2020
PRC Financial
Regulation
Annual Report

Disclaimer：This report has been prepared for discussion only, and should not in any way be considered as formal legal opinions or advice given by Fangda Partners or
its lawyers. We are not responsible for any results of any actions (whether action or omission) taken in reliance upon the whole or any part of the contents of this report.
You are welcome to contact us for formal legal opinion or legal service on the relevant topic.

Beijing

Guangzhou

Hong Kong

Shanghai

Shenzhen

27/F, North Tower
Beijing Kerry Centre
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Chaoyang District
Beijing 100020, China

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Place, 8 Huaxia Road,
Zhujiang New Town
Guangzhou 510623, China

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8 Connaught Place, Central
Hong Kong

24/F, HKRI Centre Two,
HKRI Taikoo Hui
288 Shi Men Yi Road
Shanghai 200041, China

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1 Zhong Xin Si Road
Futian District
Shenzhen 518048, China

Tel: +86 10 5769 5600
Fax:+86 10 5769 5788

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Fax:+86 755 8159 3900

www.fangdalaw.com

PRC Financial Regulation:
Annual Report (2020)

PRC Financial Regulation:
Annual Report (2020)01

Contents

Preface

Preface

01

General02

2019 marked the third full year since the holding of the Fifth National Financial Work Conference, which was a landmark
event heralding the transformation of China’s financial services industry. During the year, financial regulation underwent
significant change, the market was further opened to foreign participation and, generally, the process of market reform
accelerated. Some notable developments included the launch of the STAR market, the trialing of the IPO registration
system, commercial banks being permitted to open wealth management subsidiaries, and the implementation of the loan
prime rate (LPR) as the benchmark lending rate. The combined result of these changes spelled out major opportunities forbusinesses in financial services.

Banking

16

Securities

28

Asset Management

42

FinTech56

Insurance72

We have been working in the financial services industry for many years. We have a deep understanding of the market,
which we know is very important to our clients. We look forward to discussing with you the direction in which financial
regulation in China is headed, talking you through judicial thinking, reviewing recent reforms in China’s financial policy, andgiving insight into likely developments. To this end, we have prepared this Annual Financial Regulatory Report (2020) to
provide practical and forward-looking guidance, covering milestone events, main regulatory developments and key trends
in the banking, securities, asset management, financial technology and insurance sectors.
Our core mission is to provide effective, creative and timely legal services to meet the commercial needs of our clients.
Fangda’s Financial Institutions Group comprises 30 experienced lawyers. Our lawyers offer a full range of legal services
related to China’s financial institutions and financial markets. We advise both domestic and overseas clients on the most
cutting-edge and complex legal issues in China's financial services industry. We are at the forefront of significant initiatives
in the industry, leading on the market’s most significant transactions and new product structures. With our deep understanding of the market and our unparalleled experience of advising on groundbreaking transactions, we are able toprovide creative solutions in a complex financial regulatory environment. We look forward to sharing with you our observations that we have accumulated over years of practice.
We are always happy to absorb feedback from those working directly in the financial services industry, so please feel free
to get back to us with any comments or suggestions on the content of this report.
Much has happened in the financial services industry in 2019. We live in challenging times, but nevertheless there is muchto look forward to in 2020.

Jian Fang

Grace Yu

Siyuan Pan

Partner, Fangda Partners
jian.fang@fangdalaw.com

Partner, Fangda Partners
grace.yu@fangdalaw.com

Partner, Fangda Partners
siyuan.pan@fangdalaw.com

specializing in cutting-edge
M&A transactions, financial
markets regulations and PE
investment.

specializing in legal andregulatory issues of financial
regulations, and M&A.

specializing in M&A, PE
investment and general
corporate matters.

PRC Financial Regulation:
Annual Report (2020)

PRC Financial Regulation:
Annual Report (2020)01

Contents

Preface

Preface

01

General02

2019 marked the third full year since the holding of the Fifth National Financial Work Conference, which was a landmark
event heralding the transformation of China’s financial services industry. During the year, financial regulation underwent
significant change, the market was further opened to foreign participation and, generally, the process of market reform
accelerated. Some notable developments included the launch of the STAR market, the trialing of the IPO registration
system, commercial banks being permitted to open wealth management subsidiaries, and the implementation of the loan
prime rate (LPR) as the benchmark lending rate. The combined result of these changes spelled out major opportunities forbusinesses in financial services.

Banking

16

Securities

28

Asset Management

42

FinTech56

Insurance72

We have been working in the financial services industry for many years. We have a deep understanding of the market,
which we know is very important to our clients. We look forward to discussing with you the direction in which financial
regulation in China is headed, talking you through judicial thinking, reviewing recent reforms in China’s financial policy, andgiving insight into likely developments. To this end, we have prepared this Annual Financial Regulatory Report (2020) to
provide practical and forward-looking guidance, covering milestone events, main regulatory developments and key trends
in the banking, securities, asset management, financial technology and insurance sectors.
Our core mission is to provide effective, creative and timely legal services to meet the commercial needs of our clients.
Fangda’s Financial Institutions Group comprises 30 experienced lawyers. Our lawyers offer a full range of legal services
related to China’s financial institutions and financial markets. We advise both domestic and overseas clients on the most
cutting-edge and complex legal issues in China's financial services industry. We are at the forefront of significant initiatives
in the industry, leading on the market’s most significant transactions and new product structures. With our deep understanding of the market and our unparalleled experience of advising on groundbreaking transactions, we are able toprovide creative solutions in a complex financial regulatory environment. We look forward to sharing with you our observations that we have accumulated over years of practice.
We are always happy to absorb feedback from those working directly in the financial services industry, so please feel free
to get back to us with any comments or suggestions on the content of this report.
Much has happened in the financial services industry in 2019. We live in challenging times, but nevertheless there is muchto look forward to in 2020.

Jian Fang

Grace Yu

Siyuan Pan

Partner, Fangda Partners
jian.fang@fangdalaw.com

Partner, Fangda Partners
grace.yu@fangdalaw.com

Partner, Fangda Partners
siyuan.pan@fangdalaw.com

specializing in cutting-edge
M&A transactions, financial
markets regulations and PE
investment.

specializing in legal andregulatory issues of financial
regulations, and M&A.

specializing in M&A, PE
investment and general
corporate matters.

PRC Financial Regulation:
Annual Report (2020)
02

PRC Financial Regulation:
Annual Report (2020)
General

PRC Financial Regulation:
Annual Report (2020)032019 Key Dates
February 2
The Provisions on the Functions, Organizational
Structure and Staffing of the PBOC was issued.
The office of the Financial Stability and Development
Commission was set up in the PBOC to undertakethe daily work of the Commission

May 1
The CBIRC published 12 new opening-up measures

May 24The CBIRC took over Baoshang Bank, signaling
the regulator’s intent of the disposal ofhigh-risk problematic banks

July 11
Dajia Insurance was set up to acquire the equity,
assets and liabilities of AnBang Insurance,
signaling the start of the disposal of high-risk
insurance companies

July 26
The PBOC published the Interim Measures for
the Supervision and Administration of Financial
Holding Companies (Consultation Draft)

August 22
The PBOC issued FinTech Development Plan
(2019-2021)

December 5
The PBOC initiates a pilot regulation programfor FinTech innovations in Beijing, marking
China’s first steps into the “regulatory
sandbox” era

April 23
PRC financial regulatory authorities reached
the first ever administrative settlement with acounterparty

May 22
The first batch of commercial bank wealthmanagement subsidiaries opened for business

June 13

Shanghai Stock Exchange Science and Technology
Innovation Board (STAR) began trading andpiloted the IPO registration system

July 20
The Financial Stability and Development
Commission announced 11 new opening-up
policies for the financial sector

August 17
The PBOC issued an announcement on reforming
the LPR formation mechanism, which is an important
step in market-oriented interest rate reform

November 8
The Supreme People’s Court issued the Minutes of
the National Courts' Ninth Conference on Civil andCommercial Trial Work, with opinions on important
legal issues in the financial industry, such as
financial consumer protection

December 28
The amended Securities Law was adopted after its
fourth readingPRC Financial Regulation:
Annual Report (2020)
02

PRC Financial Regulation:
Annual Report (2020)
General

PRC Financial Regulation:
Annual Report (2020)032019 Key Dates
February 2
The Provisions on the Functions, Organizational
Structure and Staffing of the PBOC was issued.
The office of the Financial Stability and Development
Commission was set up in the PBOC to undertakethe daily work of the Commission

May 1
The CBIRC published 12 new opening-up measures

May 24The CBIRC took over Baoshang Bank, signaling
the regulator’s intent of the disposal ofhigh-risk problematic banks

July 11
Dajia Insurance was set up to acquire the equity,
assets and liabilities of AnBang Insurance,
signaling the start of the disposal of high-risk
insurance companies

July 26
The PBOC published the Interim Measures for
the Supervision and Administration of Financial
Holding Companies (Consultation Draft)

August 22
The PBOC issued FinTech Development Plan
(2019-2021)

December 5
The PBOC initiates a pilot regulation programfor FinTech innovations in Beijing, marking
China’s first steps into the “regulatory
sandbox” era

April 23
PRC financial regulatory authorities reached
the first ever administrative settlement with acounterparty

May 22
The first batch of commercial bank wealthmanagement subsidiaries opened for business

June 13

Shanghai Stock Exchange Science and Technology
Innovation Board (STAR) began trading andpiloted the IPO registration system

July 20
The Financial Stability and Development
Commission announced 11 new opening-up
policies for the financial sector

August 17
The PBOC issued an announcement on reforming
the LPR formation mechanism, which is an important
step in market-oriented interest rate reform

November 8
The Supreme People’s Court issued the Minutes of
the National Courts' Ninth Conference on Civil andCommercial Trial Work, with opinions on important
legal issues in the financial industry, such as
financial consumer protection

December 28
The amended Securities Law was adopted after its
fourth readingPRC Financial Regulation:
Annual Report (2020)
04

PRC Financial Regulation:
Annual Report (2020)05

2019 Regulatory Observations

01

Top-level authorities were promoting regulatory coordination andconsistency

There have been ongoing refinements in China to help
reduce and diffuse market risk in the financial markets.
The process started three years ago with the Fifth
National Financial Work Meeting. There have beensignificant changes in regulatory structures, frameworks
and approaches.
In this process, there was unprecedented co-effort andcoordination between: the PBOC, the CSRC, and CBIRC;
the executive, judicial and legislative authorities; and thecentral and local governments. The Financial Stability
and Development Commission held five meetings in thesecond half of 2019 to discuss and assign various tasks.
And at the executive level, the CSRC initiated uniform law
enforcement action against illegal conduct in theinter-bank bond market and the exchange bond market
following the promulgation of the Opinions on Issues
Concerning Further Strengthening Law Enforcement in

the Bond Market by the PBOC, the CSRC, and the NDRC.
For illegal or non-compliant information disclosure,insider trading, market manipulation and other acts that
violate the Securities Law involving all types of bonds
and debt financing instruments, the CSRC has exerted its
regulation and law enforcement by investigating
violations and imposing administrative penalties
according to the Securities Law. This concentration of
power by the CSRC sets an example for regulators tostrengthen their coordination and cooperation inestablishing a unified law and regulatory enforcement
regime for the securities market.

02

Regulation focus has shifted from institutions to conduct and function,
while the government has rolled out a more comprehensive system forbusiness and individual creditworthiness

The regulatory authorities paid more attention tofunction-based regulation and conduct-based
regulation in their regulatory philosophies.
Commenting on asset management, a CBIRC official
said in an interview that the wealth managementbusiness of a commercial bank and its wealthmanagement subsidiaries is built on a trust relationshipwith clients, breaking the long-term "trust" taboo forthe asset management and wealth managementbusiness of commercial banks. The newly revised
Securities Law also clearly authorizes the State Council
to formulate administrative measures for the issuanceand trade of asset management products under the
principles set out under the Securities Law. All thesemean, the asset and wealth management
product/service offered by different financial
institutions, being identical in nature, will be subject touniform rules. In internet finance, the regulatory
authorities have clearly defined the parameters towhich banks and other lending institutions assisting thebanks may be subject in undertaking their cooperation.
The “sandbox” regulation is an even more importantreflection of the change from institution-based
regulation to conduct-based regulation – it applies toall innovative fintech activities rather than any specific
type of institutions.

Meanwhile, following the Outline of the Plan for the
Building of a Social Credit System (2014-2020), the StateCouncil issued the Guiding Opinions on Accelerating
the Construction of a Social Credit System and Building
up a New Credit Based Regulatory Regime, specifyingthat such matters as the priority given in futureadministrative licensing and the proportion andfrequency of random market checks will both be
adjusted according to the credit conditions ofenterprises. In the financial service sector, great
importance has been attached to the credit conditionsof financial institutions in the grant of regulatory
approvals on significant matters and tiered regulationof financial institutions, and therefore the opinions will
not materially impact the regulation of financial
institutions. That said, the linking of enterprise credit
with administrative supervision in the broad society will
significantly strengthen and improve the establishmentof the entire social credit system, which will be more
conducive to risk control of financial institutions, and ofcourse, but also set higher standards for their due
diligence work regarding KYC and anti-money
laundering.

PRC Financial Regulation:
Annual Report (2020)
04

PRC Financial Regulation:
Annual Report (2020)05

2019 Regulatory Observations

01

Top-level authorities were promoting regulatory coordination andconsistency

There have been ongoing refinements in China to help
reduce and diffuse market risk in the financial markets.
The process started three years ago with the Fifth
National Financial Work Meeting. There have beensignificant changes in regulatory structures, frameworks
and approaches.
In this process, there was unprecedented co-effort andcoordination between: the PBOC, the CSRC, and CBIRC;
the executive, judicial and legislative authorities; and thecentral and local governments. The Financial Stability
and Development Commission held five meetings in thesecond half of 2019 to discuss and assign various tasks.
And at the executive level, the CSRC initiated uniform law
enforcement action against illegal conduct in theinter-bank bond market and the exchange bond market
following the promulgation of the Opinions on Issues
Concerning Further Strengthening Law Enforcement in

the Bond Market by the PBOC, the CSRC, and the NDRC.
For illegal or non-compliant information disclosure,insider trading, market manipulation and other acts that
violate the Securities Law involving all types of bonds
and debt financing instruments, the CSRC has exerted its
regulation and law enforcement by investigating
violations and imposing administrative penalties
according to the Securities Law. This concentration of
power by the CSRC sets an example for regulators tostrengthen their coordination and cooperation inestablishing a unified law and regulatory enforcement
regime for the securities market.

02

Regulation focus has shifted from institutions to conduct and function,
while the government has rolled out a more comprehensive system forbusiness and individual creditworthiness

The regulatory authorities paid more attention tofunction-based regulation and conduct-based
regulation in their regulatory philosophies.
Commenting on asset management, a CBIRC official
said in an interview that the wealth managementbusiness of a commercial bank and its wealthmanagement subsidiaries is built on a trust relationshipwith clients, breaking the long-term "trust" taboo forthe asset management and wealth managementbusiness of commercial banks. The newly revised
Securities Law also clearly authorizes the State Council
to formulate administrative measures for the issuanceand trade of asset management products under the
principles set out under the Securities Law. All thesemean, the asset and wealth management
product/service offered by different financial
institutions, being identical in nature, will be subject touniform rules. In internet finance, the regulatory
authorities have clearly defined the parameters towhich banks and other lending institutions assisting thebanks may be subject in undertaking their cooperation.
The “sandbox” regulation is an even more importantreflection of the change from institution-based
regulation to conduct-based regulation – it applies toall innovative fintech activities rather than any specific
type of institutions.

Meanwhile, following the Outline of the Plan for the
Building of a Social Credit System (2014-2020), the StateCouncil issued the Guiding Opinions on Accelerating
the Construction of a Social Credit System and Building
up a New Credit Based Regulatory Regime, specifyingthat such matters as the priority given in futureadministrative licensing and the proportion andfrequency of random market checks will both be
adjusted according to the credit conditions ofenterprises. In the financial service sector, great
importance has been attached to the credit conditionsof financial institutions in the grant of regulatory
approvals on significant matters and tiered regulationof financial institutions, and therefore the opinions will
not materially impact the regulation of financial
institutions. That said, the linking of enterprise credit
with administrative supervision in the broad society will
significantly strengthen and improve the establishmentof the entire social credit system, which will be more
conducive to risk control of financial institutions, and ofcourse, but also set higher standards for their due
diligence work regarding KYC and anti-money
laundering.

PRC Financial Regulation:
Annual Report (2020)
06

PRC Financial Regulation:
Annual Report (2020)
07

03

Market-oriented reform of financial resources and financial regulation
were deepened

The reform in 2019 addressed several core andfundamental financial market problems that hadremained unsolved for a long time, and took a big step
towards the marketization of the financial resources
allocation and the financial regulation. Loan prime rate(LPR) reform has made significant progress in the"two-track merger" of interest rates. The securities
issuance registration system was piloted with thelaunch of the STAR in the middle of 2019 and was fully
adopted in the revised Securities Law. According to therelevant statistics, 203 new A-shares were listed on thestock exchanges in 2019, and 70 enterprises weresuccessfully listed on the STAR within less than half ayear of its opening, representing 32% of the total
financing in the A-share IPO market. This reflects the
positive results of market oriented reform.
In terms of resolving risks posed by problematic
financial institutions, the PBOC, the MOF, and othercompetent financial regulatory authorities and local
governments took various measures that combined
administrative actions with market-oriented disposals.
These combined methods could be seen in the
takeover of Baoshang Bank, the capital injection into
Hengfeng Bank, the restructuring of AnBang Insurance
and the administrative winding-up and entrustment of
Huaxin Securities and including the remaining assets inthe bankruptcy procedures of Huaxin Group. In
addition, in some fields, extensive but generalregulation has been gradually replaced with targeted
and precise regulation. For example, in terms of

payment business, in addition to the license
requirement, payment companies were further
required to terminate their direct links with banks andto deposit 100% of the advance payments they receive
into the central reserves. Moreover, in terms of internet
finance, after extensive investigations by regulatory
authorities, market players were required to graduallyand positively exit from the market. Regulatory
authorities have also provided guidance for them toexit P2P business depending on specific targets andbusiness, which is in sharp contrast with the previous
practice of immediately suspending all illegal
businesses at one time.

04“Look through” approach was taken for regulating financial institution
shareholding and separation of industry and finance was required.

Following the joint issuance of the Guiding Opinions on
Strengthening the Supervision Over Non-financial
Enterprises' Investment in Financial Institutions by
various regulatory authorities, the Provisional Measures
on Administration of Equities of Commercial Banks andthe Administrative Measures on Equity of Insurance
Companies were issued in 2018. In 2019, the regulatory
authorities continued to comprehensively implement
the Guiding Opinions with the issuance of the
Administrative Provisions on Equities of Securities
Companies and the issuance of the draft of Provisional
Measures on Administration of Equities of Trust
Companies for public consultation.
These provisions, as well as the regulatory examination
and approval practices implemented in 2019, strictly
require regulatory authorities to enhance examinationof shareholders' qualifications, shareholding structureand source of capital by taking the “look through”
approach and to differentiate the regulation of different
types of shareholders. These also impose shareholding
limits on non-financial enterprises in respect of certain
types of institutions (such as securities companies). The
SASAC issued a document to central State-owned
enterprises early 2019, requiring those enterprises to"strictly control new investments in financial business,
and not to, in principle, make new investments inbanks, trust companies and other financial institutions
that are not highly related to the group’s main businessand have little effect on the integration of industry andfinance". This is in line with the rules jointly issued byvarious financial regulatory authorities whichemphasized the separation of industry and finance toprevent investments shifting from the real economy to
the fictitious economy.

PRC Financial Regulation:
Annual Report (2020)
06

PRC Financial Regulation:
Annual Report (2020)
07

03

Market-oriented reform of financial resources and financial regulation
were deepened

The reform in 2019 addressed several core andfundamental financial market problems that hadremained unsolved for a long time, and took a big step
towards the marketization of the financial resources
allocation and the financial regulation. Loan prime rate(LPR) reform has made significant progress in the"two-track merger" of interest rates. The securities
issuance registration system was piloted with thelaunch of the STAR in the middle of 2019 and was fully
adopted in the revised Securities Law. According to therelevant statistics, 203 new A-shares were listed on thestock exchanges in 2019, and 70 enterprises weresuccessfully listed on the STAR within less than half ayear of its opening, representing 32% of the total
financing in the A-share IPO market. This reflects the
positive results of market oriented reform.
In terms of resolving risks posed by problematic
financial institutions, the PBOC, the MOF, and othercompetent financial regulatory authorities and local
governments took various measures that combined
administrative actions with market-oriented disposals.
These combined methods could be seen in the
takeover of Baoshang Bank, the capital injection into
Hengfeng Bank, the restructuring of AnBang Insurance
and the administrative winding-up and entrustment of
Huaxin Securities and including the remaining assets inthe bankruptcy procedures of Huaxin Group. In
addition, in some fields, extensive but generalregulation has been gradually replaced with targeted
and precise regulation. For example, in terms of

payment business, in addition to the license
requirement, payment companies were further
required to terminate their direct links with banks andto deposit 100% of the advance payments they receive
into the central reserves. Moreover, in terms of internet
finance, after extensive investigations by regulatory
authorities, market players were required to graduallyand positively exit from the market. Regulatory
authorities have also provided guidance for them toexit P2P business depending on specific targets andbusiness, which is in sharp contrast with the previous
practice of immediately suspending all illegal
businesses at one time.

04“Look through” approach was taken for regulating financial institution
shareholding and separation of industry and finance was required.

Following the joint issuance of the Guiding Opinions on
Strengthening the Supervision Over Non-financial
Enterprises' Investment in Financial Institutions by
various regulatory authorities, the Provisional Measures
on Administration of Equities of Commercial Banks andthe Administrative Measures on Equity of Insurance
Companies were issued in 2018. In 2019, the regulatory
authorities continued to comprehensively implement
the Guiding Opinions with the issuance of the
Administrative Provisions on Equities of Securities
Companies and the issuance of the draft of Provisional
Measures on Administration of Equities of Trust
Companies for public consultation.
These provisions, as well as the regulatory examination
and approval practices implemented in 2019, strictly
require regulatory authorities to enhance examinationof shareholders' qualifications, shareholding structureand source of capital by taking the “look through”
approach and to differentiate the regulation of different
types of shareholders. These also impose shareholding
limits on non-financial enterprises in respect of certain
types of institutions (such as securities companies). The
SASAC issued a document to central State-owned
enterprises early 2019, requiring those enterprises to"strictly control new investments in financial business,
and not to, in principle, make new investments inbanks, trust companies and other financial institutions
that are not highly related to the group’s main businessand have little effect on the integration of industry andfinance". This is in line with the rules jointly issued byvarious financial regulatory authorities whichemphasized the separation of industry and finance toprevent investments shifting from the real economy to
the fictitious economy.

PRC Financial Regulation:
Annual Report (2020)
08

PRC Financial Regulation:
Annual Report (2020)0905

Regulatory authorities continued their focus on greater enforcement,
and considered expanding range of enforcement measures

It became apparent that judicial practice become moreadministration-oriented and policy-oriented.

In addition, new law enforcement models wereexperimented with and innovated in the tightened
regulatory environment. In 2019, the CSRC announced
China’s first administrative settlement under the
Measures for Implementing the Pilot Program of
Administrative Settlement, which took effect in 2015.
This marked a new model for law enforcement infinancial regulation.

