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Selection of Landing Site for Financial Holding Model

Chinese financial policy that targeted different problems at different periods of time has resulted in many rudimentary, policy-oriented financial holding models with differing focuses. For the argument that the future financial holding model has the advantage of economies of scale and synergies to be tested and confirmed, another important question needs to be answered: How to develop the financial holding model, or what kind of model needs to be developed. Based on realistic options of policy, this question would lead to a discussion on how to choose between further development with modification based on existing rudimentary models and exploration of a new model based on the evolution of market demands. Judged from the Chinese financial history and industrial practice, further development seems a reliable and pragmatic way for the design of policy for the following three reasons:

1. Under the current legal framework on the principle of operations and oversight based on separation of activities, the constraints on market behaviors are strong. Crossover is subject to official examination and approval/endorsement on a case-by-case basis. This usually requires coordination and franchise by the central government. In the short and medium run, the current framework will remain the suitable one for the development and regulation of the Chinese financial industry, and it will continue to improve and consolidate. Exploring and testing the financial holding model under the current framework can reduce the direct impact on the present status, unnecessary cost of change, and uncertainty. It can also help keep the systemic risk under control.

2. The existing crossover model can indicate a successful combination of financial practice and policy framework, to some extent. Despite various crossover models, such exploration of diversification offers more options and test perspectives for the selection of the future financial holding model, without the extra cost.

3. The Chinese financial industry is still growing and reengineering itself. The industrial landscape is changing. Inertia is being replaced by new market-oriented competitiveness. The banking sector, as the conventional financing channel, remains dominant in the financial industry. Securities and insurance sectors have more motivation and vitality for innovation during the exploration. When exploring the financial holding model, the competitive landscape and established strength of the three sectors must be considered. In fact, the single-line, market-oriented practice actually acquiesces in the arrangement that the conventional banking sector has for the resources endowment. The securities and insurance sectors have an innate disadvantage. There is no natural space for them during the development of the financial holding mode. Therefore, policy coordination and institutional design will be important in the process.

Among the existing financial holding models in China, the trial model, in which commercial banks are the main parts in holding companies, is directly subject to the provisions of Section 43 of the Commercial Banking Act. It states that "within the People's Republic of China, commercial banks shall not engage in trust investment and securities business; shall not invest in non-owner-occupied real estate or non-banking financial institutions and business, except as otherwise provided by the Chinese law." This reflects how stringent legislative requirements are on separation of banking from other financial sectors. It also indicates how difficult it will be if policy challenges the law by allowing banks to establish affiliates that engage in the activities of another financial sector.

Nonbanking companies that buy into financial institutions usually have the purpose of financial investment and local resources integration. They are not actually involved in financial business and specialized decision-making intervention. Therefore, the China Investment Corporation, conglomerates approved directly by the central government, and financial asset management companies seem closer to the path of substantive exploration of the financial holding model. A further comparison of these three firms follows.

Both the China Investment Corp. and national conglomerates (such as CITIC Group, China Everbright Group, and China Merchants Group) have important economic functions. These include foreign investment, cross-border economic exchanges, equity management, and the management of state-owned financial assets for the purpose of inflation proofing and possible appreciation. Their participation in financial business is a means to exercise such functions, rather than an end. They aim to carry out the government-defined functions, rather than become financial holding companies. In the course of business development, such duality in development orientation, in a particular environment and for a particular issue, may internalize goals and means into a unified business motive. It may also generate frictions and conflicts.

In contrast, financial asset management companies (AMC) that have accomplished the historical mission to dispose of nonperforming loans are in need of new functional orientation. They also need a development path to build on their relatively pure financial background, keep sources of assets, carry on asset management experience, and expand into a new category of financial institutions.

In real-world practice, Huarong and Cinda asset management companies are becoming such an embryonic form. Their subsidiaries have already obtained multiple licenses, respectively for banking, securities, futures, insurance, trust, leasing, and others. Their headquarters have full strategic decision-making power over subsidiaries. To transform into a financial holding company under the existing policy framework, a financial asset management company would not have to break through strict legislative and regulatory restrictions and spend extra money to build a new financial institution. For such policy-oriented financial institutions, it would be a discreet transformation in a particular historical background, which does not require a new regulatory framework. In this sense, it is a reformative design that has relatively low market, policy, and institutional costs. Of course, this is based on the premise that the Chinese financial market really needs financial holding companies.

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