May 18, 2016 / 5:30 AM / 3 years ago

China to curb shadow banking via checks on fund house subsidiaries

A man walks on a bridge in the financial district of Pudong in Shanghai, China, April 5, 2016. REUTERSAly Song

SHANGHAI (Reuters) - China plans to tighten supervision over fund houses’ subsidiaries and rein in the expansion of a sector worth nearly 10 trillion yuan ($1.53 trillion) as regulators target a key channel for so-called shadow banking to contain financial risks, according to a copy of the draft rules seen by Reuters.

The Asset Management Association of China (AMAC) will set thresholds for fund houses to establish subsidiaries and use capital ratios to limit the subsidiaries’ ability to expand businesses, the draft rules said.

AMAC did not have an immediate comment when contacted by telephone and fax.

Loosely-regulated subsidiaries set up by mutual fund firms have grown rapidly over the past year, managing 9.8 trillion yuan worth of assets by the end of March, according to the AMAC, and becoming a key channel for shadow banking activities.

Under the proposed rules, fund houses applying to set up subsidiaries must manage at least 20 billion yuan in assets excluding money-market funds, and have a minimum 600 million yuan in net assets. Current thresholds are much lower.

The new rules would also require that a subsidiary’s net capital not be lower than the company’s total risk assets, while net assets must not be lower than 20 percent of its liability, in effect slashing the leverage ratio of the business.

China’s prolonged crackdown on riskier practices in the lesser-regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults as the economy struggles, and as top policymakers appear increasingly worried about the risks of relying on too much debt-fuelled stimulus.

Reporting by Samuel Shen, David Lin and John Ruwitch in Shanghai and Watson Zhang in Beijing; Editing by Kim Coghill

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