The Minutes of the National Courts' Ninth Conferenceon Civil and Commercial Trial Work, which generated asignificant impact on the judiciary in 2019, granted forthe first time legal force equivalent to mandatory laws
and regulations to departmental rules involving
financial security. The minutes formally establish a
direct relationship between the violation of financial
regulations and the violation of public order in their
quasi-judicial interpretation following the nominee
shareholding case involving J.K. Life Insurance Co., Ltd.
The minutes provide that "the contract which violates
departmental rules involving public order and good
morals such as financial security, market order andnational macro policies shall be determined to beinvalid. When determining whether departmental rules
involve public order and good morals, the people's
courts shall, on the basis of examining the objects being
regulated, prudently consider the intensity of
regulation, protection of transaction security, social
impact and other aspects, and make full reasoning in
the judgments."

Technology was used more widely in regulation andlaw enforcement, and the CSRC was reported toestablish the Technology Supervision Bureau at the endof 2019 to propel Regtech into version 3.0. Protecting
financial consumers’ rights and interests was a focus offinancial institutions in 2019. In the middle of the year,
the alarm was sounded for the whole asset
management industry when China Construction Bank

In light of this, regulatory rules in the financial sector will
no longer be simply considered as administrative
regulations (not regulations impacting on validity ofcontracts). That said, whether a violation of such rules
will impact the validity of a contract will be subject tothe regulatory environment and social impact of such
violation at the specific time and place. This means that
violation of the same provision may lead to different

All financial regulatory authorities continued to apply
strong regulatory pressure in 2019. Out of the cases inwhich sanctions were imposed by the PBOC, the CSRC,
CBIRC and SAFE, the number in the asset management
industry including banks' wealth management
products, trust schemes, securities companies' asset
management products and others grew steadily andmoderately; based on the data disclosed by the CBIRC
as an example, the total amount of penalties imposedby the CBIRC during 2017 to the first quarter of 2019 isabout RMB6 billion, which is higher than the total
amount of penalties imposed in the past ten years.

was required to fully compensate a client for the bank’s
failure to perform suitability obligations. At the end of
2019, the Minutes of the National Courts' Ninth
Conference on Civil and Commercial Trial Work set out
a high number of provisions on cases involving financial
consumer rights and interests. Financial consumers has
become the focus in both administrative and judicial
practice in 2019, and this has triggered deep thought
about how to accurately define and classify financial
consumers.

06

results
dependingondifferent
regulatoryenvironments. Meanwhile, the judiciary has made moreinnovations to further support and promote financial
regulation, and the introduction of "demonstration
cases" by the Shanghai Financial Court is a good
example of this innovation.

PRC Financial Regulation:
Annual Report (2020)
08

PRC Financial Regulation:
Annual Report (2020)0905

Regulatory authorities continued their focus on greater enforcement,
and considered expanding range of enforcement measures

It became apparent that judicial practice become moreadministration-oriented and policy-oriented.

In addition, new law enforcement models wereexperimented with and innovated in the tightened
regulatory environment. In 2019, the CSRC announced
China’s first administrative settlement under the
Measures for Implementing the Pilot Program of
Administrative Settlement, which took effect in 2015.
This marked a new model for law enforcement infinancial regulation.

The Minutes of the National Courts' Ninth Conferenceon Civil and Commercial Trial Work, which generated asignificant impact on the judiciary in 2019, granted forthe first time legal force equivalent to mandatory laws
and regulations to departmental rules involving
financial security. The minutes formally establish a
direct relationship between the violation of financial
regulations and the violation of public order in their
quasi-judicial interpretation following the nominee
shareholding case involving J.K. Life Insurance Co., Ltd.
The minutes provide that "the contract which violates
departmental rules involving public order and good
morals such as financial security, market order andnational macro policies shall be determined to beinvalid. When determining whether departmental rules
involve public order and good morals, the people's
courts shall, on the basis of examining the objects being
regulated, prudently consider the intensity of
regulation, protection of transaction security, social
impact and other aspects, and make full reasoning in
the judgments."

Technology was used more widely in regulation andlaw enforcement, and the CSRC was reported toestablish the Technology Supervision Bureau at the endof 2019 to propel Regtech into version 3.0. Protecting
financial consumers’ rights and interests was a focus offinancial institutions in 2019. In the middle of the year,
the alarm was sounded for the whole asset
management industry when China Construction Bank

In light of this, regulatory rules in the financial sector will
no longer be simply considered as administrative
regulations (not regulations impacting on validity ofcontracts). That said, whether a violation of such rules
will impact the validity of a contract will be subject tothe regulatory environment and social impact of such
violation at the specific time and place. This means that
violation of the same provision may lead to different

All financial regulatory authorities continued to apply
strong regulatory pressure in 2019. Out of the cases inwhich sanctions were imposed by the PBOC, the CSRC,
CBIRC and SAFE, the number in the asset management
industry including banks' wealth management
products, trust schemes, securities companies' asset
management products and others grew steadily andmoderately; based on the data disclosed by the CBIRC
as an example, the total amount of penalties imposedby the CBIRC during 2017 to the first quarter of 2019 isabout RMB6 billion, which is higher than the total
amount of penalties imposed in the past ten years.

was required to fully compensate a client for the bank’s
failure to perform suitability obligations. At the end of
2019, the Minutes of the National Courts' Ninth
Conference on Civil and Commercial Trial Work set out
a high number of provisions on cases involving financial
consumer rights and interests. Financial consumers has
become the focus in both administrative and judicial
practice in 2019, and this has triggered deep thought
about how to accurately define and classify financial
consumers.

06

results
dependingondifferent
regulatoryenvironments. Meanwhile, the judiciary has made moreinnovations to further support and promote financial
regulation, and the introduction of "demonstration
cases" by the Shanghai Financial Court is a good
example of this innovation.

PRC Financial Regulation:
Annual Report (2020)
10

PRC Financial Regulation:
Annual Report (2020)
11

07

China’s financial markets opened up, including lifting limits on foreign
shareholdings in financial institutions

In view of the driving force of “promoting reform
through opening up the market” and the changes ininternational and domestic environments, the top
levels of the Chinese government reached a consensus
in 2019 to further the opening-up of the financial
industry. The administration model has been graduallytransformed from the traditional “positive list” to a"negative list" and a number of opening-up policies andimplementation rules were issued. As a result,
break-through was made in comprehensively opening
up the financial market to foreign investors.
As far as onshore commercial presence is concerned,
several fields that had never been officially opened toforeign investors were starting to open. For example,
Paypal was approved to become the firstforeign-invested payment institution to operate in
China, and American Express was approved to establish
a payment and clearing institution. The restrictions on
the shareholding ratio for foreign investors in thefinancial industry were also removed generally. In 2020,
foreign investors will be allowed to hold 100% share insecurities, funds, futures, insurance and other types offinancial institutions, or to acquire 100% interest in
domestic financial institutions. Moreover, conditions forforeign investment to access the Chinese market were
substantially relaxed. For instance, “quantitative
qualification requirements” were reduced for thebanking and insurance industries, leaving room forsmall- and medium-sized foreign-invested institutions

to participate. National treatment to foreign investors
was further implemented in terms of business scope,and licenses for certain critical businesses were issued
to foreign-invested banks, such as license to act as
custodian for publicly offered funds and license to serve
as lead underwriters in the inter-bank bond market.
In terms of cross-border transactions, many measures
were implemented: the Shanghai-London Stock
Connect was implemented, the first GDR was launched,
Segway-Ninebot’s application to the STAR was
accepted (this is the first red-chip enterprise with VIE
structure that seeks to be listed on the STAR by issuingCDR), a number of new futures products were opened
to foreign investors, the QFII/RQFII investment quota
restrictions were lifted, and further relaxation on
QFII/RQFII investments was proposed.

08

China’s regulatory authorities were linking up more with counterpartsin other jurisdictions to coordinate enforcement

As China's financial markets have opened and become
more interconnected with foreign financial markets, thedemand for and the complexity of cross-bordercooperation between domestic and foreign regulatory
authorities in law enforcement have increased
significantly. Cooperative efforts have already been
underway in recent years, such as the “first case under
the Shanghai-Hong Kong Stock Connect” involving
cross-border market manipulation in 2018, but 2019sought to expand on these efforts.
In 2019, for example:·The CBIRC and the Monetary Authority of Singapore
entered into a memorandum of cooperation,·the CSRC and the Securities and Exchange Commissionof Cambodia entered into a memorandum of cooperation,·the China Anti-Money Laundering Monitoring andAnalysis Centre and the Korea Financial Intelligence
Unit entered into a memorandum of understanding
on financial information exchange for anti-money
laundering and anti-terrorist financing, and·the MOF and the Financial Reporting Council of theHong Kong Special Administrative Region enteredinto a memorandum of understanding on audit
regulation.

Of these, the last is of particular importance because it
allows the Financial Reporting Council to obtain audit
working papers deposited in the mainland by Hong
Kong based accounting firms.
In addition to these memorandums of understanding,the SAFE also cooperated with various overseas
administrative and regulatory authorities in dealing
with more than 2,000 domestic and overseas illegal
foreign exchange trading platforms by banning,closing, penalizing, etc. the platforms.

PRC Financial Regulation:
Annual Report (2020)
10

PRC Financial Regulation:
Annual Report (2020)
11

07

China’s financial markets opened up, including lifting limits on foreign
shareholdings in financial institutions

In view of the driving force of “promoting reform
through opening up the market” and the changes ininternational and domestic environments, the top
levels of the Chinese government reached a consensus
in 2019 to further the opening-up of the financial
industry. The administration model has been graduallytransformed from the traditional “positive list” to a"negative list" and a number of opening-up policies andimplementation rules were issued. As a result,
break-through was made in comprehensively opening
up the financial market to foreign investors.
As far as onshore commercial presence is concerned,
several fields that had never been officially opened toforeign investors were starting to open. For example,
Paypal was approved to become the firstforeign-invested payment institution to operate in
China, and American Express was approved to establish
a payment and clearing institution. The restrictions on
the shareholding ratio for foreign investors in thefinancial industry were also removed generally. In 2020,
foreign investors will be allowed to hold 100% share insecurities, funds, futures, insurance and other types offinancial institutions, or to acquire 100% interest in
domestic financial institutions. Moreover, conditions forforeign investment to access the Chinese market were
substantially relaxed. For instance, “quantitative
qualification requirements” were reduced for thebanking and insurance industries, leaving room forsmall- and medium-sized foreign-invested institutions

to participate. National treatment to foreign investors
was further implemented in terms of business scope,and licenses for certain critical businesses were issued
to foreign-invested banks, such as license to act as
custodian for publicly offered funds and license to serve
as lead underwriters in the inter-bank bond market.
In terms of cross-border transactions, many measures
were implemented: the Shanghai-London Stock
Connect was implemented, the first GDR was launched,
Segway-Ninebot’s application to the STAR was
accepted (this is the first red-chip enterprise with VIE
structure that seeks to be listed on the STAR by issuingCDR), a number of new futures products were opened
to foreign investors, the QFII/RQFII investment quota
restrictions were lifted, and further relaxation on
QFII/RQFII investments was proposed.

08

China’s regulatory authorities were linking up more with counterpartsin other jurisdictions to coordinate enforcement

As China's financial markets have opened and become
more interconnected with foreign financial markets, thedemand for and the complexity of cross-bordercooperation between domestic and foreign regulatory
authorities in law enforcement have increased
significantly. Cooperative efforts have already been
underway in recent years, such as the “first case under
the Shanghai-Hong Kong Stock Connect” involving
cross-border market manipulation in 2018, but 2019sought to expand on these efforts.
In 2019, for example:·The CBIRC and the Monetary Authority of Singapore
entered into a memorandum of cooperation,·the CSRC and the Securities and Exchange Commissionof Cambodia entered into a memorandum of cooperation,·the China Anti-Money Laundering Monitoring andAnalysis Centre and the Korea Financial Intelligence
Unit entered into a memorandum of understanding
on financial information exchange for anti-money
laundering and anti-terrorist financing, and·the MOF and the Financial Reporting Council of theHong Kong Special Administrative Region enteredinto a memorandum of understanding on audit
regulation.

Of these, the last is of particular importance because it
allows the Financial Reporting Council to obtain audit
working papers deposited in the mainland by Hong
Kong based accounting firms.
In addition to these memorandums of understanding,the SAFE also cooperated with various overseas
administrative and regulatory authorities in dealing
with more than 2,000 domestic and overseas illegal
foreign exchange trading platforms by banning,closing, penalizing, etc. the platforms.

PRC Financial Regulation:
Annual Report (2020)
12

PRC Financial Regulation:
Annual Report (2020)
132020 Regulatory Outlook

01

Regulatory authorities will address systematic financial risk with aproposed series of reforms, including tighter regulation and greater
capital requirements

In 2019, significant progress was made in disposing ofmajor financial risks, including the risks related to internet
finance and other problematic financial institutions. In
2020, regulatory authorities is expected to establish andimplement
long-termrisk
prevention
mechanisms and will fundamentally rely on reformand development to prevent and defuse risks. Thoselong-term risk prevention mechanisms may include
enhancing commercial banks’ ability to replenish
capital, especially small and medium-sized banks,
tightening financial regulation, promoting litigation, andpromoting bankruptcy legislation. At the same time,
subjecting all financial businesses to licensing andexpanding the application of anti-money launderingsystem to more entities are expected to become theregulatory focus.

02

Institution-based regulation and function-based regulation will
advance hand-in-hand with conduct-based regulation over financial
institutions, and the regime of separate regulation of different types offinancial institutions may be broken indirectly.

Function-based regulation and conduct-based
regulation are future trends, and we expect the top-levelgovernment authorities to continue pushing for thisdirection, focusing on FinTech, securities enforcement
and financial consumer protection. That said, we believe that
institution-based regulation and conduct-based
regulation as well as function-based regulation will
coexist and complement each other for the foreseeable
future. For example, the yet-to-be-issued
administrative rules governing independent fund
distributors remain to regulate market access from alicensing perspective, and while the central bankannounced that “sandboxes” will be piloted in 10 cities,
currently the complete sandbox was merely
implemented in Beijing and Shanghai Pudong.
In contrast, the regulation of financial holding
companies (FHC), which has been studied and piloted
by the PBOC for years, has been added to the legislative
agenda and a consultation draft was promulgated in
2019. Although the original intent behind the FHC rule
was to fill the existing regulatory vacuum of separate
regulation, this does not exclude the possibility that thecross-sector financial groups within non-financial
corporate groups (which may be further expanded topure financial groups in the future) may take theopportunity to achieve intra-group information sharing
and resource allocation in a subtle way, so as to break
the barriers of separate regulation to a certain extent
through a higher level financial holding companies. This
innovation may be achieved by a sandbox in the near
future.

PRC Financial Regulation:
Annual Report (2020)
12

PRC Financial Regulation:
Annual Report (2020)
132020 Regulatory Outlook

01

Regulatory authorities will address systematic financial risk with aproposed series of reforms, including tighter regulation and greater
capital requirements

In 2019, significant progress was made in disposing ofmajor financial risks, including the risks related to internet
finance and other problematic financial institutions. In
2020, regulatory authorities is expected to establish andimplement
long-termrisk
prevention
mechanisms and will fundamentally rely on reformand development to prevent and defuse risks. Thoselong-term risk prevention mechanisms may include
enhancing commercial banks’ ability to replenish
capital, especially small and medium-sized banks,
tightening financial regulation, promoting litigation, andpromoting bankruptcy legislation. At the same time,
subjecting all financial businesses to licensing andexpanding the application of anti-money launderingsystem to more entities are expected to become theregulatory focus.

02

Institution-based regulation and function-based regulation will
advance hand-in-hand with conduct-based regulation over financial
institutions, and the regime of separate regulation of different types offinancial institutions may be broken indirectly.

Function-based regulation and conduct-based
regulation are future trends, and we expect the top-levelgovernment authorities to continue pushing for thisdirection, focusing on FinTech, securities enforcement
and financial consumer protection. That said, we believe that
institution-based regulation and conduct-based
regulation as well as function-based regulation will
coexist and complement each other for the foreseeable
future. For example, the yet-to-be-issued
administrative rules governing independent fund
distributors remain to regulate market access from alicensing perspective, and while the central bankannounced that “sandboxes” will be piloted in 10 cities,
currently the complete sandbox was merely
implemented in Beijing and Shanghai Pudong.
In contrast, the regulation of financial holding
companies (FHC), which has been studied and piloted
by the PBOC for years, has been added to the legislative
agenda and a consultation draft was promulgated in
2019. Although the original intent behind the FHC rule
was to fill the existing regulatory vacuum of separate
regulation, this does not exclude the possibility that thecross-sector financial groups within non-financial
corporate groups (which may be further expanded topure financial groups in the future) may take theopportunity to achieve intra-group information sharing
and resource allocation in a subtle way, so as to break
the barriers of separate regulation to a certain extent
through a higher level financial holding companies. This
innovation may be achieved by a sandbox in the near
future.

PRC Financial Regulation:
Annual Report (2020)
14

03

The derivatives market will
expand, offering new opportunities
as well as greater regulation. The
futures regulatory framework is
expected to take shape

With the CSRC’s 2019 introduction of five commodity
futures and three financial option products,
exchange-traded derivatives have reached an
unprecedented level. SAFE is also seeking market
opinions on the direct participation of overseas banks inforeign exchange derivatives trading in the interbank
foreign exchange market.
These all indicate that the relevant regulators haverepositioned the market risks and functions ofderivatives, and new derivatives business opportunities
will arise on the exchange markets and over-the-countermarkets in 2020. We expect the regulation of derivatives
business and their market to be a regulatory focus in 2020,
with a regulatory framework for cross-market andcross-agency coordination to take initial shape. In
addition, as the Securities Law will no longer govern
futures transactions, the promulgation of the Futures
Law and the establishment of an independent
futures regulatory framework will be a focus of financial
regulatory legislation in 2020.

PRC Financial Regulation:
Annual Report (2020)
15

04

05

The protection of personal financial information and the
security of financial transaction data will be the focus oflegislation and law enforcement in 2020. At the end of
2019, the PBOC released the consultation draft on theProtection of Personal Financial Information (Data); The
Personal Information Protection Law and the Data
Security Law are both listed on the NPC’s 2020 legislative
agenda; and the newly revised Securities Law also
contains special provisions on cross-border datatransmission.

The revised Securities Law is scheduled to take effect inMarch 2020. Once it takes effect, heavier administrative
punishments and collective-action lawsuits can be
expected. It is noteworthy that in two cases involving abranch of the Shanghai Pudong Development Bank anda branch of the Guanfa Bank respectively in October
2019, the CBIRC abruptly imposed punishments on thecurrent bank chairmen and senior officers of banks that
violated relevant regulations in 2017 and 2018. The
CBIRC’s penalties indicate that the ex post administrative
penalties (after penalties on the institution itself) uponsenior managers, including senior managers locatedin the institutions’ headquarters, will become the newnorm. In addition, the Securities Law broadly provide

Financial information protection
and data security will be the focusof new laws and enforcement

Meanwhile, the PBOC and the National Internet Finance
Association of China have clearly signaled their intent topush forward the filing system for registrations and tostrengthen the assessment and certification of financial
apps. The PBOC will also work with the relevant ministries
and departments to take joint measures to app stores andto quickly require the removal of apps that are unlawfulor have material hidden risks.

Administrative and judicial enforcement against illegal securities
activities will step up, including imposing sanctions againstcompany managers

that if foreign securities activities disrupted China’s
domestic market order and damaged the legitimate
rights and interests of domestic Chinese investors, legal
liabilities may be imposed pursuant to the Securities
Law. While it is not clear as to how this will be applied,there remains a possibility that new types of such cases
will be seen.

PRC Financial Regulation:
Annual Report (2020)
14

03

The derivatives market will
expand, offering new opportunities
as well as greater regulation. The
futures regulatory framework is
expected to take shape

With the CSRC’s 2019 introduction of five commodity
futures and three financial option products,
exchange-traded derivatives have reached an
unprecedented level. SAFE is also seeking market
opinions on the direct participation of overseas banks inforeign exchange derivatives trading in the interbank
foreign exchange market.
These all indicate that the relevant regulators haverepositioned the market risks and functions ofderivatives, and new derivatives business opportunities
will arise on the exchange markets and over-the-countermarkets in 2020. We expect the regulation of derivatives
business and their market to be a regulatory focus in 2020,
with a regulatory framework for cross-market andcross-agency coordination to take initial shape. In
addition, as the Securities Law will no longer govern
futures transactions, the promulgation of the Futures
Law and the establishment of an independent
futures regulatory framework will be a focus of financial
regulatory legislation in 2020.

PRC Financial Regulation:
Annual Report (2020)
15

04

05

The protection of personal financial information and the
security of financial transaction data will be the focus oflegislation and law enforcement in 2020. At the end of
2019, the PBOC released the consultation draft on theProtection of Personal Financial Information (Data); The
Personal Information Protection Law and the Data
Security Law are both listed on the NPC’s 2020 legislative
agenda; and the newly revised Securities Law also
contains special provisions on cross-border datatransmission.

The revised Securities Law is scheduled to take effect inMarch 2020. Once it takes effect, heavier administrative
punishments and collective-action lawsuits can be
expected. It is noteworthy that in two cases involving abranch of the Shanghai Pudong Development Bank anda branch of the Guanfa Bank respectively in October
2019, the CBIRC abruptly imposed punishments on thecurrent bank chairmen and senior officers of banks that
violated relevant regulations in 2017 and 2018. The
CBIRC’s penalties indicate that the ex post administrative
penalties (after penalties on the institution itself) uponsenior managers, including senior managers locatedin the institutions’ headquarters, will become the newnorm. In addition, the Securities Law broadly provide

Financial information protection
and data security will be the focusof new laws and enforcement

Meanwhile, the PBOC and the National Internet Finance
Association of China have clearly signaled their intent topush forward the filing system for registrations and tostrengthen the assessment and certification of financial
apps. The PBOC will also work with the relevant ministries
and departments to take joint measures to app stores andto quickly require the removal of apps that are unlawfulor have material hidden risks.

Administrative and judicial enforcement against illegal securities
activities will step up, including imposing sanctions againstcompany managers

that if foreign securities activities disrupted China’s
domestic market order and damaged the legitimate
rights and interests of domestic Chinese investors, legal
liabilities may be imposed pursuant to the Securities
Law. While it is not clear as to how this will be applied,there remains a possibility that new types of such cases
will be seen.

