.S. Trade Agreement has paved the way for U.S. financial service suppliers to hold an AMC license in China and the fifth nationwide AMC was approved by CBIRC last month, the changes to the thresholds for investors of a NPL license holder are worth noting.
This article briefly summarizes the current thresholds for investors of nationwide AMCs, as well as local AMCs and bank-type AMCs, the other two types of licensed players in China’s NPL market. In the last part of this article, we will also give a description of the thresholds for foreign investors to participate in the NPL market.
I.Thresholds for Nationwide AMCs
Nationwide AMCs were established with special background. For a long time, until the issuance of the previous version of the Implementation Measures in 2015 ("2015 Implementation Measures") by the China Banking Regulatory Commission (the predecessor of CBIRC) ("CBRC"), the regulator had not made clear the thresholds for investors in nationwide AMCs. The 2015 Implementation Measures classified the investors of nationwide AMCs into three types, namely, domestic financial institutions, domestic non-financial institutions, and overseas financial institutions. It also specified the threshold requirements that shall be satisfied by each type of investor.
The Implementation Measures retains the classification for nationwide AMCs investors in the 2015 Implementation Measures, although the thresholds applicable to those investors have been adjusted. The table below outlines the changes made under the new Implementation Measures.
Investor
Old Thresholds
New Thresholds
Domestic Financial Institution
Article 115
A domestic financial institution subscribing capital of a financial asset management company shall satisfy the following criteria:
(1) compliance with the key prudential regulatory indicators specified by the regulator;
(2) have good corporate governance, and proper and effective internal controls;
(3) achieved profits in each of the past two consecutive accounting years;
(4) have a good social reputation, and no record of a major case or a major violation of law or irregularity over the past two years;
(5) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(6) a commitment not to transfer the equity it holds in the financial asset management company within the next five years (except where ordered by the CBIRC to transfer the equity pursuant to the law); and
(7) any other regulatory requirements stipulated under the rules of the CBIRC.
Article 116
A domestic financial institution subscribing capital of a financial asset management company shall satisfy the following criteria:
(1) compliance with the key prudential regulatory indicators specified by the regulator;
(2) have good corporate governance, and proper and effective internal controls;
(3) with good financial standing, and achieved profits in each of the past two consecutive accounting years;
(4) have a good social reputation, and no record of a major case or a major violation of law or irregularity over the past two years, or has been rectified in place and approved by CBIRC;
(5) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(6) for any investor other than an investment company or a holding company prescribed by the State Council, the total amount of equity investments made by such an investor (including the investment in the nationwide AMC under contemplation) in aggregate shall not exceed 50% of such an investor's net asset value;
(7) any other regulatory requirements stipulated under the rules of the CBIRC.
Overseas Financial Institution
Article 116
An overseas financial institution acting as a strategic investor in a financial asset management company shall satisfy the following criteria:
(1) have total assets of not less than US$10 billion as at the end of the latest accounting year;
(2) have its long-term credit rating assessed at an “investment grade” for the past two years by an international rating organization recognized by the CBIRC;
(3) achieved profits in each of the past two consecutive accounting years;
(4) with respect to any investor which is a commercial bank, with a capital adequacy ratio of no less than the higher of the average capital adequacy ratio of the banking industry at its place of incorporation and 10.5%; and with respect to other investors, the total amount of issued capital shall not be lower than 10% of its total weighted risk assets;
(5) have a proper and effective internal control system;
(6) have a satisfactory banking regulatory and supervisory regime at its place of incorporation;
(7) have satisfactory economic conditions in the country (region) where the investor is located;
(8) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(9) a commitment not to transfer the equity it holds in the financial asset management company within the next five years (except where ordered by the CBIRC to transfer the equity pursuant to the law); and
(10) any other regulatory requirements stipulated under the rules of the CBIRC.