PRC Financial Regulation:
Annual Report (2020)
16

PRC Financial Regulation:
Annual Report (2020)
Banking1

PRC Financial Regulation:
Annual Report (2020)172019 Key Dates
January 17
Bank of China was approved to issue China’s first
perpetual bonds

May 24
Baoshang Bank became the first bank to be taken overin the past 20 years

August 17
The PBOC announced the reform of the Loan Prime Rate
(LPR) formation mechanism

September 28
Privately owned banks remerged:
Jiangxi Yumin Bank opened for business

October 15
The Regulations on the Administration of Foreign-invested
Banks were amended to reflect the new financial market
opening-up policies

December 18
Hengfeng Bank announced restructuring: the bankissued 100 billion new shares by private offering, andCentral Huijin subscribed for 60% of those shares

1. “Banking industry” as discussed in this Chapter includes commercial banks, rural cooperative banks, rural credit cooperatives, policy banks and the China
Development Bank established in the People's Republic of China, together with financial asset management companies, trust companies, enterprise groupfinance companies, financial leasing companies, auto finance companies, money brokerage companies, consumer finance companies and other financial
institutions established with license from CBIRC

May 22
The first batch of commercial bank wealthmanagement subsidiaries were approved to open forbusiness

July 20
The Financial Stability and Development Commission
announced 11 new opening-up policies for thefinancial sector

August 26
The “CCB funds distribution case” was decided. The
investor was awarded full damages for the investment
because China Construction Bank (CCB) failed toperform its investor suitability obligations

October 12
CBIRC penalized Guangfa Bank and Pudong
Development Bank and held the ex-president andchairman of the board personally liable

November 26 and 27
New consumer finance licenses issued: Chongqing
Xiaomi Consumer Finance and Ping An Consumer
Finance were approved for establishment

December 20
Amundi and Bank of China wealth management
subsidiary was approved to set up the firstforeign-controlled wealth management company

PRC Financial Regulation:
Annual Report (2020)
16

PRC Financial Regulation:
Annual Report (2020)
Banking1

PRC Financial Regulation:
Annual Report (2020)172019 Key Dates
January 17
Bank of China was approved to issue China’s first
perpetual bonds

May 24
Baoshang Bank became the first bank to be taken overin the past 20 years

August 17
The PBOC announced the reform of the Loan Prime Rate
(LPR) formation mechanism

September 28
Privately owned banks remerged:
Jiangxi Yumin Bank opened for business

October 15
The Regulations on the Administration of Foreign-invested
Banks were amended to reflect the new financial market
opening-up policies

December 18
Hengfeng Bank announced restructuring: the bankissued 100 billion new shares by private offering, andCentral Huijin subscribed for 60% of those shares

1. “Banking industry” as discussed in this Chapter includes commercial banks, rural cooperative banks, rural credit cooperatives, policy banks and the China
Development Bank established in the People's Republic of China, together with financial asset management companies, trust companies, enterprise groupfinance companies, financial leasing companies, auto finance companies, money brokerage companies, consumer finance companies and other financial
institutions established with license from CBIRC

May 22
The first batch of commercial bank wealthmanagement subsidiaries were approved to open forbusiness

July 20
The Financial Stability and Development Commission
announced 11 new opening-up policies for thefinancial sector

August 26
The “CCB funds distribution case” was decided. The
investor was awarded full damages for the investment
because China Construction Bank (CCB) failed toperform its investor suitability obligations

October 12
CBIRC penalized Guangfa Bank and Pudong
Development Bank and held the ex-president andchairman of the board personally liable

November 26 and 27
New consumer finance licenses issued: Chongqing
Xiaomi Consumer Finance and Ping An Consumer
Finance were approved for establishment

December 20
Amundi and Bank of China wealth management
subsidiary was approved to set up the firstforeign-controlled wealth management company

PRC Financial Regulation:
Annual Report (2020)
18

PRC Financial Regulation:
Annual Report (2020)
192019 Regulatory Observations

01

Banking industry continued to open up, and is now almost fully open toforeign investment

The Regulations on the Administration of Foreign-funded
Banks were revised in October 2019, officially putting inplace several measures announced earlier to open up thebanking industry. The measures include removing total
asset requirements for the parent companies offoreign-funded banks (which follows the regulatory
direction of reducing “quantitative eligibility requirements”),
allowing foreign banks and domestic non-financial
institutions to establish joint ventures, allowing foreignbanks to establish their subsidiaries and branches
simultaneously in China, removing the limits on foreignbank shareholding in domestic Chinese banks andfinancial asset management companies, and providing
national treatment for foreign banks in terms of thenumber of banks they can set up and the business permit(including RMB business) they obtain. In practice, someforeign-funded banks were approved to act as
custodians for publicly offered funds and as A-class leadunderwriters in the inter-bank bond market, respectively.
All these measures indicate that the banking industry
was as good as fully accessible to foreign participationand that foreign investment was effectively given
national treatment.

02

The debut of wealth management subsidiaries of commercial banks
opened a new chapter for banks’ asset management business, and a“two-pillar” regulatory structure was formally set up under which the
CBIRC and the CSRC separately regulate publicly-offered andprivately-offered asset management markets

Since the Administrative Measures on Wealth Management
Subsidiaries of Commercial Banks were issued in December
2018, nine wealth management subsidiaries of commercial
banks have started operations, and the first foreign-owned
wealth management company (jointly held by Amundi
and Bank of China wealth management subsidiary) wasapproved at the end of 2019. With the issuance of the
Administration Measures on Net Capital of WealthManagement Subsidiaries of Commercial Banks (Trial), a
regulatory regime governing wealth management
subsidiaries of commercial banks started to take shapeand set the foundation for the development of themarket. New policies for the wealth management ofcommercial bank subsidiaries include issuing
publicly-offered products with a minimum investment
requirement of RMB1, investing directly in thesecondary securities market, and issuing bothpublicly-offered and privately-offered products on thesame platform. These policies would enable wealthmanagement subsidiaries to compete on a levelplaying field for wealth management business withother asset management service providers such as

securities companies (and their subsidiaries) and fundmanagement companies (and their subsidiaries).
Added to this, commercial bank subsidiaries have theadvantages of existing network and clients. These
factors combined to give commercial bank subsidiaries
an edge over their competitors.
This confirms the CBIRC’s role in regulating the publicly-offeredproducts issued by financial institutions in the banking
sector and therefore a “two-pillar” regulatory structure
under which the CBRIC and the CSRC separately regulate
publicly-offered and privately-offered asset management
markets. Allowing foreign investment to invest in thewealth management subsidiaries of commercial banks
and allowing foreign investors to control wealth management
joint ventures to be established between wealthmanagement subsidiaries of commercial banks and foreign
investors will also enable foreign investors to accessthe domestic asset management market through a new
high-value platform.

PRC Financial Regulation:
Annual Report (2020)
18

PRC Financial Regulation:
Annual Report (2020)
192019 Regulatory Observations

01

Banking industry continued to open up, and is now almost fully open toforeign investment

The Regulations on the Administration of Foreign-funded
Banks were revised in October 2019, officially putting inplace several measures announced earlier to open up thebanking industry. The measures include removing total
asset requirements for the parent companies offoreign-funded banks (which follows the regulatory
direction of reducing “quantitative eligibility requirements”),
allowing foreign banks and domestic non-financial
institutions to establish joint ventures, allowing foreignbanks to establish their subsidiaries and branches
simultaneously in China, removing the limits on foreignbank shareholding in domestic Chinese banks andfinancial asset management companies, and providing
national treatment for foreign banks in terms of thenumber of banks they can set up and the business permit(including RMB business) they obtain. In practice, someforeign-funded banks were approved to act as
custodians for publicly offered funds and as A-class leadunderwriters in the inter-bank bond market, respectively.
All these measures indicate that the banking industry
was as good as fully accessible to foreign participationand that foreign investment was effectively given
national treatment.

02

The debut of wealth management subsidiaries of commercial banks
opened a new chapter for banks’ asset management business, and a“two-pillar” regulatory structure was formally set up under which the
CBIRC and the CSRC separately regulate publicly-offered andprivately-offered asset management markets

Since the Administrative Measures on Wealth Management
Subsidiaries of Commercial Banks were issued in December
2018, nine wealth management subsidiaries of commercial
banks have started operations, and the first foreign-owned
wealth management company (jointly held by Amundi
and Bank of China wealth management subsidiary) wasapproved at the end of 2019. With the issuance of the
Administration Measures on Net Capital of WealthManagement Subsidiaries of Commercial Banks (Trial), a
regulatory regime governing wealth management
subsidiaries of commercial banks started to take shapeand set the foundation for the development of themarket. New policies for the wealth management ofcommercial bank subsidiaries include issuing
publicly-offered products with a minimum investment
requirement of RMB1, investing directly in thesecondary securities market, and issuing bothpublicly-offered and privately-offered products on thesame platform. These policies would enable wealthmanagement subsidiaries to compete on a levelplaying field for wealth management business withother asset management service providers such as

securities companies (and their subsidiaries) and fundmanagement companies (and their subsidiaries).
Added to this, commercial bank subsidiaries have theadvantages of existing network and clients. These
factors combined to give commercial bank subsidiaries
an edge over their competitors.
This confirms the CBIRC’s role in regulating the publicly-offeredproducts issued by financial institutions in the banking
sector and therefore a “two-pillar” regulatory structure
under which the CBRIC and the CSRC separately regulate
publicly-offered and privately-offered asset management
markets. Allowing foreign investment to invest in thewealth management subsidiaries of commercial banks
and allowing foreign investors to control wealth management
joint ventures to be established between wealthmanagement subsidiaries of commercial banks and foreign
investors will also enable foreign investors to accessthe domestic asset management market through a new
high-value platform.

PRC Financial Regulation:
Annual Report (2020)
20

03

Regulators sought to stop
“mandatory repayments”
After the Guiding Opinions on Regulating the AssetManagement Business of Financial Institutions set thebasic rules for breaking “mandatory repayment”, theregulatory requirement was implemented in full for thebanking industry in 2019. Also, in 2019, the takeover of
Baoshang Bank was completed with inter-bank debts
being discounted for disposal and thus the “mandatory
repayment” in the inter-bank business was broken.
Wealth management subsidiaries of banks wereopened, "shadow bank" business was moved off-balance
sheet, and the banking industry’s wealth managementbusiness was separated completely from credit provision.
In addition, the CBIRC publicly stated that the wealthmanagement services provided by commercial banks
and their wealth management subsidiaries were built
on a trust relationship with the clients. All these indicatethat the “mandatory repayment” in wealth managementbusiness in the banking industry was broken. On top ofthis, the Minutes of the National Courts' Ninth Civil andCommercial Trial Work Conference specifically made invalid
terms providing for minimum guaranteed returns or
mandatory repayments provided by trust companies,
commercial banks and other financial institutions inasset management.
Thus, the “mandatory repayment” in the inter-bankbusiness and in the assets management business,
respectively, was stopped. Further, the structural deposit
products that have substituted for principal-guaranteed
and return-guaranteed products were subject to harsher
regulatory scrutiny in 2019. "Fake structural deposits"with no genuine embedded derivatives products wereprohibited even if issued by qualified banks. This prohibition
will reduce the number of "deposit products" that solicit
customers with guaranteed returns and high interest
rates, and is consistent with the intention of stopping
the practice of “mandatory repayment”.

PRC Financial Regulation:
Annual Report (2020)
21

04

Banking continued to be strictly
regulated, with maximum
punishment and imposition of
responsibilities on head offices
and individuals becoming newfeatures

The CBIRC again exercised a policy of strict regulation in
2019. In the first three quarters, the total fines andconfiscations of illegal gains from banking institutions
amounted to CNY680 million. Enforcement mainly focusedon shadow banking, inter-bank business, provision ofguarantees and lending in violation of rules, especially inreal estate lending. Under the accountability system, inthe first three quarters, 1,223 people were punished, 62of whom were disqualified from holding senior
management positions, and 37 were subject to the
maximum punishment of a lifetime ban on working inbanking. In respect of the violation in lending by Pudong
Development Bank’s and Guangfa Bank’s branches in2017 and 2018, severe punishments were imposed oneach bank’s chairman of the board and its senior executives in
its head office in October 2019. Each bank eventuallyreplaced its board chairman and president.

05

Capital replenishment channels
were broadened for banks andestablishment of a long termmechanism for banks’ capital
replenishment was accelerated

In December 2018, the Financial Stability and Development
Commission of the State Council announced that it
would support commercial banks in replenishingcapital through multiple channels. This policy led to
substantial breakthroughs in perpetual bonds andpreferred shares in 2019. It took less than a year from thepreliminary framework set-up for perpetual bonds at the
beginning of 2019 to its normalization - 15 banks ofdifferent types have in total issued more than CNY500
billion in perpetual bonds. Regulators also lowered thethreshold for insurance funds investing in perpetualbonds and strengthened the financing capability of
perpetual bonds (e.g., the PBOC announced theestablishment of the Central Bank Bill Swap (CBS)enabling primary dealers on the open market to
exchange their perpetual bonds for central bank bills).
In addition, the regulators removed the requirementthat only the banks listed on A-share exchanges or the
new third board may issue preferred shares. This would
facilitate small and medium-sized banks to supplement
their tier-one capital by issuing perpetual bonds. Expanding
capital replenishment channels available to banks
constitutes an important part of the measures for“accelerating development for risk prevention” and iscritical for the reform, development and risk prevention ofsmall and medium-sized banks.

06

Disposal of at-risk banks
happened through a
combination of policy rescue
and market measures

In the first half of 2019, the PBOC and the CBIRC jointly
announced the takeover of Baoshang Bank, which
was later entrusted to China Construction Bank. The
takeover was the first of its kind in the past 20 years.
During the takeover, the regulators applied a partial
discount to the external inter-bank debts of Baoshang
Bank on a case-by-case basis, which broke "mandatory
repayment" in the interbank business and thus caused
market shock to some extent (see 03, above). In thesecond half of 2019, Hengfeng Bank issued 100
billion shares by a private offering. This took the formof capital raising on the market but, in fact, approximately
60% of the shares were subscribed by Central Huijin
Investment Company, which invests in critical central
financial institutions on behalf of the state, and over
30% of the shares were subscribed by local state-owned
enterprises.
These two cases are typical cases on the disposal of
at-risk banks in recent years where the regulators haveused both administrative measures and market-based
mechanisms to dispose of at-risk financial institutions.
Under the premise of maintaining stability in thefinancial sector while conducting these disposals,
market participants, mainly participants in the inter-bankmarket, were required to bear part of the risk, and local
governments were required to actively participate indefusing the relevant risks. The cases also serve as an
exploratory basis for the future establishment of abankruptcy system for financial institutions.

PRC Financial Regulation:
Annual Report (2020)
20

03

Regulators sought to stop
“mandatory repayments”
After the Guiding Opinions on Regulating the AssetManagement Business of Financial Institutions set thebasic rules for breaking “mandatory repayment”, theregulatory requirement was implemented in full for thebanking industry in 2019. Also, in 2019, the takeover of
Baoshang Bank was completed with inter-bank debts
being discounted for disposal and thus the “mandatory
repayment” in the inter-bank business was broken.
Wealth management subsidiaries of banks wereopened, "shadow bank" business was moved off-balance
sheet, and the banking industry’s wealth managementbusiness was separated completely from credit provision.
In addition, the CBIRC publicly stated that the wealthmanagement services provided by commercial banks
and their wealth management subsidiaries were built
on a trust relationship with the clients. All these indicatethat the “mandatory repayment” in wealth managementbusiness in the banking industry was broken. On top ofthis, the Minutes of the National Courts' Ninth Civil andCommercial Trial Work Conference specifically made invalid
terms providing for minimum guaranteed returns or
mandatory repayments provided by trust companies,
commercial banks and other financial institutions inasset management.
Thus, the “mandatory repayment” in the inter-bankbusiness and in the assets management business,
respectively, was stopped. Further, the structural deposit
products that have substituted for principal-guaranteed
and return-guaranteed products were subject to harsher
regulatory scrutiny in 2019. "Fake structural deposits"with no genuine embedded derivatives products wereprohibited even if issued by qualified banks. This prohibition
will reduce the number of "deposit products" that solicit
customers with guaranteed returns and high interest
rates, and is consistent with the intention of stopping
the practice of “mandatory repayment”.

PRC Financial Regulation:
Annual Report (2020)
21

04

Banking continued to be strictly
regulated, with maximum
punishment and imposition of
responsibilities on head offices
and individuals becoming newfeatures

The CBIRC again exercised a policy of strict regulation in
2019. In the first three quarters, the total fines andconfiscations of illegal gains from banking institutions
amounted to CNY680 million. Enforcement mainly focusedon shadow banking, inter-bank business, provision ofguarantees and lending in violation of rules, especially inreal estate lending. Under the accountability system, inthe first three quarters, 1,223 people were punished, 62of whom were disqualified from holding senior
management positions, and 37 were subject to the
maximum punishment of a lifetime ban on working inbanking. In respect of the violation in lending by Pudong
Development Bank’s and Guangfa Bank’s branches in2017 and 2018, severe punishments were imposed oneach bank’s chairman of the board and its senior executives in
its head office in October 2019. Each bank eventuallyreplaced its board chairman and president.

05

Capital replenishment channels
were broadened for banks andestablishment of a long termmechanism for banks’ capital
replenishment was accelerated

In December 2018, the Financial Stability and Development
Commission of the State Council announced that it
would support commercial banks in replenishingcapital through multiple channels. This policy led to
substantial breakthroughs in perpetual bonds andpreferred shares in 2019. It took less than a year from thepreliminary framework set-up for perpetual bonds at the
beginning of 2019 to its normalization - 15 banks ofdifferent types have in total issued more than CNY500
billion in perpetual bonds. Regulators also lowered thethreshold for insurance funds investing in perpetualbonds and strengthened the financing capability of
perpetual bonds (e.g., the PBOC announced theestablishment of the Central Bank Bill Swap (CBS)enabling primary dealers on the open market to
exchange their perpetual bonds for central bank bills).
In addition, the regulators removed the requirementthat only the banks listed on A-share exchanges or the
new third board may issue preferred shares. This would
facilitate small and medium-sized banks to supplement
their tier-one capital by issuing perpetual bonds. Expanding
capital replenishment channels available to banks
constitutes an important part of the measures for“accelerating development for risk prevention” and iscritical for the reform, development and risk prevention ofsmall and medium-sized banks.

06

Disposal of at-risk banks
happened through a
combination of policy rescue
and market measures

In the first half of 2019, the PBOC and the CBIRC jointly
announced the takeover of Baoshang Bank, which
was later entrusted to China Construction Bank. The
takeover was the first of its kind in the past 20 years.
During the takeover, the regulators applied a partial
discount to the external inter-bank debts of Baoshang
Bank on a case-by-case basis, which broke "mandatory
repayment" in the interbank business and thus caused
market shock to some extent (see 03, above). In thesecond half of 2019, Hengfeng Bank issued 100
billion shares by a private offering. This took the formof capital raising on the market but, in fact, approximately
60% of the shares were subscribed by Central Huijin
Investment Company, which invests in critical central
financial institutions on behalf of the state, and over
30% of the shares were subscribed by local state-owned
enterprises.
These two cases are typical cases on the disposal of
at-risk banks in recent years where the regulators haveused both administrative measures and market-based
mechanisms to dispose of at-risk financial institutions.
Under the premise of maintaining stability in thefinancial sector while conducting these disposals,
market participants, mainly participants in the inter-bankmarket, were required to bear part of the risk, and local
governments were required to actively participate indefusing the relevant risks. The cases also serve as an
exploratory basis for the future establishment of abankruptcy system for financial institutions.

PRC Financial Regulation:
Annual Report (2020)
22

PRC Financial Regulation:
Annual Report (2020)
23

07

The CBIRC started to grant key financial licenses as a norm and support
the establishment of more privately owned banks and consumer
finance companies

In February 2019, the CBIRC proposed promoting thenormal development of privately-owned banks by granting
a license to any applicant which has met all the eligibility
requirements. Shortly thereafter, the CBIRC approved theestablishment of two privately-owned banks, Jiangxi Yumin
Bank and Xishang Bank. Jiangxi Yumin Bank opened forbusiness at the end of 2019 and became the 18th privatebank. Xiaomi and Ping An were approved in 2019 tobecome the 28th and 29th domestic consumer financecompanies.

After no new licenses were issued in 2017 and 2018 forprivately-owned banks and consumer finance companies,
the new licenses issued in 2019 further reflect the supportof the regulators of the financial service providers whichhave clear development goals and positioning and compliant
operations.

08

Regulatory regime governing commercial factoring, pawn brokerageand financial leasing was proactively promoted with regulatory
responsibilities between central and local authorities being divided andcooperation being improved
The CBIRC has been empowered to be responsible forformulating regulatory rules governing six types of
institutions that were previously regulated by the Ministryof Commerce. These institutions include those doing
commercial factoring, pawn brokerage and financial
leasing. In performing these responsibilities, the CBIRC
promulgated the Circular on Strengthening the Supervision
and Administration over Commercial Factoring Enterprises
in 2019, which prescribes the regulatory guidelines forcommercial factoring and the uniform national business
operation rules and industry-specific administration
requirements. The circular provides that the day-to-day
supervision of these institutions rests on the local financial
service bureaus. This filled a gap in the national regulations
on commercial factoring, and we expect that the same
approach will be adopted in the pawn brokerage industry
and the financial leasing industry where uniform nationalrules are lacking. In the meantime, uniform national rules
have been in existence to govern three other industries,

covering: financial guarantees, small loans, and local
asset management. In addition, the CBIRC was contemplating a
new administrative licensing system for industries such as
financial leasing and commercial factoring and how to
supplement those uniform national rules withindustry-specific regulatory provisions, such as in financial
guarantee. The CBIRC was also striving to accelerate
the promulgation of the Regulations on Non-deposit-taking
Lending Organizations and other higher-level laws. Finally,
the CBIRC was working on improving risk monitoring
indicators and categorized regulation, and applying
differentiated regulation of the relevant institutions. The
regulatory regime governing the division of responsibilities
and cooperation between central and local authorities,
with the CBIRC being in charge of making regulatory
rules and local financial services bureaus being in chargeof day-to-day supervision is gradually being improved.

PRC Financial Regulation:
Annual Report (2020)
22

PRC Financial Regulation:
Annual Report (2020)
23

07

The CBIRC started to grant key financial licenses as a norm and support
the establishment of more privately owned banks and consumer
finance companies

In February 2019, the CBIRC proposed promoting thenormal development of privately-owned banks by granting
a license to any applicant which has met all the eligibility
requirements. Shortly thereafter, the CBIRC approved theestablishment of two privately-owned banks, Jiangxi Yumin
Bank and Xishang Bank. Jiangxi Yumin Bank opened forbusiness at the end of 2019 and became the 18th privatebank. Xiaomi and Ping An were approved in 2019 tobecome the 28th and 29th domestic consumer financecompanies.

After no new licenses were issued in 2017 and 2018 forprivately-owned banks and consumer finance companies,
the new licenses issued in 2019 further reflect the supportof the regulators of the financial service providers whichhave clear development goals and positioning and compliant
operations.

08

Regulatory regime governing commercial factoring, pawn brokerageand financial leasing was proactively promoted with regulatory
responsibilities between central and local authorities being divided andcooperation being improved
The CBIRC has been empowered to be responsible forformulating regulatory rules governing six types of
institutions that were previously regulated by the Ministryof Commerce. These institutions include those doing
commercial factoring, pawn brokerage and financial
leasing. In performing these responsibilities, the CBIRC
promulgated the Circular on Strengthening the Supervision
and Administration over Commercial Factoring Enterprises
in 2019, which prescribes the regulatory guidelines forcommercial factoring and the uniform national business
operation rules and industry-specific administration
requirements. The circular provides that the day-to-day
supervision of these institutions rests on the local financial
service bureaus. This filled a gap in the national regulations
on commercial factoring, and we expect that the same
approach will be adopted in the pawn brokerage industry
and the financial leasing industry where uniform nationalrules are lacking. In the meantime, uniform national rules
have been in existence to govern three other industries,

covering: financial guarantees, small loans, and local
asset management. In addition, the CBIRC was contemplating a
new administrative licensing system for industries such as
financial leasing and commercial factoring and how to
supplement those uniform national rules withindustry-specific regulatory provisions, such as in financial
guarantee. The CBIRC was also striving to accelerate
the promulgation of the Regulations on Non-deposit-taking
Lending Organizations and other higher-level laws. Finally,
the CBIRC was working on improving risk monitoring
indicators and categorized regulation, and applying
differentiated regulation of the relevant institutions. The
regulatory regime governing the division of responsibilities
and cooperation between central and local authorities,
with the CBIRC being in charge of making regulatory
rules and local financial services bureaus being in chargeof day-to-day supervision is gradually being improved.

PRC Financial Regulation:
Annual Report (2020)24

PRC Financial Regulation:
Annual Report (2020)
252020 Regulatory Outlook01

The opening-up may lead tomarket restructuring and bringnew challenges for regulation

Throughout 2019, we saw unexpectedly far-reaching
and fast-moving changes in China’s opening-up of its
financial markets. As a result, in 2020, foreign investors
are expected to increase their investments in thebanking industry by investing in or controlling domestic
banks, setting up joint venture banks with domestic
non-financial institutions, setting up or controlling joint
venture wealth management companies in the banking
industry, or even acquiring financial holding companies.
This expanded investment and business access forforeign banks, coupled with the series of policies recently
issued by the CBIRC on guiding and encouraging
foreign-funded banks to cooperate with their overseas
parent banks in helping Chinese enterprises "go global",as well as the opening-up of other financial industries toforeign institutions, will allow foreign-funded financial
institutions to leverage their group’s integrated advantages
and share such advantages and resources between
onshore and offshore affiliates, and may also lead torestructuring and mergers and acquisitions in thedomestic banking industry. In connection with thisdevelopment, many new regulatory issues may arise,such as cross-border and cross-industry regulatory issues,potential competition in the same industry andrelated-party transactions.

02

Banking and non-banking
financial institutions will be
encouraged to differentiate theirdevelopment based on theircore businessAccording to the CBIRC Guiding Opinions on Promoting
the High-quality Development of the Banking and Insurance
Sectors issued in late 2019, regulatory authorities are aiming
within the next five to six years to “form a multi-level,
wide-coverage and differentiated banking and insurance
system”, “form a financial products system with significantly
enhanced ability to develop personalized, differentiatedand customized products” and “further improve and perfect
the credit market, insurance market, trust market, financial
leasing market and non-performing asset market”. The
guiding opinions also contained suggestions on thepositioning and differentiated development for medium
and large banks, small and medium-sized banks, foreign-fundedbanks and non-banking financial institutions. In 2020, we
can expect more regulatory support will be granted to,and new opportunities for, all types of banking institutions
targeted at their development needs based on their corebusiness areas. Such development needs could be in theform of innovative new organizational structures, productdesign, business and operational models, science andtechnology applications, and incentive mechanisms.

03

Strict regulation will become the new norm, while the regulatory focus
will be on defusing risks in the banking system

Strict in-process and ex-post regulation are necessary
for market-oriented regulation. This, together withthe shift from institution-based regulation to function and conduct-based regulation, means that the banking
industry is more likely to face investigations or sanctions
from multiple governmental and regulatory authorities.
For example, the Cyberspace Administration of China
and the public security bureau both have the power
to regulate data and personal privacy. In 2020, we
expect strict regulation to become the norm. We also
expect regulations directly targeting core risk control
and compliance issues to be more diverse andeffective. Furthermore, we don’t expect theregulation of shadow banking to be relaxed, while
the regulation of inter-bank businesses will be
increasingly tightened. Finally, we expect the policies to“break mandatory repayment” to be strictly implemented.

In addition, according to regulatory stress tests andthorough examinations, among the 4,588 banks in
China, more than 600 small and medium-sized banks
are at high risk. It is reported that the regulators haveplans to deal with these high-risk small and medium-sizedbanks. The overall plan is to: (1) intervene with bankswith lower risks as soon as possible by introducing
corrective programs to defuse risks; and (2) eliminate
the crisis in banks with higher risks through suchmeans as self-help within a prescribed time period,
timely capital replenishment and reduction in
non-performing assets, complemented by such ways
as holding senior management in charge accountable,
capital increases and reorganization, and assessing
whether to save or dissolve such banks on acase-by-case basis depending on its systemic importance.
In 2020, it is expected that the regulators will moreregularly and more leisurely dispose of the risks insmall and medium-sized banks. Separately, thedrafting of the Bank Bankruptcy Law is also on theagenda of the regulators.

PRC Financial Regulation:
Annual Report (2020)24

PRC Financial Regulation:
Annual Report (2020)
252020 Regulatory Outlook01

The opening-up may lead tomarket restructuring and bringnew challenges for regulation

Throughout 2019, we saw unexpectedly far-reaching
and fast-moving changes in China’s opening-up of its
financial markets. As a result, in 2020, foreign investors
are expected to increase their investments in thebanking industry by investing in or controlling domestic
banks, setting up joint venture banks with domestic
non-financial institutions, setting up or controlling joint
venture wealth management companies in the banking
industry, or even acquiring financial holding companies.
This expanded investment and business access forforeign banks, coupled with the series of policies recently
issued by the CBIRC on guiding and encouraging
foreign-funded banks to cooperate with their overseas
parent banks in helping Chinese enterprises "go global",as well as the opening-up of other financial industries toforeign institutions, will allow foreign-funded financial
institutions to leverage their group’s integrated advantages
and share such advantages and resources between
onshore and offshore affiliates, and may also lead torestructuring and mergers and acquisitions in thedomestic banking industry. In connection with thisdevelopment, many new regulatory issues may arise,such as cross-border and cross-industry regulatory issues,potential competition in the same industry andrelated-party transactions.

02

Banking and non-banking
financial institutions will be
encouraged to differentiate theirdevelopment based on theircore businessAccording to the CBIRC Guiding Opinions on Promoting
the High-quality Development of the Banking and Insurance
Sectors issued in late 2019, regulatory authorities are aiming
within the next five to six years to “form a multi-level,
wide-coverage and differentiated banking and insurance
system”, “form a financial products system with significantly
enhanced ability to develop personalized, differentiatedand customized products” and “further improve and perfect
the credit market, insurance market, trust market, financial
leasing market and non-performing asset market”. The
guiding opinions also contained suggestions on thepositioning and differentiated development for medium
and large banks, small and medium-sized banks, foreign-fundedbanks and non-banking financial institutions. In 2020, we
can expect more regulatory support will be granted to,and new opportunities for, all types of banking institutions
targeted at their development needs based on their corebusiness areas. Such development needs could be in theform of innovative new organizational structures, productdesign, business and operational models, science andtechnology applications, and incentive mechanisms.

03

Strict regulation will become the new norm, while the regulatory focus
will be on defusing risks in the banking system

Strict in-process and ex-post regulation are necessary
for market-oriented regulation. This, together withthe shift from institution-based regulation to function and conduct-based regulation, means that the banking
industry is more likely to face investigations or sanctions
from multiple governmental and regulatory authorities.
For example, the Cyberspace Administration of China
and the public security bureau both have the power
to regulate data and personal privacy. In 2020, we
expect strict regulation to become the norm. We also
expect regulations directly targeting core risk control
and compliance issues to be more diverse andeffective. Furthermore, we don’t expect theregulation of shadow banking to be relaxed, while
the regulation of inter-bank businesses will be
increasingly tightened. Finally, we expect the policies to“break mandatory repayment” to be strictly implemented.

In addition, according to regulatory stress tests andthorough examinations, among the 4,588 banks in
China, more than 600 small and medium-sized banks
are at high risk. It is reported that the regulators haveplans to deal with these high-risk small and medium-sizedbanks. The overall plan is to: (1) intervene with bankswith lower risks as soon as possible by introducing
corrective programs to defuse risks; and (2) eliminate
the crisis in banks with higher risks through suchmeans as self-help within a prescribed time period,
timely capital replenishment and reduction in
non-performing assets, complemented by such ways
as holding senior management in charge accountable,
capital increases and reorganization, and assessing
whether to save or dissolve such banks on acase-by-case basis depending on its systemic importance.
In 2020, it is expected that the regulators will moreregularly and more leisurely dispose of the risks insmall and medium-sized banks. Separately, thedrafting of the Bank Bankruptcy Law is also on theagenda of the regulators.

PRC Financial Regulation:
Annual Report (2020)
26

PRC Financial Regulation:
Annual Report (2020)
27

04

05

We expect that banks and financial institutions will
expand their scope of use of and size of financial derivatives for a number of reasons. First, interest rate risks
increased after the reform of the LPR mechanism, andthus banks and financial institutions will be seeking to
reduce this interest rate risk by using interest rate derivatives. Second, as structural deposits increase in size andface stricter regulation, financial institutions are using
derivatives to hedge the risks associated with those structuraldeposits. Finally, with the financial sector opening up,
there is higher demand and stronger investment capability
for derivatives among foreign institutions. In light of thisand given the lack of systemic regulatory rules covering
financial derivatives, we expect that a number of newpolicies will be introduced to fill the gaps in the current
derivatives regulatory regime.

The “CCB fund distribution case” set a precedent thatbanks are fully liable to investors for their losses due totheir failure to fulfill their duties to sell products to “suitable
investors” in their distribution of financial products. In
addition, the Minutes of the National Courts' Ninth Civil andCommercial Trial Work Conference established the principlethat caveat emptor should be based on “sellers having
fulfilled all their duties owed to the buyers”, andaccording to the PBOC’s consultation draft for the
Implementation Measures for the Protection of Financial
Consumers Rights, financial consumers should soon beprovided with more comprehensive protection in suchareas as financial institutions' conduct, information protection,and dispute resolution. In addition, the Notice on Further
Regulating Financial Promotions further unifies the supervision
standards over financial products’ promotions by various
institutions to further protect the interests of financial
consumers. In 2020, we foresee that the regulatory authorities
will more closely scrutinize commercial banks to ensure
they fulfill their investor suitability duties in issuing anddistributing products, establish the right process andprocedures and retain the relevant records. Moreover,
the regulatory authorities will also likely increase thefrequency and severity of regulatory sanctions against
those in breach of violations.

New policies to regulate financial
derivatives are expected

Financial consumer protections
will continue to be tightenedPRC Financial Regulation:
Annual Report (2020)
26

PRC Financial Regulation:
Annual Report (2020)
27

04

05

We expect that banks and financial institutions will
expand their scope of use of and size of financial derivatives for a number of reasons. First, interest rate risks
increased after the reform of the LPR mechanism, andthus banks and financial institutions will be seeking to
reduce this interest rate risk by using interest rate derivatives. Second, as structural deposits increase in size andface stricter regulation, financial institutions are using
derivatives to hedge the risks associated with those structuraldeposits. Finally, with the financial sector opening up,
there is higher demand and stronger investment capability
for derivatives among foreign institutions. In light of thisand given the lack of systemic regulatory rules covering
financial derivatives, we expect that a number of newpolicies will be introduced to fill the gaps in the current
derivatives regulatory regime.

The “CCB fund distribution case” set a precedent thatbanks are fully liable to investors for their losses due totheir failure to fulfill their duties to sell products to “suitable
investors” in their distribution of financial products. In
addition, the Minutes of the National Courts' Ninth Civil andCommercial Trial Work Conference established the principlethat caveat emptor should be based on “sellers having
fulfilled all their duties owed to the buyers”, andaccording to the PBOC’s consultation draft for the
Implementation Measures for the Protection of Financial
Consumers Rights, financial consumers should soon beprovided with more comprehensive protection in suchareas as financial institutions' conduct, information protection,and dispute resolution. In addition, the Notice on Further
Regulating Financial Promotions further unifies the supervision
standards over financial products’ promotions by various
institutions to further protect the interests of financial
consumers. In 2020, we foresee that the regulatory authorities
will more closely scrutinize commercial banks to ensure
they fulfill their investor suitability duties in issuing anddistributing products, establish the right process andprocedures and retain the relevant records. Moreover,
the regulatory authorities will also likely increase thefrequency and severity of regulatory sanctions against
those in breach of violations.

New policies to regulate financial
derivatives are expected

Financial consumer protections
will continue to be tightenedPRC Financial Regulation:
Annual Report (2020)
28

PRC Financial Regulation:
Annual Report (2020)
Securities

PRC Financial Regulation:
Annual Report (2020)292019 Key Dates
February
AIA Beijing Branch was approved to participate in thepilot program for integrated operations in
Beijing-Tianjin-Hebei region

June 1The Measures for the Administration of Information
Technology Management of Securities Fund Trading
Institutions came into effect

March 13
The CSRC approved the establishment of Nomura
Orient International Securities Co., Ltd. and J.P. Morgan
Securities (China) Company Limited

June 4
The amended Measures for the Supervision and
Administration of Futures Companies was promulgatedJune 13
Shanghai Stock Exchange Science and Technology
Innovation Board (STAR Market) began its trading, andpiloted the IPO registration system

June 17
Shanghai-London Stock Connect was officially launched

July 5The CSRC issued the Provisions on the Administration of
Equities of Securities Companies

September 10
The SAFE removed QFII and RQFII investment quota

October 11
The CSRC specified the time point at which foreign
shareholding limit for securities companies, fundmanagement companies, and futures companies would
be lifted

November 15
The CSRC revoked all business licenses of CEFC
Shanghai Securities Co

Nov – Dec
Nomura Orient International Securities Co., Ltd. and J.P.
Morgan Securities (China) Company Limited obtained
securities business permits, becoming the first two
newly established joint venture securities companies toobtain such permits after the foreign investor’sshareholding limit was raised to 51%

December 28
The amended Securities Law was adopted

PRC Financial Regulation:
Annual Report (2020)
28

PRC Financial Regulation:
Annual Report (2020)
Securities

PRC Financial Regulation:
Annual Report (2020)292019 Key Dates
January 26
The meeting on securities and futures regulatory work
was convened. The State Council appointed Yi Huimanas Chairman of the CSRC

June 1The Measures for the Administration of Information
Technology Management of Securities Fund Trading
Institutions came into effect

March 13
The CSRC approved the establishment of Nomura
Orient International Securities Co., Ltd. and J.P. Morgan
Securities (China) Company Limited

June 4
The amended Measures for the Supervision and
Administration of Futures Companies was promulgatedJune 13
Shanghai Stock Exchange Science and Technology
Innovation Board (STAR Market) began its trading, andpiloted the IPO registration system

June 17
Shanghai-London Stock Connect was officially launched

July 5The CSRC issued the Provisions on the Administration of
Equities of Securities Companies

September 10
The SAFE removed QFII and RQFII investment quota

October 11
The CSRC specified the time point at which foreign
shareholding limit for securities companies, fundmanagement companies, and futures companies would
be lifted

November 15
The CSRC revoked all business licenses of CEFC
Shanghai Securities Co

Nov – Dec
Nomura Orient International Securities Co., Ltd. and J.P.
Morgan Securities (China) Company Limited obtained
securities business permits, becoming the first two
newly established joint venture securities companies toobtain such permits after the foreign investor’sshareholding limit was raised to 51%

December 28
The amended Securities Law was adopted

PRC Financial Regulation:
Annual Report (2020)30

PRC Financial Regulation:
Annual Report (2020)312019 Regulatory Observations

01

The amended Securities Law
was adopted, signaling thephilosophies and future
direction of securities
regulation
The amended Securities Law, after more than four years
and undergoing four readings, was adopted at the 15th
Session of the Standing Committee of the 13th National
People's Congress on December 28, 2019. The amended
Securities Law modified the current securities regulatory
system in many aspects, such as the structure, concepts,
principles and core of securities regulation. Notablechanges include: (1) expanding the scope of securities
to asset management products, reflecting the transitionof financial regulation from purely institution-based
regulation to the combination of function-based regulation,
conduct-based regulation and institution-based regulation;(2) strengthening interim regulation (e.g. the establishmentof an -extensive information disclosure system) and ex-post
regulation (e.g. substantially increasing penalty amounts
and expanded regulatory scope) and relaxing ex-ante
regulation (e.g. the introduction of the IPO registration
system), as opposed to the previous heavy reliance on
ex-ante regulation; and (3) improving investor protection
through the introduction of innovative systems such as“class action”.
At the same time, the amended Securities Law grants moreregulatory power to the securities regulatory authorities.
This will give the judiciary more room to make decisions
based on the departmental rules of the securities regulatory
authorities. In addition, the introduction of the extraterritorial
jurisdiction principle makes statutory preparations for the
Chinese regulatory authorities to regulate certain overseas
securities issuance and trading.

02

03

The registration system for the initial public offerings
made by companies on the STAR market launched onJune 13, 2019, marking the official introduction of theregistration system for the public offerings of securities
that the industry has been waiting for years. The revised
Administrative Measures on Significant Asset Restructuringof Listed Companies, which took effect on October 18,
2019, further adapts the regulatory environment to themarket, removing the ‘net profit’ indicator in the criteria
for approving listing by way of restructuring, resuming
the provision of financing support for listing by way ofrestructuring, and allowing the relevant assets of high-techindustries and strategic emerging industries that meetthe national strategy to be restructured and listed on
the Growth Enterprise Board.

While approving the establishment of Nomura Orient
International Securities Co., Ltd. and J.P. Morgan Securities(China) Company Limited, and accepting applications
for establishment or increase in capital of several securities
joint ventures, the CSRC announced that it would restart
the examination and approval of the establishment ofdomestic securities companies after 12 years and toaccept applications from foreign investors to invest in
futures companies after several years. Obviously, theregulatory authorities intend to introduce more high-quality
shareholders and market players into the market and topromote full competition in the securities and futuresindustries.

Regulatory environment
becomes more market-oriented

On November 15, 2019, the CSRC made an administrativedecision to revoke all business licenses and permits of
Huaxin Securities, to conduct the administrative liquidationand entrustment of Huaxin Securities, and to bring theremaining assets and liabilities of Huaxin Securities into
Huaxin Group to be disposed of as part of the groupassets and liabilities. In this way, it took an important stepin defusing the risk of securities companies by using amarket approach. In terms of regulatory enforcement,
the introduction of the system of administrative settlement
and the announcement of the first administrative settlementcase tested the water for introducing market-oriented
approach in regulatory enforcement, which should help
achieve more efficiency in regulatory enforcement.

CSRC aimed to promote more competition in the securities and futuresindustries at the same time as imposing more restrictions onshareholders and equities

Meanwhile, the Administrative Provisions on Equities of
Securities Companies issued by the CSRC on July 5, 2019
put forward more stringent requirements for theshareholders, especially the controlling shareholders,of securities companies in terms of qualifications andequity management. For example, a new requirement is
added that the main shareholders of a securities company
shall have good financial status, appropriate asset liability
and leverage levels, and shall have the capacity to increase
capital of the securities company to match its business.
In addition, the new regulation also imposed restrictions
on shareholders of securities companies topledge theirequity. On June 4, 2019, the CSRC issued the revised
Administrative Measures on Supervision of Futures
Companies, which imposes more strict qualification
requirements for the major shareholders and controllingshareholders of futures companies, strengthens the
management of shareholders of futures companies andtightens the examination and approval of shareholder
qualifications.

PRC Financial Regulation:
Annual Report (2020)30

PRC Financial Regulation:
Annual Report (2020)312019 Regulatory Observations

01

The amended Securities Law
was adopted, signaling thephilosophies and future
direction of securities
regulation
The amended Securities Law, after more than four years
and undergoing four readings, was adopted at the 15th
Session of the Standing Committee of the 13th National
People's Congress on December 28, 2019. The amended
Securities Law modified the current securities regulatory
system in many aspects, such as the structure, concepts,
principles and core of securities regulation. Notablechanges include: (1) expanding the scope of securities
to asset management products, reflecting the transitionof financial regulation from purely institution-based
regulation to the combination of function-based regulation,
conduct-based regulation and institution-based regulation;(2) strengthening interim regulation (e.g. the establishmentof an -extensive information disclosure system) and ex-post
regulation (e.g. substantially increasing penalty amounts
and expanded regulatory scope) and relaxing ex-ante
regulation (e.g. the introduction of the IPO registration
system), as opposed to the previous heavy reliance on
ex-ante regulation; and (3) improving investor protection
through the introduction of innovative systems such as“class action”.
At the same time, the amended Securities Law grants moreregulatory power to the securities regulatory authorities.
This will give the judiciary more room to make decisions
based on the departmental rules of the securities regulatory
authorities. In addition, the introduction of the extraterritorial
jurisdiction principle makes statutory preparations for the
Chinese regulatory authorities to regulate certain overseas
securities issuance and trading.

02

03

The registration system for the initial public offerings
made by companies on the STAR market launched onJune 13, 2019, marking the official introduction of theregistration system for the public offerings of securities
that the industry has been waiting for years. The revised
Administrative Measures on Significant Asset Restructuringof Listed Companies, which took effect on October 18,
2019, further adapts the regulatory environment to themarket, removing the ‘net profit’ indicator in the criteria
for approving listing by way of restructuring, resuming
the provision of financing support for listing by way ofrestructuring, and allowing the relevant assets of high-techindustries and strategic emerging industries that meetthe national strategy to be restructured and listed on
the Growth Enterprise Board.

While approving the establishment of Nomura Orient
International Securities Co., Ltd. and J.P. Morgan Securities(China) Company Limited, and accepting applications
for establishment or increase in capital of several securities
joint ventures, the CSRC announced that it would restart
the examination and approval of the establishment ofdomestic securities companies after 12 years and toaccept applications from foreign investors to invest in
futures companies after several years. Obviously, theregulatory authorities intend to introduce more high-quality
shareholders and market players into the market and topromote full competition in the securities and futuresindustries.

Regulatory environment
becomes more market-oriented

On November 15, 2019, the CSRC made an administrativedecision to revoke all business licenses and permits of
Huaxin Securities, to conduct the administrative liquidationand entrustment of Huaxin Securities, and to bring theremaining assets and liabilities of Huaxin Securities into
Huaxin Group to be disposed of as part of the groupassets and liabilities. In this way, it took an important stepin defusing the risk of securities companies by using amarket approach. In terms of regulatory enforcement,
the introduction of the system of administrative settlement
and the announcement of the first administrative settlementcase tested the water for introducing market-oriented
approach in regulatory enforcement, which should help
achieve more efficiency in regulatory enforcement.

CSRC aimed to promote more competition in the securities and futuresindustries at the same time as imposing more restrictions onshareholders and equities

Meanwhile, the Administrative Provisions on Equities of
Securities Companies issued by the CSRC on July 5, 2019
put forward more stringent requirements for theshareholders, especially the controlling shareholders,of securities companies in terms of qualifications andequity management. For example, a new requirement is
added that the main shareholders of a securities company
shall have good financial status, appropriate asset liability
and leverage levels, and shall have the capacity to increase
capital of the securities company to match its business.
In addition, the new regulation also imposed restrictions
on shareholders of securities companies topledge theirequity. On June 4, 2019, the CSRC issued the revised
Administrative Measures on Supervision of Futures
Companies, which imposes more strict qualification
requirements for the major shareholders and controllingshareholders of futures companies, strengthens the
management of shareholders of futures companies andtightens the examination and approval of shareholder
qualifications.

PRC Financial Regulation:
Annual Report (2020)32

PRC Financial Regulation:
Annual Report (2020)
33

04

A differentiated management system was introduced and the principle oftiered regulation was specified for securities companies
The Administrative Provisions on Equities of Securities Companies
officially put forward the policies of tiered and differentiatedregulation of securities companies further to theimplementation of a rating system and different regulatory
polies for securities companies. Securities companies will
be divided into specialized securities companies andcomprehensive securities companies. The main businessesof specialized securities companies are regular intermediaryservices, i.e. not involving large liabilities and large capitalintermediary services and the risk of externality being low,
ad including services such as securities brokerage, securities
investment advisory, financial advisory, securities
underwriting and sponsoring, and securities proprietary
trading. The main businesses of comprehensive securities
companies include market-making of stock options, OTC
derivatives, stock pledge repurchase and other complex

business, in addition to traditional securities businesses,
involving significant leverage and cross-risks between
various businesses. The two different types of securities
companies will be subject to different requirements interms of shareholder qualifications and scope of business,among others. In particular, there will be higher qualification
requirements for the main and controlling shareholdersof comprehensive securities companies. The specificdifferentiation methods, conversion between different
types, and differentiated business policies and capital
policies of different types of securities companies are
subject to further interpretation or issuance of thecorresponding implementation rules by the competentauthorities.