Article 117
An overseas financial institution subscribing capital of a financial asset management company shall satisfy the following criteria:
(1) have total assets of not less than US$10 billion as at the end of the latest accounting year, or an equivalent freely convertible currency;
(2) have its long-term credit rating assessed at an “investment grade” for the past two years;
(3) have good financial standing, and achieved profits in each of the past two consecutive accounting years;
(4) with respect to any investor which is a commercial bank, with a capital adequacy ratio of no less than the higher of the average capital adequacy ratio of the banking industry at its place of incorporation and 10.5%; and with respect to other investors, the total amount of issued capital shall not be lower than 10% of its total weighted risk assets;
(5) have a proper and effective internal control system;
(6) have a satisfactory banking regulatory and supervisory regime at its place of incorporation;
(7) have satisfactory economic conditions in the country (region) where the investor is located;
(8) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(9) the total amount of equity investments made by the investor (including the investment in the nationwide AMC under contemplation) in aggregate shall not exceed 50% of such investor's net asset value; and
(10) any other regulatory requirements stipulated under the rules of the CBIRC.
Domestic Non-financial Institution
Article 117
A domestic non-financial institution subscribing capital of a financial asset management company shall satisfy the following criteria:
(1) be duly incorporated as a separate legal entity;
(2) have good corporate governance structures or effective organization management methods;
(3) have a positive social reputation, creditworthiness records and tax payment records, and the ability to repay the outstanding principal and interest of the financial institution's loan(s) in the full amount when due;
(4) have a long track record of business development and stable business conditions;
(5) have a strong business management capacity and funding supports;
(6) have a good financial standing, and achieved profits in each of the past two consecutive accounting years;
(7) have a net asset value of no less than 30% of its total assets (after having taken into account year-end distributions, if any);
(8) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(9) a commitment not to transfer the equity it holds in the financial asset management company within the next five years (except where ordered by the CBIRC to transfer the equity pursuant to the law); and
(10) any other regulatory requirements stipulated under the rules of the CBIRC.
Article 118
A domestic non-financial institution subscribing capital of a financial asset management company shall satisfy the following criteria:
(1) be duly incorporated as a separate legal entity;
(2) have good corporate governance structures or effective organization management methods;
(3) have a positive social reputation, creditworthiness records and tax payment records, and the ability to repay the outstanding principal and interest of the financial institution's loan(s) in the full amount when due;
(4) have a long track record of business development and stable business conditions;
(5) have a strong business management capacity and funding supports;
(6) have a good financial standing, and achieved profits in each of the past two consecutive accounting years. For the controlling shareholder of a financial asset management company, achieve profits in each of the past three consecutive accounting years;
(7) have a net asset value of no less than 30% of its total assets at the end of the most recent fiscal year;
(8) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(9) for any investor other than an investment company or a holding company prescribed by the State Council, the total amount of equity investments made by such an investor (including the investment in the nationwide AMC under contemplation) in aggregate shall not exceed 50%, or 40% if the investor is the controlling investor, of such an investor's net asset value; and
(10) any other regulatory requirements stipulated under the rules of the CBIRC.
Negative List
Article 118
An enterprise with any of the following circumstances shall not be allowed to subscribe for capital of a financial asset management company:
(1) have manifest defects in its corporate governance structures and mechanisms;
(2) have a large number of connected entities, a complicated and opaque shareholding structure, or frequent unusual connected-party transactions;
(3) have a wide scope of business involving multiple industries without a core business;
(4) be subject to volatile cash flow fluctuations according to economic conditions;
(5) have a debt-to-asset ratio or a financial leverage ratio of a level higher than the industry average;
(6) have equity in the financial asset management company held on trust for any other party; or
(7) have any other circumstances which have a significant adverse impact on a financial asset management company.
Article 119
An enterprise with any of the following circumstances shall not be allowed to subscribe for capital of a financial asset management company:
(1) have manifest defects in its corporate governance structures and mechanisms;
(2) have a large number of connected entities, a complicated and opaque shareholding structure, or frequent unusual connected-party transactions;
(3) have a wide scope of business involving multiple industries without a core business;
(4) be subject to volatile cash flow fluctuations according to economic conditions;
(5) have a debt-to-asset ratio or a financial leverage ratio of a level higher than the industry average;
(6) have equity in the financial asset management company held on trust for any other party;
(7) be subject to joint sanctions by relevant authorities for failure to discharge overdue liabilities;
(8) have records of attempts to evade overdue bank debts;
(9) have records of providing false materials or making misleading statements;
(10) be subject to investigation or punishment by competent financial supervisors or government authorities as a result of material violation of laws or regulations; or
(11) any other circumstances which have a significant adverse impact on a financial asset management company.