05

The integrity of the capital market was emphasized and credit-based
regulation was promoted

Integrity has increasingly become an important foundationof the capital market, and credit-based regulation has
also played an important role. With the Measures for theSupervision and Administration of Integrity of Securities
and Futures Markets coming into force on July 1, 2018,
the regulators stepped up their efforts in 2019 to investigate
into, and punish instances of, bad credit, imposing heavier
punishments. The CSRC worked closely with the NDRC,
the Civil Aviation Administration of China, the China
Railway Group and other regulators to restrict dishonest
individuals. As a result, the CSRC publicized a total of 191
seriously dishonest individuals.
Different departments of the CSRC took 151 actions against
high-risk and dishonest market players in 2019. As aresult of comparisons made by batches between the
integrity database and more than 10,000 listed companies
and nearly 239,000 practitioners, 157 dishonest entities/persons
were found through screening. 545 dishonest private
equity institutions were put on public notice for dishonesty.

The CSRC also built integrity into daily regulation. In
2019, the CSRC paid special attention to the credit
records of applicants during the process of examination
and approval of shareholders' qualifications, being
significantly stricter in the requirement of supporting
documents. In 2019, the CSRC provided 13 batches ofverification services for the selection of members of theSTAR Listing Committee, and provided 184 batches of
special inquiry services for the listing of enterprises on
STAR. By the end of November 2019, departments(agencies) of the CSRC had asked for credit informationin more than 39,000 batches in their review of administrative
licensing, classified inspection and law enforcement,
and risk monitoring. Meanwhile, the CSRC actively urged
securities and fund operating institutions to establish
integrity management systems and verify the credit ofclients in their business.

PRC Financial Regulation:
Annual Report (2020)32

PRC Financial Regulation:
Annual Report (2020)
33

04

A differentiated management system was introduced and the principle oftiered regulation was specified for securities companies
The Administrative Provisions on Equities of Securities Companies
officially put forward the policies of tiered and differentiatedregulation of securities companies further to theimplementation of a rating system and different regulatory
polies for securities companies. Securities companies will
be divided into specialized securities companies andcomprehensive securities companies. The main businessesof specialized securities companies are regular intermediaryservices, i.e. not involving large liabilities and large capitalintermediary services and the risk of externality being low,
ad including services such as securities brokerage, securities
investment advisory, financial advisory, securities
underwriting and sponsoring, and securities proprietary
trading. The main businesses of comprehensive securities
companies include market-making of stock options, OTC
derivatives, stock pledge repurchase and other complex

business, in addition to traditional securities businesses,
involving significant leverage and cross-risks between
various businesses. The two different types of securities
companies will be subject to different requirements interms of shareholder qualifications and scope of business,among others. In particular, there will be higher qualification
requirements for the main and controlling shareholdersof comprehensive securities companies. The specificdifferentiation methods, conversion between different
types, and differentiated business policies and capital
policies of different types of securities companies are
subject to further interpretation or issuance of thecorresponding implementation rules by the competentauthorities.

05

The integrity of the capital market was emphasized and credit-based
regulation was promoted

Integrity has increasingly become an important foundationof the capital market, and credit-based regulation has
also played an important role. With the Measures for theSupervision and Administration of Integrity of Securities
and Futures Markets coming into force on July 1, 2018,
the regulators stepped up their efforts in 2019 to investigate
into, and punish instances of, bad credit, imposing heavier
punishments. The CSRC worked closely with the NDRC,
the Civil Aviation Administration of China, the China
Railway Group and other regulators to restrict dishonest
individuals. As a result, the CSRC publicized a total of 191
seriously dishonest individuals.
Different departments of the CSRC took 151 actions against
high-risk and dishonest market players in 2019. As aresult of comparisons made by batches between the
integrity database and more than 10,000 listed companies
and nearly 239,000 practitioners, 157 dishonest entities/persons
were found through screening. 545 dishonest private
equity institutions were put on public notice for dishonesty.

The CSRC also built integrity into daily regulation. In
2019, the CSRC paid special attention to the credit
records of applicants during the process of examination
and approval of shareholders' qualifications, being
significantly stricter in the requirement of supporting
documents. In 2019, the CSRC provided 13 batches ofverification services for the selection of members of theSTAR Listing Committee, and provided 184 batches of
special inquiry services for the listing of enterprises on
STAR. By the end of November 2019, departments(agencies) of the CSRC had asked for credit informationin more than 39,000 batches in their review of administrative
licensing, classified inspection and law enforcement,
and risk monitoring. Meanwhile, the CSRC actively urged
securities and fund operating institutions to establish
integrity management systems and verify the credit ofclients in their business.

PRC Financial Regulation:
Annual Report (2020)
34

PRC Financial Regulation:
Annual Report (2020)
35

06

Securities and futures business opened up to more foreign capital andrestrictions on cross-border securities transactions were largely relaxed
In 2019, China accelerated the pace of opening-up in
the securities and futures industry, which is mainly reflectedin commercial presence and cross-border transactions.
On July 20, 2019, the Financial Stability and Development
Commission promulgated the Relevant Measures for
Further Opening-up of the Financial Industry, putting
forward 11 measures for the opening-up of the financial
services sector, bringing forward the date to lift restrictions
on the foreign equity ratio of securities companies, fundmanagement companies and futures companies from2021 to 2020.
As the follow-up to such policy, on October 11, 2019,
the CSRC clarified the specific times to lift the restrictions
on the foreign equity ratio as follows: the restrictions on
the foreign equity ratio of futures companies would be
lifted on January 1, 2020; the restrictions on the foreign
equity ratio of fund management companies would be
lifted on April 1, 2020; and the restrictions on theforeign equity ratio of securities companies would be
lifted on December 1, 2020. At present, Nomura Orient
International Securities Co., Ltd. and J.P. Morgan Securities(China) Company Limited have already obtained
licenses/permits to operate a securities business, andmany joint venture securities companies, including
Credit Suisse, Daiwa Securities and DBS Bank, areapplying to set up or to increase capital.

The Shanghai-London Stock Connect was officiallylaunched on June 17, 2019, starting the interconnection
between the Shanghai Stock Exchange and the London
Stock Exchange. Domestic Chinese enterprises may liston the London Stock Exchange through issuing global
depositary receipts (GDRs), and enterprises listed on the
London Stock Exchange may list on Shanghai Stock
Exchange by issuing Chinese depositary receipts(CDRs). With respect to cross-border investment indomestic markets, SAFE has canceled the restrictions
on investment for QFIIs and RQFIIs, and introduced thedraft of the new QFII policy to give foreign institutions
more scope in terms of eligible investors and permissible
products in which to invest, among others. While broadening
the channels and scope of permissible products forforeign capital, foreign institutions were allowed toenter into more types of derivatives transactions, tohelp manage the risks generated from cross-bordertransactions.

07

Insider trading and intermediary institutions were the focus of
regulatory actions
In 2019, the CSRC and its local bureaus continued tokeep the pressure on those found to be in violation of
securities laws and regulations. Sanctions for morethan 300 cases were imposed during the year, withinsider trading being the main target of regulatory
actions and accounting for about 40% of the total.
Regulatory actions also focused on intermediaryinstitutions. In 2019, the CSRC imposed sanctions onfour securities companies. The most severe sanction
was imposed on Shanghai Huaxin Securities Co., Ltd.,
which had its business license revoked after it had
been found to provide financing to its shareholders inviolation of the relevant laws and regulations; and theother three securities companies were punished becauseof their failure to act diligently and responsibly as
financial advisors/underwriters.
On June 28, 2019, in order to further punish violationsin the securities and futures markets, the Supreme
Court and the Supreme Procuratorate promulgatedthe Interpretations of the Supreme People's Court andthe Supreme People's Procuratorate on Several Issues
concerning the Application of Law in Handling Criminal
Cases of Manipulation of the Securities and Futures
Markets and the Interpretations of the Supreme People's
Court and the Supreme People's Procuratorate on
Several Issues concerning the Application of Law in
Handling Criminal Cases of Transactions by Using
Undisclosed Information. The CSRC also released theProvisions for "Other Activities of Manipulating Futures
Price" under Item 5, Article 70 of the Administrative
Regulations on Futures Transactions. Both broaden
the scope of market manipulation by including new
types of market manipulations (such as manipulation
by false information, manipulation by scalping (i.e.
manipulation by using vicious KOL to recommend
shares), manipulation by using major events, manipulation
by abusing information advantages, manipulation by false
orders, cross-period manipulation or manipulation inspot market).

PRC Financial Regulation:
Annual Report (2020)
34

PRC Financial Regulation:
Annual Report (2020)
35

06

Securities and futures business opened up to more foreign capital andrestrictions on cross-border securities transactions were largely relaxed
In 2019, China accelerated the pace of opening-up in
the securities and futures industry, which is mainly reflectedin commercial presence and cross-border transactions.
On July 20, 2019, the Financial Stability and Development
Commission promulgated the Relevant Measures for
Further Opening-up of the Financial Industry, putting
forward 11 measures for the opening-up of the financial
services sector, bringing forward the date to lift restrictions
on the foreign equity ratio of securities companies, fundmanagement companies and futures companies from2021 to 2020.
As the follow-up to such policy, on October 11, 2019,
the CSRC clarified the specific times to lift the restrictions
on the foreign equity ratio as follows: the restrictions on
the foreign equity ratio of futures companies would be
lifted on January 1, 2020; the restrictions on the foreign
equity ratio of fund management companies would be
lifted on April 1, 2020; and the restrictions on theforeign equity ratio of securities companies would be
lifted on December 1, 2020. At present, Nomura Orient
International Securities Co., Ltd. and J.P. Morgan Securities(China) Company Limited have already obtained
licenses/permits to operate a securities business, andmany joint venture securities companies, including
Credit Suisse, Daiwa Securities and DBS Bank, areapplying to set up or to increase capital.

The Shanghai-London Stock Connect was officiallylaunched on June 17, 2019, starting the interconnection
between the Shanghai Stock Exchange and the London
Stock Exchange. Domestic Chinese enterprises may liston the London Stock Exchange through issuing global
depositary receipts (GDRs), and enterprises listed on the
London Stock Exchange may list on Shanghai Stock
Exchange by issuing Chinese depositary receipts(CDRs). With respect to cross-border investment indomestic markets, SAFE has canceled the restrictions
on investment for QFIIs and RQFIIs, and introduced thedraft of the new QFII policy to give foreign institutions
more scope in terms of eligible investors and permissible
products in which to invest, among others. While broadening
the channels and scope of permissible products forforeign capital, foreign institutions were allowed toenter into more types of derivatives transactions, tohelp manage the risks generated from cross-bordertransactions.

07

Insider trading and intermediary institutions were the focus of
regulatory actions
In 2019, the CSRC and its local bureaus continued tokeep the pressure on those found to be in violation of
securities laws and regulations. Sanctions for morethan 300 cases were imposed during the year, withinsider trading being the main target of regulatory
actions and accounting for about 40% of the total.
Regulatory actions also focused on intermediaryinstitutions. In 2019, the CSRC imposed sanctions onfour securities companies. The most severe sanction
was imposed on Shanghai Huaxin Securities Co., Ltd.,
which had its business license revoked after it had
been found to provide financing to its shareholders inviolation of the relevant laws and regulations; and theother three securities companies were punished becauseof their failure to act diligently and responsibly as
financial advisors/underwriters.
On June 28, 2019, in order to further punish violationsin the securities and futures markets, the Supreme
Court and the Supreme Procuratorate promulgatedthe Interpretations of the Supreme People's Court andthe Supreme People's Procuratorate on Several Issues
concerning the Application of Law in Handling Criminal
Cases of Manipulation of the Securities and Futures
Markets and the Interpretations of the Supreme People's
Court and the Supreme People's Procuratorate on
Several Issues concerning the Application of Law in
Handling Criminal Cases of Transactions by Using
Undisclosed Information. The CSRC also released theProvisions for "Other Activities of Manipulating Futures
Price" under Item 5, Article 70 of the Administrative
Regulations on Futures Transactions. Both broaden
the scope of market manipulation by including new
types of market manipulations (such as manipulation
by false information, manipulation by scalping (i.e.
manipulation by using vicious KOL to recommend
shares), manipulation by using major events, manipulation
by abusing information advantages, manipulation by false
orders, cross-period manipulation or manipulation inspot market).

PRC Financial Regulation:
Annual Report (2020)
36

PRC Financial Regulation:
Annual Report (2020)
372020 Regulatory Outlook08

The first model securities case was heard, providing guidance in future
investor protection cases
On November 13, 2018, the Supreme Court and the
CSRC issued Opinions on Comprehensively Promoting
the Construction of a Diversified Resolution Mechanism
for Securities and Futures Disputes, proposing theestablishment of a model judgment mechanism forthe handling of securities and futures disputes.
On August 7, 2019, the Shanghai High Court heard
China's first model case of securities disputes involving
multiple investors. The final judgment rejected theappeal and upheld the original judgment. This casewas selected as a model case by the Shanghai Financial
Court in accordance with the Shanghai Financial Court's
Provisions on the Model for the Modeling of Securities
Disputes (Trial). This case was one of a series of cases inwhich Founder Technology Corporation was alleged tohave made misrepresentations to investors. The
judgment finally resolved the dispute through mediation,and provided sufficient litigation expectations forlitigants (investors) in parallel cases involving thousandsof investors (referencing cases with common factualand legal issues with the one model case), as well as
enhancing judicial efficiency. This model case mechanism,
together with the new dispute resolution mechanisms
stipulated in the Securities Law (such as class actions),
will provide investors with more diversified, convenient,and predictable measures in respect of the approaches
and effects of investors’ protection.

01

China broadened access of foreign capital to securities and futures
business and substantially relaxed restrictions on cross-bordersecurities transactions
2020 is a vital year for deepening capital market reforms,
and various reform policies are expected to be issued andimplemented. With the promulgation and implementation of the new Securities Law, based on the STAR
practice in which securities issuances were examined by
the Exchange and registered by the CSRC, it is expectedthat in 2020 the review authority by the CSRC over the
public issuance of all securities will be delegated to theexchanges, the CSRC's Committee for Examining Securities Issuance will be abolished, and the role of the CSRC insecurities issuance will be changed from "approval" to"registration”. In addition to the STAR, the listing requirements for the SME board are also expected to be more
flexible to accommodate different types of businesses.

At the same time, the information disclosure system oflisted companies will be further strengthened. The main
focus of supervision will be on disclosure by different
entities, how well they are deemed to have met theirdisclosure obligations, and responsibilities of securities
intermediaries.

PRC Financial Regulation:
Annual Report (2020)
36

PRC Financial Regulation:
Annual Report (2020)
372020 Regulatory Outlook08

The first model securities case was heard, providing guidance in future
investor protection cases
On November 13, 2018, the Supreme Court and the
CSRC issued Opinions on Comprehensively Promoting
the Construction of a Diversified Resolution Mechanism
for Securities and Futures Disputes, proposing theestablishment of a model judgment mechanism forthe handling of securities and futures disputes.
On August 7, 2019, the Shanghai High Court heard
China's first model case of securities disputes involving
multiple investors. The final judgment rejected theappeal and upheld the original judgment. This casewas selected as a model case by the Shanghai Financial
Court in accordance with the Shanghai Financial Court's
Provisions on the Model for the Modeling of Securities
Disputes (Trial). This case was one of a series of cases inwhich Founder Technology Corporation was alleged tohave made misrepresentations to investors. The
judgment finally resolved the dispute through mediation,and provided sufficient litigation expectations forlitigants (investors) in parallel cases involving thousandsof investors (referencing cases with common factualand legal issues with the one model case), as well as
enhancing judicial efficiency. This model case mechanism,
together with the new dispute resolution mechanisms
stipulated in the Securities Law (such as class actions),
will provide investors with more diversified, convenient,and predictable measures in respect of the approaches
and effects of investors’ protection.

01

China broadened access of foreign capital to securities and futures
business and substantially relaxed restrictions on cross-bordersecurities transactions
2020 is a vital year for deepening capital market reforms,
and various reform policies are expected to be issued andimplemented. With the promulgation and implementation of the new Securities Law, based on the STAR
practice in which securities issuances were examined by
the Exchange and registered by the CSRC, it is expectedthat in 2020 the review authority by the CSRC over the
public issuance of all securities will be delegated to theexchanges, the CSRC's Committee for Examining Securities Issuance will be abolished, and the role of the CSRC insecurities issuance will be changed from "approval" to"registration”. In addition to the STAR, the listing requirements for the SME board are also expected to be more
flexible to accommodate different types of businesses.

At the same time, the information disclosure system oflisted companies will be further strengthened. The main
focus of supervision will be on disclosure by different
entities, how well they are deemed to have met theirdisclosure obligations, and responsibilities of securities
intermediaries.

PRC Financial Regulation:
Annual Report (2020)
38

PRC Financial Regulation:
Annual Report (2020)
39

02

The opening up of the securities market will be centered on the
two-way opening of cross-border transactions
On top of allowing wholly foreign-owned futures companies
and securities companies, more open policies are expected
to allow foreign financial institutions to enter into China's
securities market in 2020:· The new QFII policy will be officially launched,which will grant the QFII license to more foreign
institutions, and expand QFII's tradeable productrange to commodities futures, wealth management
products issued by financial institutions, andprivately-offered products;· "Wealth Management Connect" will officially launchin the Greater Bay Area and Hong Kong, andwill also expand to regions such as Shanghai;· Mechanisms such as those used in "Shanghai-London
Stock Connect” (such as global depositary receipts(GDR) and Chinese depositary receipts (CDR))
will be established between China and morecountries and regions;· More foreign companies will be allowed to belisted on the STAR;· More foreign-invested companies will be listed in
China;· Asset securitization products (such as asset-backed
securities (ABS)) will be allowed to be issued on across-border basis.
Correspondingly, we expect that the supervision ofdomestic securities companies' cross-border transactions
will also be relaxed. More domestic securities companies
will be permitted to conduct overseas investments andcross-border derivatives transactions, and the pace ofinternationalization of domestic securities firms will also
be accelerated.

03

While encouraging securities companies to grow, regulators continue
to prioritize risk control and compliance management

In order to build securities companies the size of “aircraft
carriers”, it is expected that the regulators will allow morediversified market players to invest in securities companies
when these companies need to replenish their capital.
Securities companies may be allowed to issue a wider
variety of products, such as preferred shares, convertible
bonds and subordinated debts, as more innovation is
introduced into the market. However, we believe thatthe regulatory authorities will continue to take a strict
approach when reviewing shareholders’ qualifications.
In particular, they will strictly implement the shareholder
eligibility requirements provided in relevant laws andregulators in respect of controlling shareholders andmajor shareholders of comprehensive securities companies.
In addition, risk prevention and compliance will remain
the focus of regulation. We expect that the classified
supervision of securities companies will be enhanced in
2020, by further applying differentiated regulatory

requirements in terms of the capital, business scale, personnel
and IT system setup of securities companies of different
categories. Following the publication of Minutes of Forumon Nationwide Bond Disputes Trial Hearing and the Noticeof Matters in Relation to Dealing with Defaults in Corporate
Credit Bonds (Consultation Draft) for public comments,
the prevention and diffusion of risks and the strengtheningof risk management in key areas such as stock pledges
and bond defaults will be carried out at multiple levels.
Meanwhile, the fact that seven securities companies havebeen fined for compliance failures since the end of 2019signals more tightened regulation of compliance on
securities companies in 2020, which may focus on theestablishment of compliance system, compliance department
staffing, compliance control, compliance responsibility
and corporate governance.

PRC Financial Regulation:
Annual Report (2020)
38

PRC Financial Regulation:
Annual Report (2020)
39

02

The opening up of the securities market will be centered on the
two-way opening of cross-border transactions
On top of allowing wholly foreign-owned futures companies
and securities companies, more open policies are expected
to allow foreign financial institutions to enter into China's
securities market in 2020:· The new QFII policy will be officially launched,which will grant the QFII license to more foreign
institutions, and expand QFII's tradeable productrange to commodities futures, wealth management
products issued by financial institutions, andprivately-offered products;· "Wealth Management Connect" will officially launchin the Greater Bay Area and Hong Kong, andwill also expand to regions such as Shanghai;· Mechanisms such as those used in "Shanghai-London
Stock Connect” (such as global depositary receipts(GDR) and Chinese depositary receipts (CDR))
will be established between China and morecountries and regions;· More foreign companies will be allowed to belisted on the STAR;· More foreign-invested companies will be listed in
China;· Asset securitization products (such as asset-backed
securities (ABS)) will be allowed to be issued on across-border basis.
Correspondingly, we expect that the supervision ofdomestic securities companies' cross-border transactions
will also be relaxed. More domestic securities companies
will be permitted to conduct overseas investments andcross-border derivatives transactions, and the pace ofinternationalization of domestic securities firms will also
be accelerated.

03

While encouraging securities companies to grow, regulators continue
to prioritize risk control and compliance management

In order to build securities companies the size of “aircraft
carriers”, it is expected that the regulators will allow morediversified market players to invest in securities companies
when these companies need to replenish their capital.
Securities companies may be allowed to issue a wider
variety of products, such as preferred shares, convertible
bonds and subordinated debts, as more innovation is
introduced into the market. However, we believe thatthe regulatory authorities will continue to take a strict
approach when reviewing shareholders’ qualifications.
In particular, they will strictly implement the shareholder
eligibility requirements provided in relevant laws andregulators in respect of controlling shareholders andmajor shareholders of comprehensive securities companies.
In addition, risk prevention and compliance will remain
the focus of regulation. We expect that the classified
supervision of securities companies will be enhanced in
2020, by further applying differentiated regulatory

requirements in terms of the capital, business scale, personnel
and IT system setup of securities companies of different
categories. Following the publication of Minutes of Forumon Nationwide Bond Disputes Trial Hearing and the Noticeof Matters in Relation to Dealing with Defaults in Corporate
Credit Bonds (Consultation Draft) for public comments,
the prevention and diffusion of risks and the strengtheningof risk management in key areas such as stock pledges
and bond defaults will be carried out at multiple levels.
Meanwhile, the fact that seven securities companies havebeen fined for compliance failures since the end of 2019signals more tightened regulation of compliance on
securities companies in 2020, which may focus on theestablishment of compliance system, compliance department
staffing, compliance control, compliance responsibility
and corporate governance.

PRC Financial Regulation:
Annual Report (2020)40

PRC Financial Regulation:
Annual Report (2020)
41

04

The application of fintech in securities and futures industry will become
the regulatory focus
While the two traditional industries of securities andfutures are encouraged to make more use of technology
to support investor services, diverse trading and security,
the new Securities Law for the first time requires
program trading to be regulated, and a regulatory
system is expected to be in place in 2020 for regulating
program trading. The Administrative Measures for Programmatic
Trading in Securities and Futures Market or related provisions
may be promulgated to give institutional recognition toprogram trading and to provide express parameters foruse and reporting. In conjunction with this, we lookforward to the formal promulgation of the Interim Provisions
on External Access Management of Trading Information
System of Securities Companies (Consultation Draft) which

was issued by the CSRC on January 31, 2019. It is expectedthat the regulation will impose strict requirements on theexternal connectivity of the trading information system of
securities companies both in terms of the qualification of suchsecurities companies and the qualification of the externalcounterparties.

05

The CSRC will maintain tightened regulation on violations in securities
industry

On January 2, 2020, the Beijing CSRC and Shanxi CSRC
announced decisions of regulatory actions; on January 3,
a material case of market manipulation was reported at
the CSRC's first news conference of the new year. The
occurrence of several events at the beginning of the newyear may set the tone of tightened regulation in 2020. In
conjunction with the newly-revised Securities Law andthe judicial interpretations on securities and futures
manipulation and insider trading issued by the Supreme
Court and the Supreme Procuratorate, respectively, it isexpected that the CSRC's law enforcement will focus onmarket manipulation and continue to crack down on insider
trading in 2020. In addition, with the implementation of
the pilot registration-based IPO regime, information
disclosure of listed companies and due diligence duties
of intermediaries will also become the focus of law
enforcement. We believe that the severity of sanctions to
be imposed against violations, especially the level ofmonetary penalties, will be significantly enhanced after
the Securities Law becomes formally implemented on
March 1, 2020. This trend in the severity of regulatory
punishment has been revealed in the disclosed

regulatory action early this year - the CSRC stopped
Chinalin Securities (华林证券) from increasing its
business size across all business lines for its compliancedefects, an action which is more severe than those takenin the past. In the meantime, the judiciary and theinvestor protection institution will more actively andwidely invoke the "class action system" and the "modelcase and parallel case hearing system" to protect
investors when making civil claims, and thereby increase
the cost of violating securities laws and regulations andthe severity of penalty severity for such violations. In
addition, based on the success achieved in applying thepilot scheme in 2019, we expect that the CSRC will use
the administrative settlement mechanism in a wider
range in 2020 to deal with violations of securities laws
and regulations.

PRC Financial Regulation:
Annual Report (2020)40

PRC Financial Regulation:
Annual Report (2020)
41

04

The application of fintech in securities and futures industry will become
the regulatory focus
While the two traditional industries of securities andfutures are encouraged to make more use of technology
to support investor services, diverse trading and security,
the new Securities Law for the first time requires
program trading to be regulated, and a regulatory
system is expected to be in place in 2020 for regulating
program trading. The Administrative Measures for Programmatic
Trading in Securities and Futures Market or related provisions
may be promulgated to give institutional recognition toprogram trading and to provide express parameters foruse and reporting. In conjunction with this, we lookforward to the formal promulgation of the Interim Provisions
on External Access Management of Trading Information
System of Securities Companies (Consultation Draft) which

was issued by the CSRC on January 31, 2019. It is expectedthat the regulation will impose strict requirements on theexternal connectivity of the trading information system of
securities companies both in terms of the qualification of suchsecurities companies and the qualification of the externalcounterparties.

05

The CSRC will maintain tightened regulation on violations in securities
industry

On January 2, 2020, the Beijing CSRC and Shanxi CSRC
announced decisions of regulatory actions; on January 3,
a material case of market manipulation was reported at
the CSRC's first news conference of the new year. The
occurrence of several events at the beginning of the newyear may set the tone of tightened regulation in 2020. In
conjunction with the newly-revised Securities Law andthe judicial interpretations on securities and futures
manipulation and insider trading issued by the Supreme
Court and the Supreme Procuratorate, respectively, it isexpected that the CSRC's law enforcement will focus onmarket manipulation and continue to crack down on insider
trading in 2020. In addition, with the implementation of
the pilot registration-based IPO regime, information
disclosure of listed companies and due diligence duties
of intermediaries will also become the focus of law
enforcement. We believe that the severity of sanctions to
be imposed against violations, especially the level ofmonetary penalties, will be significantly enhanced after
the Securities Law becomes formally implemented on
March 1, 2020. This trend in the severity of regulatory
punishment has been revealed in the disclosed

regulatory action early this year - the CSRC stopped
Chinalin Securities (华林证券) from increasing its
business size across all business lines for its compliancedefects, an action which is more severe than those takenin the past. In the meantime, the judiciary and theinvestor protection institution will more actively andwidely invoke the "class action system" and the "modelcase and parallel case hearing system" to protect
investors when making civil claims, and thereby increase
the cost of violating securities laws and regulations andthe severity of penalty severity for such violations. In
addition, based on the success achieved in applying thepilot scheme in 2019, we expect that the CSRC will use
the administrative settlement mechanism in a wider
range in 2020 to deal with violations of securities laws
and regulations.

PRC Financial Regulation:
Annual Report (2020)
42

PRC Financial Regulation:
Annual Report (2020)
Asset Management

PRC Financial Regulation:
Annual Report (2020)432019 Key Dates
February 22
The CSRC published the Measures for the Supervision
and Administration of Sales Agencies for Publicly-offered
Securities Investment Fund (Consultation Draft). Under
the measures, independent fund distribution institutions
would be regulated as licensed securities and futures
business institutions

May 22
The first batch of wealth management subsidiaries (“WMS”)
of commercial banks opened for business

July 20
The Financial Stability and Development Commission
announced 11 new policies to open up the financial sector,
encouraging foreign institutions to engage in onshore
wealth management and asset management businesses

October 25
Five public fund institutions were approved to conduct
consulting business for investment in mutual funds on apilot basis. The asset management sector is gradually entering
the buyer-side investment advisory era

December 6
The CSRC published the Interim Guidelines for Manager ofManagers (MOM) Products of Securities and Futures
Business Institutions, providing channels for professional
cooperation between different managers

December 23
The AMAC updated the Instructions for the Filing of
Privately-offered Investment Funds, which are thecomprehensive operational guidelines for the filing ofprivate funds

March 18
The China Banking Association (CBA) published the
Guidelines on Asset Custody Services of Commercial
Banks. Once again, there was passionate discussion
concerning the extent of the custodian’s responsibility

June 3
The CSRC updated the Guidelines on the Examination
and Approval of Fund of Funds (FOF) (Publicly-offered),encouraging the development of FOF as well as
strengthening regulation

October 12

The PBOC published the Recognition Rules on theStandardized Debt Assets (Consultation Draft), confirming
the criteria for “non-standard assets” in asset management

November 8
The Supreme People’s Court issued the Minutes of the
National Courts' Ninth Conference on Civil and Commercial
Trial Work, addressing important legal issues in the asset
management sector, such as the effectiveness of guaranteed
returns and the obligations regarding caveat venditor.
(In a related event, on August 7, China Construction Bank
(CCB) was ordered to compensate investors for all losses
suffered resulting from the sale of fund products where
the bank had failed to fulfil obligations to check the suitabilityof investors.)

December 20
The first foreign-controlled wealth management company(the joint venture company between Amundi AssetManagement and the WMS of Bank of China) received
approval for establishment in Shanghai

December 25
The PBOC, the CBIRC, the CSRC and the SAFE jointly
published the Notice on Further Regulating Financial
Marketing and Promotional Activities

PRC Financial Regulation:
Annual Report (2020)
42

PRC Financial Regulation:
Annual Report (2020)
Asset Management

PRC Financial Regulation:
Annual Report (2020)432019 Key Dates
February 22
The CSRC published the Measures for the Supervision
and Administration of Sales Agencies for Publicly-offered
Securities Investment Fund (Consultation Draft). Under
the measures, independent fund distribution institutions
would be regulated as licensed securities and futures
business institutions

May 22
The first batch of wealth management subsidiaries (“WMS”)
of commercial banks opened for business

July 20
The Financial Stability and Development Commission
announced 11 new policies to open up the financial sector,
encouraging foreign institutions to engage in onshore
wealth management and asset management businesses

October 25
Five public fund institutions were approved to conduct
consulting business for investment in mutual funds on apilot basis. The asset management sector is gradually entering
the buyer-side investment advisory era

December 6
The CSRC published the Interim Guidelines for Manager ofManagers (MOM) Products of Securities and Futures
Business Institutions, providing channels for professional
cooperation between different managers

December 23
The AMAC updated the Instructions for the Filing of
Privately-offered Investment Funds, which are thecomprehensive operational guidelines for the filing ofprivate funds

March 18
The China Banking Association (CBA) published the
Guidelines on Asset Custody Services of Commercial
Banks. Once again, there was passionate discussion
concerning the extent of the custodian’s responsibility

June 3
The CSRC updated the Guidelines on the Examination
and Approval of Fund of Funds (FOF) (Publicly-offered),encouraging the development of FOF as well as
strengthening regulation

October 12

The PBOC published the Recognition Rules on theStandardized Debt Assets (Consultation Draft), confirming
the criteria for “non-standard assets” in asset management

November 8
The Supreme People’s Court issued the Minutes of the
National Courts' Ninth Conference on Civil and Commercial
Trial Work, addressing important legal issues in the asset
management sector, such as the effectiveness of guaranteed
returns and the obligations regarding caveat venditor.
(In a related event, on August 7, China Construction Bank
(CCB) was ordered to compensate investors for all losses
suffered resulting from the sale of fund products where
the bank had failed to fulfil obligations to check the suitabilityof investors.)

December 20
The first foreign-controlled wealth management company(the joint venture company between Amundi AssetManagement and the WMS of Bank of China) received
approval for establishment in Shanghai

December 25
The PBOC, the CBIRC, the CSRC and the SAFE jointly
published the Notice on Further Regulating Financial
Marketing and Promotional Activities

PRC Financial Regulation:
Annual Report (2020)
44

PRC Financial Regulation:
Annual Report (2020)452019 Regulatory Observations

01

The Assets Management New Rules were being fully implemented, acomprehensive regulatory regime over assets management industry
was being established centering the Assets Management New Rules;
institution-based regulation and function-based regulation
have advanced, complementing each other, and a “two-pillar”
regulatory regime has been formally established under which the CBIRC
and the CSRC separately regulate the asset management market.

To implement the principles in the Assets Management
New Rules, the CBIRC and the CSRC (as well as the AMAC)
issued or implemented several rules and measures in 2019.
These rules and measures have perfected the regulatory
regime established by the Assets Management New Rules.
- The WMSs of nine commercial banks opened forbusiness in 2019. More WMSs and one Sino-foreign
wealth management joint venture established bysuch WMS were also approved.
- The CBIRC and the PBOC sought public opinion on
the Circular of Matters Related to the Regulation of
the Management of Cash Management Products,
following which they refined the rules governing
cash management products.
- Securities companies were requested to remove
any “channel business” (under which one financial
institution acts as conduit for making investmentsby asset management products managed by anotherfinancial institutions) that they were doing. “Red
East VII” indicated that “big collective products (大集合)” launched by securities companies and worth
more than CNY700 billion were to be made available
for the public to buy.
- The AMAC has updated the Introductions for theFiling of Privately-offered Investment Funds, reiterating
the idea that private funds “are not subject to licensing
requirement(s) but cannot be unregulated”.

- The CBIRC sought opinions from the industry on
the Administrative Measures for Cash Trust of Trust
Companies and from the public on the Interim
Measures for Insurance Assets Management Products.
With the above rules and practices, a “two-pillar” regulatory
regime under which the CBIRC and the CSRC separately
regulate the asset management market was formallyestablished. This was confirmed by the fact that WMSs ofcommercial banks now enjoy regulatory treatment that isequal to, or more preferential than, that governing mutualfund management companies.
Function-based regulation still applies in many cases.
These regulations still classify asset management products
by how they are publicly or privately offered rather thanaccording to the launching institution. This new classification
system follows the principle established in the Assets
Management New Rules, including, for example, which
institutions meet the standards to become qualified investors.
Added to that, invested assets will need to meet the criteria
set out in the Rules of Validating Standardized Debts
Related Assets, currently in draft form for consultation, to be
published by the PBOC. The amended Securities Law inlate 2019 classified asset management products as“securities”, to be subject to the unified regulatory scheme
now governing securities. The amended Securities Law will
make function-based regulation at the level of law (instead of
merely at the level of administrative regulations, whichrank under the law in the legal framework of China).

02

The regulatory and judicial authorities shared the view that asset managers
had a relationship with clients based on trust, according to which managers
owed fiduciary duties to clients; however, it remained unclear the extent
of custodians’ responsibilities.
Historically, it was generally understood that only businesses
conducted by trust companies and mutual funds werebased on a trust relationship with clients. This understanding
was later extended to private fund business and asset
management businesses of securities companies, bothsubject to the supervision of the CSRC. Although theAssets Management New Rules emphasized managers
must be diligent and responsible, it failed to clarify specificallywhether managers were trustees owing a fiduciary duty
to asset management clients. In December 2018, at apress conference announcing the Administrative Measures
for Wealth Management Subsidiaries of Commercial
Banks, the CBIRC explicitly recognized that commercial
banks and their subsidiaries’ wealth managementbusinesses had trust relationship. In 2019, the Minutesof the National Courts’ Ninth Conference on Civil andCommercial Trial Work also expressed inclination toacknowledge such an understanding.

in 2018 (when managers of private funds launched by
Fuxing group were not contactable and investors requested
the custodian Shanghai Bank to take responsibility)
triggered extensive discussions about the responsibilitiesof custodians in the assets management business. However,even after the Guidance for Commercial Banks’ Custodian
Business was issued by the CBA in March 2019, and the
updated Introduction for Filing of Private-offering
Investment Funds was issued by the AMAC in late2019, the opinions of the CBA and the AMAC on
custodians’ responsibilities remained divided. There wasno consensus about how custodians should exercise
their responsibilities and if and how custodians shouldtake over responsibility in situations where managers
were incapable of carrying out their duties. Nor is there
any clear determination on whether the custodians’
responsibilities would differ when supervising themanagers’ activities in managing different products.

In light of the above, a consensus has been reached atboth the regulatory and judicial level that the legal
relationship between an asset management client andthe manager was one of trust. Having reached thisconsensus, the regulatory system now reflects the
managers’ fiduciary duties, including detailed provisionsof the trustee’s responsibilities under asset management
contracts, internal governance and information disclosure
requirements, and prohibitions and restrictions on
related-party transactions and conflicts of interest.

On 23 October 2019, the first-hearing court issued adecision in a contract dispute involving the China
Aviation Industry Park Fund. According to that decision,
the comprehensive custodian, Pacific Securities, wasliable for 15% of investors’ losses. This case further pushed
the regulators and market players to seek clarification
over the distinction between “custodian” and“comprehensive custodian”. The case also forced the
judiciary to consider whether custodians of asset
management products (not investing in securities)
should have joint liability with managers.

However, the regulations remain unclear about theextent of a custodian’s responsibilities for asset management
products other than securities investment funds (including
public and private funds). The issues surrounding Fuxing

PRC Financial Regulation:
Annual Report (2020)
44

PRC Financial Regulation:
Annual Report (2020)452019 Regulatory Observations

01

The Assets Management New Rules were being fully implemented, acomprehensive regulatory regime over assets management industry
was being established centering the Assets Management New Rules;
institution-based regulation and function-based regulation
have advanced, complementing each other, and a “two-pillar”
regulatory regime has been formally established under which the CBIRC
and the CSRC separately regulate the asset management market.

To implement the principles in the Assets Management
New Rules, the CBIRC and the CSRC (as well as the AMAC)
issued or implemented several rules and measures in 2019.
These rules and measures have perfected the regulatory
regime established by the Assets Management New Rules.
- The WMSs of nine commercial banks opened forbusiness in 2019. More WMSs and one Sino-foreign
wealth management joint venture established bysuch WMS were also approved.
- The CBIRC and the PBOC sought public opinion on
the Circular of Matters Related to the Regulation of
the Management of Cash Management Products,
following which they refined the rules governing
cash management products.
- Securities companies were requested to remove
any “channel business” (under which one financial
institution acts as conduit for making investmentsby asset management products managed by anotherfinancial institutions) that they were doing. “Red
East VII” indicated that “big collective products (大集合)” launched by securities companies and worth
more than CNY700 billion were to be made available
for the public to buy.
- The AMAC has updated the Introductions for theFiling of Privately-offered Investment Funds, reiterating
the idea that private funds “are not subject to licensing
requirement(s) but cannot be unregulated”.

- The CBIRC sought opinions from the industry on
the Administrative Measures for Cash Trust of Trust
Companies and from the public on the Interim
Measures for Insurance Assets Management Products.
With the above rules and practices, a “two-pillar” regulatory
regime under which the CBIRC and the CSRC separately
regulate the asset management market was formallyestablished. This was confirmed by the fact that WMSs ofcommercial banks now enjoy regulatory treatment that isequal to, or more preferential than, that governing mutualfund management companies.
Function-based regulation still applies in many cases.
These regulations still classify asset management products
by how they are publicly or privately offered rather thanaccording to the launching institution. This new classification
system follows the principle established in the Assets
Management New Rules, including, for example, which
institutions meet the standards to become qualified investors.
Added to that, invested assets will need to meet the criteria
set out in the Rules of Validating Standardized Debts
Related Assets, currently in draft form for consultation, to be
published by the PBOC. The amended Securities Law inlate 2019 classified asset management products as“securities”, to be subject to the unified regulatory scheme
now governing securities. The amended Securities Law will
make function-based regulation at the level of law (instead of
merely at the level of administrative regulations, whichrank under the law in the legal framework of China).

02

The regulatory and judicial authorities shared the view that asset managers
had a relationship with clients based on trust, according to which managers
owed fiduciary duties to clients; however, it remained unclear the extent
of custodians’ responsibilities.
Historically, it was generally understood that only businesses
conducted by trust companies and mutual funds werebased on a trust relationship with clients. This understanding
was later extended to private fund business and asset
management businesses of securities companies, bothsubject to the supervision of the CSRC. Although theAssets Management New Rules emphasized managers
must be diligent and responsible, it failed to clarify specificallywhether managers were trustees owing a fiduciary duty
to asset management clients. In December 2018, at apress conference announcing the Administrative Measures
for Wealth Management Subsidiaries of Commercial
Banks, the CBIRC explicitly recognized that commercial
banks and their subsidiaries’ wealth managementbusinesses had trust relationship. In 2019, the Minutesof the National Courts’ Ninth Conference on Civil andCommercial Trial Work also expressed inclination toacknowledge such an understanding.

in 2018 (when managers of private funds launched by
Fuxing group were not contactable and investors requested
the custodian Shanghai Bank to take responsibility)
triggered extensive discussions about the responsibilitiesof custodians in the assets management business. However,even after the Guidance for Commercial Banks’ Custodian
Business was issued by the CBA in March 2019, and the
updated Introduction for Filing of Private-offering
Investment Funds was issued by the AMAC in late2019, the opinions of the CBA and the AMAC on
custodians’ responsibilities remained divided. There wasno consensus about how custodians should exercise
their responsibilities and if and how custodians shouldtake over responsibility in situations where managers
were incapable of carrying out their duties. Nor is there
any clear determination on whether the custodians’
responsibilities would differ when supervising themanagers’ activities in managing different products.

In light of the above, a consensus has been reached atboth the regulatory and judicial level that the legal
relationship between an asset management client andthe manager was one of trust. Having reached thisconsensus, the regulatory system now reflects the
managers’ fiduciary duties, including detailed provisionsof the trustee’s responsibilities under asset management
contracts, internal governance and information disclosure
requirements, and prohibitions and restrictions on
related-party transactions and conflicts of interest.

On 23 October 2019, the first-hearing court issued adecision in a contract dispute involving the China
Aviation Industry Park Fund. According to that decision,
the comprehensive custodian, Pacific Securities, wasliable for 15% of investors’ losses. This case further pushed
the regulators and market players to seek clarification
over the distinction between “custodian” and“comprehensive custodian”. The case also forced the
judiciary to consider whether custodians of asset
management products (not investing in securities)
should have joint liability with managers.

However, the regulations remain unclear about theextent of a custodian’s responsibilities for asset management
products other than securities investment funds (including
public and private funds). The issues surrounding Fuxing

PRC Financial Regulation:
Annual Report (2020)
46

PRC Financial Regulation:
Annual Report (2020)
47

03

Regulators strengthened protections for financial consumers andemphasized caveat venditor (“seller beware”).
In 2019, the idea to protect interests of financial consumers
was fully reflected at regulatory and judiciary levels.
- The commitment to protecting financial consumers
was demonstrated the Notice on Further Regulating
Financial Marketing and Advertising Activities jointly
issued by the PBOC, the CSRC, the CBIRC and theSAFE, and the Implementing Measures for theProtection of Financial Consumer Rights and Interests(consultation draft) published by the PBOC.
- The Administrative Measures for the Information Disclosureof Publicly Offered Securities Investment Funds havebeen revised and renamed for the first time since2004. The revised measures were supplemented
with disclosure principles, such as "timeliness","simplicity" and "accessibility". Added to that, theGuidelines on the Record-filing of Private Investment
Funds have also been updated. The update
supplemented and strengthened the requirements
for disclosing key information, such as the arrangements
for fund dissolution and liquidation.
- The Securities Law, revised at the end of 2019, included a
specific chapter titled "Investor Protection" tostrengthen investor protection from bothadministrative and judicial perspectives. As asset
management products also fell within the scopeof the jurisdiction of the Securities Law, theseprovisions apply in the same way to investors whopurchase asset management products.

- From the judicial perspective, as indicated by the
CCB case, more stringent requirements were set
on sellers of financial products. Furthermore, theMinutes of the National Courts' Ninth Conference on
Civil and Commercial Trial Work included a chapter tospecify obligations of suitability and explanation offinancial institutions.
Based on these regulatory and judicial actions, financial
consumer protection in the asset management industry
has moved beyond being a superficial slogan. The courts
and regulatory authorities have imposed substantial
requirements in terms of caveat venditor, which has
raised challenges for all institutions selling to financial
consumers both directly and indirectly. It is fair to saythat in order to implement the general principle of caveat
emptor ("buyer beware"), the regulatory and judicial
authorities have strengthened the formulation, supervisionand implementation of the standards for caveat venditor.

04

Regulators implemented the principle of "buyer beware" and tookfurther steps to stop the practice of “mandatory repayment”.
Various default events in 2019 posed challenges forthe regulators to tackle the expectation of “mandatory
repayment”. Although the Asset Management New Rules
specified that principal and investment returns of asset
management products must not be guaranteed, inpractice it has been difficult to balance the implementationof this principle and the stability of financial markets at
a time when economic growth slowed down and there
were frequent risk events.
Nonetheless, the Minutes of the National Courts' Ninth
Conference on Civil and Commercial Trial Work expressly
stated that any mandatory repayment undertaking provided
by a trust company, commercial bank or other financial
institution in the asset management business should
be invalid. The minutes showed strong judiciary support
for implementing the policy, promoting instead theprinciple of "buyer beware". The minutes also provided
a basis for the asset management sector to move awayfrom “mandatory repayment” towards a Net Asset Value(NAV) model, ensuring transparency of risks, liabilities
and value of asset management products. The courts
still had a wide discretion in deciding, in invalid contracts,
which among the parties should bear responsibility.
As for the banking sector’s asset management business,the past year saw some significant events in moving awayfrom mandatory repayment. Banks established WMSs,
which would be completely separate from banks andmove “shadow” banks to be truly off-balance sheet. In
addition, the CBIRC publicly commented that the wealthmanagement services provided by commercial banks
and their WMSs created a trust relationship with the clients,
which, from a regulation perspective, prevented mandatory
repayment in banks’ wealth management business.