To conclude, the material changes made under the new Implementation Measures include: (1) the release of the restriction that an investor shall not transfer its equity interest within five years; and (2) the imposition of a new restriction setting out the maximum ratio the total amount of equity investments made by such an investor (including the investment in the nationwide AMC under contemplation) in aggregate vis-a-vis such an investor's net asset value.
In addition, to reflect regulatory practice, the Implementation Measures specify that NO investor (either by itself or together with its controlling shareholder, actual controller, controlling subsidiary, persons acting in concert, and other enterprises that are controlled or jointly controlled by its actual controller) shall (i) hold capital in more than two non-banking financial institutions (“NBFI”), or (ii) retain control of more than one NBFI of the same type (such as AMCs).
II.Thresholds for Local AMCs
Local AMCs refer to the asset management companies established with the approval of the people's government at the provincial level, which are allowed to acquire NPLs in bulk within the provincial territory of its place of incorporation. Since 2012, the regulatory system of local AMCs has been gradually established. During the early stages, each provincial government was allowed to establish or authorize only one local AMC1, and this quota requirement has been released afterwards2. As of the date of this article, according to publicly available information, 61 local AMCs have been established in China.
Currently, there are no nationwide statutory provisions specifying the thresholds with respect to investors of local AMCs, as the Implementation Measures apply only to nationwide AMCs, but not to local AMCs. That said, taking into account the business nature of local AMCs and nationwide AMCs, it is possible that, in practice, local authorities may make reference to the Implementation Measures in determining whether an investor is qualified to invest in a local AMC or not.
Except for Jiangxi province, none of the local authorities has issued any local regulations setting out the thresholds for investors of local AMCs.
III.Thresholds for Bank-type AMCs
Bank-type AMCs refer to non-bank financial institutions approved by the banking regulatory authority of the State Council of the PRC to mainly engage in the business of bank debt-to-equity swaps and other supporting businesses. Bank-type AMCs have a short history. The five existing bank-type AMCs were all established in 2017, by each of the five big state-owned banks, respectively.
At present, the main regulation for bank-type AMCs is the Trial Administrative Measures on Financial Asset Investment Companies ("Bank-type AMCs Measures"). According to the Bank-type AMCs Measures, a bank-type AMC shall be sponsored by a commercial bank registered in China, which shall act as the major shareholder of the sponsored bank-type AMC. In addition, the Bank-type AMCs Measures classify the shareholders of bank-type AMCs into two categories, namely "commercial banks as the major shareholders" and "other domestic and foreign legal entities as shareholders” and establishes the different thresholds for these two types of shareholders respectively.
A Commercial Bank as the Major Shareholder
Other Domestic and Foreign Legal Entities as Shareholders
Article 8
(1) have good corporate governance mechanisms, internal control systems and proper risk management systems;
(2) the key prudential regulatory indicators satisfy the regulatory requirements of the regulatory authorities where it was incorporated;
(3) have good financial standing, and achieved profits in each of the past three consecutive accounting years;
(4) being assessed at an “investment grade”, and with no record of a major violation or irregularity in the past two years;
(5) with specific development strategies and clear profit models for the financial asset investment company;
(6) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(7) a commitment not to transfer the equity it holds in the financial asset investment company within the next five years, and not to pledge or create a trust on the equity, and state the same in the articles of association of the financial asset investment company; and
(8) any other regulatory requirements stipulated under the rules of the banking regulatory department of the State Council.
The commercial bank shall, being a shareholder of the financial asset investment company, satisfy the requirements stipulated in items (1), (2), (3), (4), (6), (7) and (8) of the preceding paragraph.