PRC Financial Regulation:
Annual Report (2020)
46

PRC Financial Regulation:
Annual Report (2020)
47

03

Regulators strengthened protections for financial consumers andemphasized caveat venditor (“seller beware”).
In 2019, the idea to protect interests of financial consumers
was fully reflected at regulatory and judiciary levels.
- The commitment to protecting financial consumers
was demonstrated the Notice on Further Regulating
Financial Marketing and Advertising Activities jointly
issued by the PBOC, the CSRC, the CBIRC and theSAFE, and the Implementing Measures for theProtection of Financial Consumer Rights and Interests(consultation draft) published by the PBOC.
- The Administrative Measures for the Information Disclosureof Publicly Offered Securities Investment Funds havebeen revised and renamed for the first time since2004. The revised measures were supplemented
with disclosure principles, such as "timeliness","simplicity" and "accessibility". Added to that, theGuidelines on the Record-filing of Private Investment
Funds have also been updated. The update
supplemented and strengthened the requirements
for disclosing key information, such as the arrangements
for fund dissolution and liquidation.
- The Securities Law, revised at the end of 2019, included a
specific chapter titled "Investor Protection" tostrengthen investor protection from bothadministrative and judicial perspectives. As asset
management products also fell within the scopeof the jurisdiction of the Securities Law, theseprovisions apply in the same way to investors whopurchase asset management products.

- From the judicial perspective, as indicated by the
CCB case, more stringent requirements were set
on sellers of financial products. Furthermore, theMinutes of the National Courts' Ninth Conference on
Civil and Commercial Trial Work included a chapter tospecify obligations of suitability and explanation offinancial institutions.
Based on these regulatory and judicial actions, financial
consumer protection in the asset management industry
has moved beyond being a superficial slogan. The courts
and regulatory authorities have imposed substantial
requirements in terms of caveat venditor, which has
raised challenges for all institutions selling to financial
consumers both directly and indirectly. It is fair to saythat in order to implement the general principle of caveat
emptor ("buyer beware"), the regulatory and judicial
authorities have strengthened the formulation, supervisionand implementation of the standards for caveat venditor.

04

Regulators implemented the principle of "buyer beware" and tookfurther steps to stop the practice of “mandatory repayment”.
Various default events in 2019 posed challenges forthe regulators to tackle the expectation of “mandatory
repayment”. Although the Asset Management New Rules
specified that principal and investment returns of asset
management products must not be guaranteed, inpractice it has been difficult to balance the implementationof this principle and the stability of financial markets at
a time when economic growth slowed down and there
were frequent risk events.
Nonetheless, the Minutes of the National Courts' Ninth
Conference on Civil and Commercial Trial Work expressly
stated that any mandatory repayment undertaking provided
by a trust company, commercial bank or other financial
institution in the asset management business should
be invalid. The minutes showed strong judiciary support
for implementing the policy, promoting instead theprinciple of "buyer beware". The minutes also provided
a basis for the asset management sector to move awayfrom “mandatory repayment” towards a Net Asset Value(NAV) model, ensuring transparency of risks, liabilities
and value of asset management products. The courts
still had a wide discretion in deciding, in invalid contracts,
which among the parties should bear responsibility.
As for the banking sector’s asset management business,the past year saw some significant events in moving awayfrom mandatory repayment. Banks established WMSs,
which would be completely separate from banks andmove “shadow” banks to be truly off-balance sheet. In
addition, the CBIRC publicly commented that the wealthmanagement services provided by commercial banks
and their WMSs created a trust relationship with the clients,
which, from a regulation perspective, prevented mandatory
repayment in banks’ wealth management business.

PRC Financial Regulation:
Annual Report (2020)
48

PRC Financial Regulation:
Annual Report (2020)
49

05

A combination of regulatory and judicial efforts promoted thetransition from passive to active asset management.
The Assets Management New Rules aimed to require
asset management companies to return to their original
purpose (that is, active management) and to require
financial institutions to adopt the NAV asset management
model. The rules have had the desired effect, in part, 2019saw an increase in the number of NAV-type products incommercial banks’ wealth management business. There
was also a notable lessening of the passive management(“channel”) business of securities companies.
In addition, the CBIRC, the CSRC and other regulatory
bodies issued guidance about product valuation. In termsof public funds, it has been proposed to include “sidepocket” investments (a practice adopted by some asset
management funds to book illiquid and highly risky assets
separate from other investments) in the overall valuationsof asset management funds.

The Minutes of the National Courts' Ninth Conferenceon Civil and Commercial Trial Work stated that “illegal
channel business” conducted during the "transition period"of asset management contracts should not be deemedinvalid in the absence of other factors which might invalidate
the contracts. Such opinion implied that the courts mighthold “illegal channel business” invalid after the "transition
period". Also, the minutes distinguished between active
management and passive management, indicating thatdifferent standards for determining fiduciary duties fordifferent types of asset management business may be
adopted.

06

Regulators went to great lengths to encourage greater professionalism
in the asset management sector.
Since the implementation of the regulations on WMSsof commercial banks, many commercial banks with
WMSs have transferred existing wealth managementbusinesses to these subsidiaries. These transfers are partof a trend for parent banks to focus on lending and tohave their WMS specialize in wealth management. Added
to this, some WMSs have set up subsidiaries focusing
on asset management, separate from WMSs focusing
on wealth management.
Since the Guidelines for Manager of Manager (MOM)
Products of Securities and Futures Business Institutions (Trial)
were implemented, managers (i.e. parent managers) of
both public funds and asset management schemes
launched by securities firms have been permitted to
entrust management of assets to multiple Investment
advisors (i.e., sub-managers). In this way, parent managers
can efficiently manage assets by entrusting different
asset classes to different sub-managers. By the end of
December 2019, several MOM products had been registeredwith the CSRC.

The first batch of private asset allocation managers
completed their registrations with the SAC. Private asset
funds were mainly in the form of FOFs, which had a broad
range of underlying investment assets. The existenceof private asset allocation managers also expanded therange of private fund managers.
The era of “buyer-side” investment advisory services
relating to public funds commenced with several fundmanagement companies and independent fund
distribution companies being granted pilot business permits.
The buyer-side investment advisory service thus separated
fund distribution and investment advisory services. This
separation not only settled the conflict of interest forfund distributors but also promoted the specializationof different services.
In sum, the asset management sector has adopted amore precise regulatory approach, and this helped create
specialization and intra-sector cooperation, as well as
improving efficiency generally.

PRC Financial Regulation:
Annual Report (2020)
48

PRC Financial Regulation:
Annual Report (2020)
49

05

A combination of regulatory and judicial efforts promoted thetransition from passive to active asset management.
The Assets Management New Rules aimed to require
asset management companies to return to their original
purpose (that is, active management) and to require
financial institutions to adopt the NAV asset management
model. The rules have had the desired effect, in part, 2019saw an increase in the number of NAV-type products incommercial banks’ wealth management business. There
was also a notable lessening of the passive management(“channel”) business of securities companies.
In addition, the CBIRC, the CSRC and other regulatory
bodies issued guidance about product valuation. In termsof public funds, it has been proposed to include “sidepocket” investments (a practice adopted by some asset
management funds to book illiquid and highly risky assets
separate from other investments) in the overall valuationsof asset management funds.

The Minutes of the National Courts' Ninth Conferenceon Civil and Commercial Trial Work stated that “illegal
channel business” conducted during the "transition period"of asset management contracts should not be deemedinvalid in the absence of other factors which might invalidate
the contracts. Such opinion implied that the courts mighthold “illegal channel business” invalid after the "transition
period". Also, the minutes distinguished between active
management and passive management, indicating thatdifferent standards for determining fiduciary duties fordifferent types of asset management business may be
adopted.

06

Regulators went to great lengths to encourage greater professionalism
in the asset management sector.
Since the implementation of the regulations on WMSsof commercial banks, many commercial banks with
WMSs have transferred existing wealth managementbusinesses to these subsidiaries. These transfers are partof a trend for parent banks to focus on lending and tohave their WMS specialize in wealth management. Added
to this, some WMSs have set up subsidiaries focusing
on asset management, separate from WMSs focusing
on wealth management.
Since the Guidelines for Manager of Manager (MOM)
Products of Securities and Futures Business Institutions (Trial)
were implemented, managers (i.e. parent managers) of
both public funds and asset management schemes
launched by securities firms have been permitted to
entrust management of assets to multiple Investment
advisors (i.e., sub-managers). In this way, parent managers
can efficiently manage assets by entrusting different
asset classes to different sub-managers. By the end of
December 2019, several MOM products had been registeredwith the CSRC.

The first batch of private asset allocation managers
completed their registrations with the SAC. Private asset
funds were mainly in the form of FOFs, which had a broad
range of underlying investment assets. The existenceof private asset allocation managers also expanded therange of private fund managers.
The era of “buyer-side” investment advisory services
relating to public funds commenced with several fundmanagement companies and independent fund
distribution companies being granted pilot business permits.
The buyer-side investment advisory service thus separated
fund distribution and investment advisory services. This
separation not only settled the conflict of interest forfund distributors but also promoted the specializationof different services.
In sum, the asset management sector has adopted amore precise regulatory approach, and this helped create
specialization and intra-sector cooperation, as well as
improving efficiency generally.

PRC Financial Regulation:
Annual Report (2020)
50

PRC Financial Regulation:
Annual Report (2020)
51

07

The asset management sector fully opened up.
The opening-up of the asset management sector in2019 went further than ever before, as exemplified by:- Foreign investors were permitted to hold morethan 25% of insurance asset management companies.
This change followed the removal of restrictions
on the shareholding percentage in the Big 4 AMCs
and trust companies.
- The timetable was brought forward by one year to2020 from 2021 for removing the foreign ownershipcap on securities companies, fund managementcompanies (FMC), and futures companies.
- Nomura established a Nomura-controlled securities
company to engage in asset management.
Meanwhile, Morgan Stanley and JP Morgan haveapplied to acquire a certain percentage of sharesin their FMCs, by which the Morgan Stanley FMC
and the JP Morgan FMC would become the firstforeign-invested FMC in which the foreign shareholder
would hold interest higher than the biggest Chinese
shareholder and the first majority foreign-controlled
FMC, respectively, upon approval.
- Foreign asset management companies were allowed
to partner with subsidiaries of domestic banks orinsurance companies to set up foreign-controlledwealth management companies. One example
would be the joint venture between Amundi AssetManagement and the WMS of Bank of China, which
has been approved for establishment in Shanghai.

- Lubrizol and Fullerton became the first PFMs toobtain private investment advisory licenses in early
2019, while Qingdao Yitsai became the firstwholly-owned subsidiary of a foreign bank to
obtain an independent fund distribution license.
- The CSRC intended to further expand investment
by QFII/RQFII in domestic products, includingcommodity futures and private equity funds.
- The concept of "Wealth Management Connect"
for the Guangdong-Hong Kong-Macao Greater Bay
Area was proposed and discussed, which may allow
mainland individuals to purchase Hong Kong wealthmanagement products through onshore institutions,and vice-versa.
With the growth in demand among Chinese citizens for
asset management services and with the overall trend
in more active asset management, foreign capital would
focus on and seek opportunities in China’s asset
management industry. However, as things stand, it will
still be difficult for foreign investors to choose between
multiple domestic asset management platforms andarrange intra-group resource sharing both domesticallyand with overseas headquarters.

08

Regulators strengthened sanctions against thosebusinesses failing to comply.
There was more enforcement in 2019, with a focus on
asset management companies. Taking trust companies
and securities asset management companies as examples:- In the trust sector, 29 trust companies received 42 fines
in 2019, amounting to close to CNY200million. The
number and amounts of fines increased comparedto the previous year. Of those companies fined forbreaches, the investigations and punishments targeted
real estate and trust-insurance channel businesses,
post-lending management, and information disclosure.

- As for asset management by securities companies,
the CSRC suspended the securities business license of
one securities company for six months, and foundothers in breach of regulations covering a wide arrayof offenses, including information disclosure delays,
non-compliant sales, the omission of mandatory contract
provisions, excessive investment ratios, inadequate
internal controls, guaranteed returns, and violation ofChinese Wall rules.

PRC Financial Regulation:
Annual Report (2020)
50

PRC Financial Regulation:
Annual Report (2020)
51

07

The asset management sector fully opened up.
The opening-up of the asset management sector in2019 went further than ever before, as exemplified by:- Foreign investors were permitted to hold morethan 25% of insurance asset management companies.
This change followed the removal of restrictions
on the shareholding percentage in the Big 4 AMCs
and trust companies.
- The timetable was brought forward by one year to2020 from 2021 for removing the foreign ownershipcap on securities companies, fund managementcompanies (FMC), and futures companies.
- Nomura established a Nomura-controlled securities
company to engage in asset management.
Meanwhile, Morgan Stanley and JP Morgan haveapplied to acquire a certain percentage of sharesin their FMCs, by which the Morgan Stanley FMC
and the JP Morgan FMC would become the firstforeign-invested FMC in which the foreign shareholder
would hold interest higher than the biggest Chinese
shareholder and the first majority foreign-controlled
FMC, respectively, upon approval.
- Foreign asset management companies were allowed
to partner with subsidiaries of domestic banks orinsurance companies to set up foreign-controlledwealth management companies. One example
would be the joint venture between Amundi AssetManagement and the WMS of Bank of China, which
has been approved for establishment in Shanghai.

- Lubrizol and Fullerton became the first PFMs toobtain private investment advisory licenses in early
2019, while Qingdao Yitsai became the firstwholly-owned subsidiary of a foreign bank to
obtain an independent fund distribution license.
- The CSRC intended to further expand investment
by QFII/RQFII in domestic products, includingcommodity futures and private equity funds.
- The concept of "Wealth Management Connect"
for the Guangdong-Hong Kong-Macao Greater Bay
Area was proposed and discussed, which may allow
mainland individuals to purchase Hong Kong wealthmanagement products through onshore institutions,and vice-versa.
With the growth in demand among Chinese citizens for
asset management services and with the overall trend
in more active asset management, foreign capital would
focus on and seek opportunities in China’s asset
management industry. However, as things stand, it will
still be difficult for foreign investors to choose between
multiple domestic asset management platforms andarrange intra-group resource sharing both domesticallyand with overseas headquarters.

08

Regulators strengthened sanctions against thosebusinesses failing to comply.
There was more enforcement in 2019, with a focus on
asset management companies. Taking trust companies
and securities asset management companies as examples:- In the trust sector, 29 trust companies received 42 fines
in 2019, amounting to close to CNY200million. The
number and amounts of fines increased comparedto the previous year. Of those companies fined forbreaches, the investigations and punishments targeted
real estate and trust-insurance channel businesses,
post-lending management, and information disclosure.

- As for asset management by securities companies,
the CSRC suspended the securities business license of
one securities company for six months, and foundothers in breach of regulations covering a wide arrayof offenses, including information disclosure delays,
non-compliant sales, the omission of mandatory contract
provisions, excessive investment ratios, inadequate
internal controls, guaranteed returns, and violation ofChinese Wall rules.

PRC Financial Regulation:
Annual Report (2020)
52

PRC Financial Regulation:
Annual Report (2020)
53

2020 Regulatory Outlook01

It is not clear whether there will be significant changes in the top-levelsystem design and regulatory framework covering asset management.

Since 2018, the Assets Management New Rules andsupporting measures have proposed a series ofmeasures to revert asset management to the way it was
originally intended to operate. Those measures include:
removing “channel business”, prohibiting mandatory
repayment, and clarifying the legal relationship in asset
management business between managers and investors.
However, many questions remain about how regulators
will promote the long-term development of the market.
How can institution-based
regulationandfunction-based regulation be effectively integrated?
How can day-to-day asset management activities bemore closely regulated? How will the specific Securities
Law provisions on securities issuance, trading andinvestor protection be applied to asset management?
Should the regulatory regime established by the Assets
Management New Rules be updated?

The WMSs of commercial banks under the CBIRC’s
regulation enjoy preferential policies similar to publicfunds. Those preferential policies touch on productinvestment scope, fundraising methods, and otheraspects. However, at the same time, these WMSs
operate under a much looser code of conduct and withfewer restrictions. This has raised questions as towhether it would lead to inconsistent regulations again,
and how the implementation of function-based
regulation will be impacted. We expect that thelegislative calendar will soon contain plans for a refinedand unified regulatory regime, making reference toforeign regulations on collective asset management
products, under which all market players have one asset
management regulatory regime, which they manage. In
addition, regulators will likely further clarify the distinction
between asset management and wealth management,
and promote professional services.

02

Regulators may, from a macro-economic viewpoint, extend the transition
period for existing products under the Assets Management New Rules,
allowing new and old products as well as new and existing asset
management methodology to coexist for an extended period, which will
create opportunities in the non-performing asset management business.
The Assets Management New Rules provide a transition
period until the end of 2020 for existing asset management
products to be corrected or replaced with new products
to comply with the provisions of the Assets Management
New Rules. After the transition period, financial institutions
may not issue or manage any asset management productin violation of the Assets Management New Rules.

or for transferring assets back to financial institutions’balance sheets. Also, there is potential issue as to whether
investors should be repaid on the basis of the rate of return
they had expected to make on their investments or on
the likely lower rate of return in the scenario where invested
assets are locked while revolving issuance of asset
management products continues on the funding side.

However, as of the end of 2019, the correction of existingproducts is behind schedule. Specifically, commercial
banks, who (among all types of asset managers) have thelargest amounts of existing asset management products,
most of which are invested in non-standard assets, havecorrected only about one-quarter of them by the end of
2019. Thus, it is likely that the full-scale correction will not
be completed by the end of 2020.

During the transition period, it is not clear how quickly
asset management products that do not comply with theAssets Management New Rules will be phased out. The
likelihood, therefore, is that there will continue to be a
mix of new and old asset management products, as well
as new and old asset management methodology, for sometime to come. In the meantime, to incentivize the reductionof existing products, regulators may, in approving/supporting an asset manager’s new business, take into
account progress made in addressing aspects of existingproducts that do not comply with the new rules. Assetmanagers that wish to take the lead in developing new
products should be proactive in disposing of assets that
do not meet the new standards. This way, asset disposal
and non-performing asset management business may
also be promoted to certain extent.

In response, regulators have indicated that they may
extend the transition period, potentially by three years,
for individual banks on a case-by-case basis. It is unclear
whether all banks will be treated equally and whether
other financial institutions will be treated similarly. It isalso unclear what actions will be taken to substantiallyremove existing products that do not comply with theAssets Management New Rules, especially those products
investing in non-standard assets. Any radical accelerationin their reduction could lead to pressure for assets disposal

PRC Financial Regulation:
Annual Report (2020)
52

PRC Financial Regulation:
Annual Report (2020)
53

2020 Regulatory Outlook01

It is not clear whether there will be significant changes in the top-levelsystem design and regulatory framework covering asset management.

Since 2018, the Assets Management New Rules andsupporting measures have proposed a series ofmeasures to revert asset management to the way it was
originally intended to operate. Those measures include:
removing “channel business”, prohibiting mandatory
repayment, and clarifying the legal relationship in asset
management business between managers and investors.
However, many questions remain about how regulators
will promote the long-term development of the market.
How can institution-based
regulationandfunction-based regulation be effectively integrated?
How can day-to-day asset management activities bemore closely regulated? How will the specific Securities
Law provisions on securities issuance, trading andinvestor protection be applied to asset management?
Should the regulatory regime established by the Assets
Management New Rules be updated?

The WMSs of commercial banks under the CBIRC’s
regulation enjoy preferential policies similar to publicfunds. Those preferential policies touch on productinvestment scope, fundraising methods, and otheraspects. However, at the same time, these WMSs
operate under a much looser code of conduct and withfewer restrictions. This has raised questions as towhether it would lead to inconsistent regulations again,
and how the implementation of function-based
regulation will be impacted. We expect that thelegislative calendar will soon contain plans for a refinedand unified regulatory regime, making reference toforeign regulations on collective asset management
products, under which all market players have one asset
management regulatory regime, which they manage. In
addition, regulators will likely further clarify the distinction
between asset management and wealth management,
and promote professional services.

02

Regulators may, from a macro-economic viewpoint, extend the transition
period for existing products under the Assets Management New Rules,
allowing new and old products as well as new and existing asset
management methodology to coexist for an extended period, which will
create opportunities in the non-performing asset management business.
The Assets Management New Rules provide a transition
period until the end of 2020 for existing asset management
products to be corrected or replaced with new products
to comply with the provisions of the Assets Management
New Rules. After the transition period, financial institutions
may not issue or manage any asset management productin violation of the Assets Management New Rules.

or for transferring assets back to financial institutions’balance sheets. Also, there is potential issue as to whether
investors should be repaid on the basis of the rate of return
they had expected to make on their investments or on
the likely lower rate of return in the scenario where invested
assets are locked while revolving issuance of asset
management products continues on the funding side.

However, as of the end of 2019, the correction of existingproducts is behind schedule. Specifically, commercial
banks, who (among all types of asset managers) have thelargest amounts of existing asset management products,
most of which are invested in non-standard assets, havecorrected only about one-quarter of them by the end of
2019. Thus, it is likely that the full-scale correction will not
be completed by the end of 2020.

During the transition period, it is not clear how quickly
asset management products that do not comply with theAssets Management New Rules will be phased out. The
likelihood, therefore, is that there will continue to be a
mix of new and old asset management products, as well
as new and old asset management methodology, for sometime to come. In the meantime, to incentivize the reductionof existing products, regulators may, in approving/supporting an asset manager’s new business, take into
account progress made in addressing aspects of existingproducts that do not comply with the new rules. Assetmanagers that wish to take the lead in developing new
products should be proactive in disposing of assets that
do not meet the new standards. This way, asset disposal
and non-performing asset management business may
also be promoted to certain extent.

In response, regulators have indicated that they may
extend the transition period, potentially by three years,
for individual banks on a case-by-case basis. It is unclear
whether all banks will be treated equally and whether
other financial institutions will be treated similarly. It isalso unclear what actions will be taken to substantiallyremove existing products that do not comply with theAssets Management New Rules, especially those products
investing in non-standard assets. Any radical accelerationin their reduction could lead to pressure for assets disposal

PRC Financial Regulation:
Annual Report (2020)
54

PRC Financial Regulation:
Annual Report (2020)55

03

To encourage the transformation of the asset management sector,
regulators may tolerate and even encourage innovation by andcooperation between various competing businesses.
The transformation of the asset management sector has
been an important theme in recent years. Various asset
management institutions, such as commercial banks,
securities companies, FMCs, private funds, insurance
asset managers, trusts and futures brokers compete witheach other under generally similar rules. From 2020, theasset management market will be fully open to foreign
investors, who will be allowed to establish or acquiredifferent types of asset management platforms andinvest in various products. Market players and regulators
will face shared challenges in how institutions candifferentiate and develop themselves in a regulatoryenvironment that is aimed at returning asset
management to its original objectives.

Given that asset management in China is still in its
infancy, we expect regulators to tolerate andencourage innovation in products, internal governance,business models and other aspects provided market
players demonstrate adequate risk control andfiduciary duty. Regulators will also support cooperation
among different institutions (including Sino-foreign
cooperation) to improve domestic asset managers’
technical capabilities (including know how covering
asset allocation, customer demand analysis andexploration, artificial intelligence and product design)and management culture, to educate and foster
sophisticated and honest institutional investors and toserve the development of the capital market and thereal economy.

04

05

In 2020, we expect that strong regulation will become
the norm for asset managers. We also expect that
regulators will take a “look-through” approach in theregulation, emphasizing substance over form and will
focus on inspection of, and sanctions resulting from,
non-compliance in futures asset management.