Article 9
(1) have good corporate governance mechanisms;
(2) have a positive social reputation, creditworthiness records and tax payment records;
(3) if the investor is a financial institution, its total assets at the end of the preceding year shall not be less than RMB 5 billion or the equivalent value of a freely-convertible currency, and its net assets at the end of the preceding year shall not be less than 30% of the total assets;
(4) if the investor is a non-financial institution, the total amount of equity investments made by such shall not exceed 50% of its net assets (by consolidated accounting statements);
(5) with a good financial standing, and achieved profits in each of the past two consecutive accounting years;
(6) have good business management, and no record of major violations or irregularities over the past two years;
(7) self-owned funds (rather than funds held under trust or loan proceeds) shall be the sole source of funds for capital contribution;
(8) a commitment not to transfer the equity it holds in the financial asset investment company within the next five years, and not to pledge or create a trust on the shareholding, and state the same in the articles of association of the financial asset investment company; and
(9) any other regulatory requirements stipulated under the rules of the banking regulatory department of the State Council.
If the investor is a financial institution, it shall also satisfy the regulatory requirements stipulated under the relevant laws and regulations of where it is incorporated.
Furthermore, Bank-type AMCs Measures also provide that an enterprise shall not become an investor/shareholder of a bank-type AMC if it has any of the following circumstances: (1) have manifest defects in its corporate governance structures and mechanisms; (2) have a complicated and opaque shareholding structure, or unusual connected-party transactions; (3) have a wide scope of business involving multiple industries without a core business; (4) be subject to volatile cash flow fluctuations according to economic conditions; (5) have a debt-to-asset ratio or a financial leverage ratio at a level higher than the industry average; (6) have equity in the financial asset investment company held on trust for any other party; or (7) any other circumstances which have a significant adverse impact on a financial asset investment company.
IV.Thresholds for Foreign Investors
As of the date of this article, China has not issued specific regulations applicable to foreign investments in entities licensed to participate in China’s NPL market. In practice, there were only two market precedents in which foreign investors were allowed to invest in nationwide AMCs as strategic investors3.
For nationwide AMCs, as mentioned previously, the Implementation Measures have classified the investors of nationwide AMCs into domestic financial institutions, domestic non-financial institutions, and overseas financial institutions. For foreign investors, only financial institutions were allowed to invest in nationwide AMCs. Moreover, compared with the 2015 Implementation Measures, the new Implementation Measures no longer require that a foreign investor shall be a strategic investor. Thus, a foreign investor may invest as a financial investor in the future pursuant to the Implementation Measures. For the thresholds applicable to an overseas financial institution, please refer to Part I of this article.
For local AMCs, the thresholds for foreign investors of local AMCs are not clear under the law. Also, there is no market precedent of a foreign investor directly holding equity in a local AMC. However, taking into account that the China-U.S. Trade Agreement has allowed U.S. investors to hold NPL licenses for local AMCs, we expect that specific guidelines for foreign investments in local AMCs may be introduced in the near future.
For bank-type AMCs, only five bank-type AMCs have been established in China so far, and each of them is wholly-owned by a domestic commercial bank. However, considering that Bank-type AMCs Measures classify the shareholders of bank-type AMCs into "commercial banks as the major shareholders" and "other domestic and foreign legal entities shareholders", we understand that foreign investors are not excluded from investing in bank-type AMCs. For the thresholds of foreign investors, please refer to Part III of this article.
V.Summary
The current laws specify the thresholds for qualified investors to the nationwide AMCs and bank AMCs. However, the thresholds for the qualified investors to local AMCs remain unclear. Since the China-U.S. Trade Agreement has allowed U.S. investors to hold NPL licenses for local AMCs, we will keep our eyes on how this Trade Agreement will be implemented.
Wei Chen, Partner, Jun He
chenwei@junhe.com
1. In accordance with the Administrative Measures for Batch Transfer of Non-performing Assets by Financial Enterprises promulgated by the Ministry of Finance and the CBRC on January 18th, 2012, any people's government at the provincial level shall only, in principle, establish or authorize one asset management or operating company.
2. In accordance with the Letter of the CBRC’s General Office on the Appropriate Adjustment of Relevant Policies of Local Asset Management Companies promulgated by the former CBRC on January 18th, 2012, people's governments at the provincial level are allowed to establish one more local AMC.
3. UBS Group and Standard Chartered invested in China Cinda as strategic investors in 2012; Warburg Pincus, Malaysia Treasury Holdings Limited and Goldman Sachs invested in China Huarong as strategic investors in 2014.