Technology is widely used in the asset management
sector, including middle and back office services tofunds, automated investment advisory services, hedge
funds and internal governance of FMCs. The
development of fintech in the asset management sector
will be driven on one hand by domestic asset managers
identifying global assets in which to and on the other
hand by international asset managers entering into andcompeting in the Chinese market. We expect that in2020 regulators will focus on the opportunities of fintech
in the asset management sector and its risk control. The
Administrative Measures for Program Trading in the
Securities and Futures Market or other relevant rules may
be published in 2020, enabling institutions such ashedge funds to conduct program trading and at thesame time set specific restrictions on the use of program
trading and reporting. The consultation draft of theInterim Provisions on the Administration of External Accessto the Trading Information Systems of Securities Companies
also sets many strict requirements for investors eligiblefor direct market access service and their conduct.
Regulators will also focus their attention on automatedinvestment advisory services. We also expect that
"regulatory sandbox" will be applied to fintech.

Compliance and risk control willcontinue to be emphasized.

Moreover, returning to asset management’s origins aswell as transforming and upgrading the asset
management business have also raised new complianceand risk control requirements. Regulators may
encourage improvements on compliance and risk
control capacities in system design. For example,
regulators may implement a grading system for FMCs
referring to the similar system for securities companies.
The grading system will factor in compliance and risk
control conditions into ratings to indirectly affectregulatory resources allocation to, and customer
acquisition by, FMCs. Strengthening the risk control,internal governance, information disclosure, risk
disclosure and conflict prevention will be key tocompliance and risk control.

Regulators will focus on fintech.

PRC Financial Regulation:
Annual Report (2020)
54

PRC Financial Regulation:
Annual Report (2020)55

03

To encourage the transformation of the asset management sector,
regulators may tolerate and even encourage innovation by andcooperation between various competing businesses.
The transformation of the asset management sector has
been an important theme in recent years. Various asset
management institutions, such as commercial banks,
securities companies, FMCs, private funds, insurance
asset managers, trusts and futures brokers compete witheach other under generally similar rules. From 2020, theasset management market will be fully open to foreign
investors, who will be allowed to establish or acquiredifferent types of asset management platforms andinvest in various products. Market players and regulators
will face shared challenges in how institutions candifferentiate and develop themselves in a regulatoryenvironment that is aimed at returning asset
management to its original objectives.

Given that asset management in China is still in its
infancy, we expect regulators to tolerate andencourage innovation in products, internal governance,business models and other aspects provided market
players demonstrate adequate risk control andfiduciary duty. Regulators will also support cooperation
among different institutions (including Sino-foreign
cooperation) to improve domestic asset managers’
technical capabilities (including know how covering
asset allocation, customer demand analysis andexploration, artificial intelligence and product design)and management culture, to educate and foster
sophisticated and honest institutional investors and toserve the development of the capital market and thereal economy.

04

05

In 2020, we expect that strong regulation will become
the norm for asset managers. We also expect that
regulators will take a “look-through” approach in theregulation, emphasizing substance over form and will
focus on inspection of, and sanctions resulting from,
non-compliance in futures asset management.

Technology is widely used in the asset management
sector, including middle and back office services tofunds, automated investment advisory services, hedge
funds and internal governance of FMCs. The
development of fintech in the asset management sector
will be driven on one hand by domestic asset managers
identifying global assets in which to and on the other
hand by international asset managers entering into andcompeting in the Chinese market. We expect that in2020 regulators will focus on the opportunities of fintech
in the asset management sector and its risk control. The
Administrative Measures for Program Trading in the
Securities and Futures Market or other relevant rules may
be published in 2020, enabling institutions such ashedge funds to conduct program trading and at thesame time set specific restrictions on the use of program
trading and reporting. The consultation draft of theInterim Provisions on the Administration of External Accessto the Trading Information Systems of Securities Companies
also sets many strict requirements for investors eligiblefor direct market access service and their conduct.
Regulators will also focus their attention on automatedinvestment advisory services. We also expect that
"regulatory sandbox" will be applied to fintech.

Compliance and risk control willcontinue to be emphasized.

Moreover, returning to asset management’s origins aswell as transforming and upgrading the asset
management business have also raised new complianceand risk control requirements. Regulators may
encourage improvements on compliance and risk
control capacities in system design. For example,
regulators may implement a grading system for FMCs
referring to the similar system for securities companies.
The grading system will factor in compliance and risk
control conditions into ratings to indirectly affectregulatory resources allocation to, and customer
acquisition by, FMCs. Strengthening the risk control,internal governance, information disclosure, risk
disclosure and conflict prevention will be key tocompliance and risk control.

Regulators will focus on fintech.

PRC Financial Regulation:
Annual Report (2020)
56

PRC Financial Regulation:
Annual Report (2020)
FinTech

PRC Financial Regulation:
Annual Report (2020)572019 Key Dates
January 21
The FinTech Regulation and Rectification Steering
Team and the Online Lending Steering Team issued
the Opinion on the Classification and Treatment of
Online Lenders and Risk Prevention

May 13
SAMR and the National Standardization Administration
Committee published national standards 2.0 for
multi-level cybersecurity protection

August 23
The PBOC published the FinTech Development Plan
(2019-2021)

September 30
The PBOC approved PayPal’s acquisition of 70% equity
in GoPay, resulting in the formation of the firstforeign-controlled payment institution

October 9Nine ministries and departments of the central government
jointly published the Notice on Issuing Supplementary
Provisions for the Supervision and Administration of Financing
Guarantee Companies, prohibiting non-licensed institutions
from providing financing guarantee services

October 29
The PBOC and SAMR jointly announced that FinTech
products would fall within a national certification
systemFebruary 2
The PBOC issued the Regulation on Functions, Divisionsand Headcounts of the PBOC, which made clear that
the PBOC will be in charge of regulating internet
finance and assessing FinTech innovation

May 28 and June 13
The CAC published the consultation draft of the Administrative
Measures on Data Security and the consultation draft of
the Measures for Security Evaluation on OutboundTransfers of Personal Information

September 6
The managers of two start-ups, 91Moxie and Xinyan
Technology, were investigated by the police,
marking the start of the “rectification” of the
web-crawling business and the big data sector

October 9
The PBOC distributed the draft of the Pilot Measures for
the Protection of Personal Financial Information (Data) tocommercial banks for comment

October 24
President Xi issued instructions that blockchain shouldbe treated as the breakthrough point of independent
innovation in core technologies and that thedevelopment of blockchain technology and theblockchain sector should be accelerated

December 5
The PBOC initiated a pilot program to mark China’s firststep in the regulatory sandbox

PRC Financial Regulation:
Annual Report (2020)
56

PRC Financial Regulation:
Annual Report (2020)
FinTech

PRC Financial Regulation:
Annual Report (2020)572019 Key Dates
January 21
The FinTech Regulation and Rectification Steering
Team and the Online Lending Steering Team issued
the Opinion on the Classification and Treatment of
Online Lenders and Risk Prevention

May 13
SAMR and the National Standardization Administration
Committee published national standards 2.0 for
multi-level cybersecurity protection

August 23
The PBOC published the FinTech Development Plan
(2019-2021)

September 30
The PBOC approved PayPal’s acquisition of 70% equity
in GoPay, resulting in the formation of the firstforeign-controlled payment institution

October 9Nine ministries and departments of the central government
jointly published the Notice on Issuing Supplementary
Provisions for the Supervision and Administration of Financing
Guarantee Companies, prohibiting non-licensed institutions
from providing financing guarantee services

October 29
The PBOC and SAMR jointly announced that FinTech
products would fall within a national certification
systemFebruary 2
The PBOC issued the Regulation on Functions, Divisionsand Headcounts of the PBOC, which made clear that
the PBOC will be in charge of regulating internet
finance and assessing FinTech innovation

May 28 and June 13
The CAC published the consultation draft of the Administrative
Measures on Data Security and the consultation draft of
the Measures for Security Evaluation on OutboundTransfers of Personal Information

September 6
The managers of two start-ups, 91Moxie and Xinyan
Technology, were investigated by the police,
marking the start of the “rectification” of the
web-crawling business and the big data sector

October 9
The PBOC distributed the draft of the Pilot Measures for
the Protection of Personal Financial Information (Data) tocommercial banks for comment

October 24
President Xi issued instructions that blockchain shouldbe treated as the breakthrough point of independent
innovation in core technologies and that thedevelopment of blockchain technology and theblockchain sector should be accelerated

December 5
The PBOC initiated a pilot program to mark China’s firststep in the regulatory sandbox

PRC Financial Regulation:
Annual Report (2020)
58

PRC Financial Regulation:
Annual Report (2020)
592019 Regulatory Observations

01

02

FinTech regulatory framework islargely in place.

With the issuance of the FinTech Development Plan
(2019-2021) by the PBOC in 2019, the long-awaited FinTech
regulatory framework has largely been completed.
The PBOC listed licensed financial institutions as addressees
in its public notice on issuance of the Plan, which showed
the regulatory authorities’ recognition of the “financial”
nature of FinTech. This also represented the regulatory
authorities’ intention that licensed financial institutions
should be considered the main players when planningthe future development of FinTech, and that FinTech
should to become "compliant, innovative, safe andcontrollable". During 2019, the PBOC coordinated thedesign of the regulatory framework and issued policies or
consultation drafts on data regulation, FinTech productstandardization, and the regulatory sandbox.

License-based regulation has been reinforced to reduce risk, whileregulators are exploring “soft” regulation.

Regulatory experience obtained from governing internet
finance is underpinning FinTech regulation. Such experience
includes strengthening the PBOC's overall coordination,
introducing self-regulation by industry associations andencouraging the central and local FinTech regulatory
authorities to conduct behavior- and function-based
regulation in addition to institution-based regulation. We
have yet to observe what impact the cybersecurity authorities,
such as the CAC, will have on financial regulation.

In 2019, regulators continued to focus on license-based
regulation of FinTech. For example, regulators havestrengthened regulation of banks cooperating with,and outsourcing to, technology and data companies(which are unlicensed) by prohibiting them fromoutsourcing core risk control functions to unlicensed
organizations.
There are new regulations governing provision of
fallback guarantees by FinTech companies for financial
products such as cash loans. Multiple ministries anddepartments of the central government have jointly
issued the Supplementary Administrative Regulations on
Financing Guarantee Companies, prohibiting companies
from providing financing guarantee services in actual or
disguised form without approval. Any FinTech
company that adopts this guarantee model in its
lending assisting business should make sure that it iscomplying with the new regulations.
The peer to peer (P2P) sector has been completely
overhauled. All institutions engaging in such business
are required to make a filing with local financial
regulators or to convert themselves into lending

assisting institutions, consumer finance companies orsmall loan companies, unless regulators decree theyshould be dissolved.
Meanwhile, to encourage FinTech companies to beboth innovative and compliant – and to learn from bestpractice internationally - the PBOC has, for the first time,
proposed as part of the FinTech Development Plan
(2019-2021) applying a review mechanism focusing on
the substance and overall structure of, and setting
unified minimum regulatory requirements for FinTechbusinesses. At the same time, the PBOC is exploring “soft”
regulation such as imposing requirements for informationand disclosure, as well as public supervision.
The FinTech pilot project is ongoing in many cities,
and a regulatory sandbox is rapidly developing. The
regulators are showing a certain level of tolerance forrisks brought about by technological innovation, whichreflects their determination to actively explore “soft”
regulation.

PRC Financial Regulation:
Annual Report (2020)
58

PRC Financial Regulation:
Annual Report (2020)
592019 Regulatory Observations

01

02

FinTech regulatory framework islargely in place.

With the issuance of the FinTech Development Plan
(2019-2021) by the PBOC in 2019, the long-awaited FinTech
regulatory framework has largely been completed.
The PBOC listed licensed financial institutions as addressees
in its public notice on issuance of the Plan, which showed
the regulatory authorities’ recognition of the “financial”
nature of FinTech. This also represented the regulatory
authorities’ intention that licensed financial institutions
should be considered the main players when planningthe future development of FinTech, and that FinTech
should to become "compliant, innovative, safe andcontrollable". During 2019, the PBOC coordinated thedesign of the regulatory framework and issued policies or
consultation drafts on data regulation, FinTech productstandardization, and the regulatory sandbox.

License-based regulation has been reinforced to reduce risk, whileregulators are exploring “soft” regulation.

Regulatory experience obtained from governing internet
finance is underpinning FinTech regulation. Such experience
includes strengthening the PBOC's overall coordination,
introducing self-regulation by industry associations andencouraging the central and local FinTech regulatory
authorities to conduct behavior- and function-based
regulation in addition to institution-based regulation. We
have yet to observe what impact the cybersecurity authorities,
such as the CAC, will have on financial regulation.

In 2019, regulators continued to focus on license-based
regulation of FinTech. For example, regulators havestrengthened regulation of banks cooperating with,and outsourcing to, technology and data companies(which are unlicensed) by prohibiting them fromoutsourcing core risk control functions to unlicensed
organizations.
There are new regulations governing provision of
fallback guarantees by FinTech companies for financial
products such as cash loans. Multiple ministries anddepartments of the central government have jointly
issued the Supplementary Administrative Regulations on
Financing Guarantee Companies, prohibiting companies
from providing financing guarantee services in actual or
disguised form without approval. Any FinTech
company that adopts this guarantee model in its
lending assisting business should make sure that it iscomplying with the new regulations.
The peer to peer (P2P) sector has been completely
overhauled. All institutions engaging in such business
are required to make a filing with local financial
regulators or to convert themselves into lending

assisting institutions, consumer finance companies orsmall loan companies, unless regulators decree theyshould be dissolved.
Meanwhile, to encourage FinTech companies to beboth innovative and compliant – and to learn from bestpractice internationally - the PBOC has, for the first time,
proposed as part of the FinTech Development Plan
(2019-2021) applying a review mechanism focusing on
the substance and overall structure of, and setting
unified minimum regulatory requirements for FinTechbusinesses. At the same time, the PBOC is exploring “soft”
regulation such as imposing requirements for informationand disclosure, as well as public supervision.
The FinTech pilot project is ongoing in many cities,
and a regulatory sandbox is rapidly developing. The
regulators are showing a certain level of tolerance forrisks brought about by technological innovation, whichreflects their determination to actively explore “soft”
regulation.

PRC Financial Regulation:
Annual Report (2020)60

PRC Financial Regulation:
Annual Report (2020)
6103

Regulatory authorities tighten regulation ofdata management and use.
2019 was an important year for data protection. Given
data is linked to myriad interests, such as individual
privacy, social and economic security and national
security, and considering China has long adopted atolerant attitude towards the development of the data
sector, regulating data and the use of data needs tocatch up, to solve practical problems and to formulate
appropriate forward-looking rules. Regulatory authorities
have introduced a number of measures operating atdifferent levels, including:- Cleaning up the web crawler (spider-bot) practicethat originally operated under the name of big
data. More than 10 companies were investigated,and senior executives of those companies wereinterrogated or detained by the police; as a result,
the top data companies announced they wouldstop their web crawler business.
- More than 50 financial apps (including those operated
by large state-owned banks) were criticized for the
failings of their privacy policies, including exceeding
their authority when collecting personal information.

- In the second half of 2019, the regulatory authorities
began a process requiring companies to register
any financial apps, with the aim of standardizing
regulation of such apps. Twenty-three operators
participated in the first pilot filing.
- In addition to protecting the privacy rights ofindividuals, the regulatory authorities also increased
protection of the use of important data such astransaction data. After the Measures for the Information
Technology Management of Securities and Fund
Operators took effect, the CSRC has increasingly
focused on data protection when conducting
compliance inspections of securities companies.
The CSRC has also set regulatory requirements ondata held by securities companies’ overseas branches.
- The sharing of data between domestic financial
platforms and their overseas parent companies ordomestic affiliated companies became a key focus
of attention by the regulatory authorities whenapproving the establishment of foreign-invested
financial institutions.

04

Payments will be more strictly regulated, as well as being opened further
to foreign investment.
The payments sector has hitherto been well regulated,
and that trend continued in 2019.
- The process of disconnecting payment institutions
from banks accelerated, with payment institutions
achieving turning in 100% of “customer provisionfunds”.
- Some Illegal practices were banned. These included
banning point of sale (POS) machines linked to multiple
merchants and "allowing selection of merchants on
the POS machine". In 2019, the authorities handed
down more than 100 sanctions imposed on thosecarrying out illegal activities, resulting in total finesof RMB150 million. One company, IPS, was finednearly RMB60 million by the PBOC Shanghai Branch,
the largest fine levied in the third-party payment
sector.
- The PBOC rejected renewal of licenses for several
companies in the payment sector.

Although regulation was tightened in order to reducerisks in payments, at the same time, the authorities took
a number of steps to help open up the sector. For
example, the PBOC approved PayPal’s acquisition of a
70% equity stake in GoPay on September 30, 2019,making PayPal the first foreign payment institution toenter the Chinese market. American Express received
approval to establish a joint venture to engage in bankcard clearing. This joint venture will be the first
Sino-foreign bank card clearing joint venture in China.
On top of this, the regulatory authorities supported
cross-border payments. In April 2019, the State
Administration of Foreign Exchange issued theAdministrative Measures for the Foreign Exchange
Business of Payment Institutions, allowing the original
pilot program in cross-border payments by payment
institutions in the foreign trade, study abroad, andtourism sectors be implemented in full across thecountry under the supervision of banks partnering withsuch payment institutions in such business. Further
innovation in the payments sector is to be encouraged,
involving cooperation with international partners andthe utilization of new technology such as blockchain.

PRC Financial Regulation:
Annual Report (2020)60

PRC Financial Regulation:
Annual Report (2020)
6103

Regulatory authorities tighten regulation ofdata management and use.
2019 was an important year for data protection. Given
data is linked to myriad interests, such as individual
privacy, social and economic security and national
security, and considering China has long adopted atolerant attitude towards the development of the data
sector, regulating data and the use of data needs tocatch up, to solve practical problems and to formulate
appropriate forward-looking rules. Regulatory authorities
have introduced a number of measures operating atdifferent levels, including:- Cleaning up the web crawler (spider-bot) practicethat originally operated under the name of big
data. More than 10 companies were investigated,and senior executives of those companies wereinterrogated or detained by the police; as a result,
the top data companies announced they wouldstop their web crawler business.
- More than 50 financial apps (including those operated
by large state-owned banks) were criticized for the
failings of their privacy policies, including exceeding
their authority when collecting personal information.

- In the second half of 2019, the regulatory authorities
began a process requiring companies to register
any financial apps, with the aim of standardizing
regulation of such apps. Twenty-three operators
participated in the first pilot filing.
- In addition to protecting the privacy rights ofindividuals, the regulatory authorities also increased
protection of the use of important data such astransaction data. After the Measures for the Information
Technology Management of Securities and Fund
Operators took effect, the CSRC has increasingly
focused on data protection when conducting
compliance inspections of securities companies.
The CSRC has also set regulatory requirements ondata held by securities companies’ overseas branches.
- The sharing of data between domestic financial
platforms and their overseas parent companies ordomestic affiliated companies became a key focus
of attention by the regulatory authorities whenapproving the establishment of foreign-invested
financial institutions.

04

Payments will be more strictly regulated, as well as being opened further
to foreign investment.
The payments sector has hitherto been well regulated,
and that trend continued in 2019.
- The process of disconnecting payment institutions
from banks accelerated, with payment institutions
achieving turning in 100% of “customer provisionfunds”.
- Some Illegal practices were banned. These included
banning point of sale (POS) machines linked to multiple
merchants and "allowing selection of merchants on
the POS machine". In 2019, the authorities handed
down more than 100 sanctions imposed on thosecarrying out illegal activities, resulting in total finesof RMB150 million. One company, IPS, was finednearly RMB60 million by the PBOC Shanghai Branch,
the largest fine levied in the third-party payment
sector.
- The PBOC rejected renewal of licenses for several
companies in the payment sector.

Although regulation was tightened in order to reducerisks in payments, at the same time, the authorities took
a number of steps to help open up the sector. For
example, the PBOC approved PayPal’s acquisition of a
70% equity stake in GoPay on September 30, 2019,making PayPal the first foreign payment institution toenter the Chinese market. American Express received
approval to establish a joint venture to engage in bankcard clearing. This joint venture will be the first
Sino-foreign bank card clearing joint venture in China.
On top of this, the regulatory authorities supported
cross-border payments. In April 2019, the State
Administration of Foreign Exchange issued theAdministrative Measures for the Foreign Exchange
Business of Payment Institutions, allowing the original
pilot program in cross-border payments by payment
institutions in the foreign trade, study abroad, andtourism sectors be implemented in full across thecountry under the supervision of banks partnering withsuch payment institutions in such business. Further
innovation in the payments sector is to be encouraged,
involving cooperation with international partners andthe utilization of new technology such as blockchain.

PRC Financial Regulation:
Annual Report (2020)
62

PRC Financial Regulation:
Annual Report (2020)
6305

Regulators scrutinized and cleaned up peer
to peer (P2P) online lending platforms.
The regulators’ efforts to control internet finance-relatedrisks continued in 2019. After the issuance of Opinions
on the Classified Disposal and Risk Prevention of P2P
Lending Institutions at the end of 2018, local financial
regulatory authorities started classifying P2P lending
institutions by risk status and preparing an action list for
institutions considered to be high risk.
Other than the few institutions which were identified tobe compliant and qualified, most P2P institutions wereclosed down by regulators. As a result, there were some
two-thirds fewer P2P lending institutions at the end of
2019. Hunan and Shandong provinces were among
those announcing province-wide bans on all P2P
lending services. Nearly all P2P lending institutions
suspected of being in breach of contract or illegal
fund-raising, among other crimes, were investigated by
the authorities, and anyone (whether managers or
employees) found guilty of illegal fund-raising wererequired by the police to hand over their salary andcommissions.
The financial regulators required the remaining
qualified P2P lending institutions to complete a filingprocess to continue in the same business or to convert
into consumer finance companies or small loan
companies. A distinction was drawn between informationintermediaries and lenders, who are regulated differently.
The regulation of P2P online loans set a precedent for
the regulation of other quasi-financial institutions, suchas finance guarantee companies and commercial
factoring businesses.

06

Virtual currency trading platforms and initial coin offerings (ICOs) arehighly regulated; regulators supported compliant commercial
blockchain applications.
In 2019, the regulatory authorities kept up toughregulatory pressure on blockchain assets, virtual
currency trading platforms and ICOs.
The PBOC, the National Internet Finance Association ofChina and local finance regulatory authorities issued asuccession of announcements and monitored virtual
currencies, as well as instituting regulatory measuresapplying to institutions engaged in virtual currency
operations. Regulators prohibited domestic institutions
from the advertising of, or redirecting clients to,
cross-border virtual currency trading services provided
to onshore residents, as well as imposing restrictions
on payment and settlement. In 2019, six virtual currency
trading platforms newly founded within China wereclosed down, 203 overseas virtual currency trading
platforms were blocked from domestic users, nearly
10,000 related WeChat and Alipay payment accounts
were closed, and several overseas virtual currency
exchanges announced that they would not provide
services to Chinese residents.

At the same time, regulators and reputable financial
institutions and FinTech companies indicated they
supported the development of blockchain technology
and its legitimate commercial applications. In 2019, the
CAC issued a list of 500 domestic blockchain
information service providers which had completed
filing. Based on information published for these filings,
it is the financial sector that makes most use ofblockchain technology, particularly in supply chain
finance (including the platforms established by banks
or FinTech companies) and electronic depository
receipts.
The PBOC also expanded the scope of its trade financeblockchain platform from the Bay Area (Guangdong,Hong Kong and Macao) to the whole country. It is
possible that the PBOC will link this platform withsimilar platforms of overseas regulators to establish apublic financing infrastructure for cross-border trade.

PRC Financial Regulation:
Annual Report (2020)
62

PRC Financial Regulation:
Annual Report (2020)
6305

Regulators scrutinized and cleaned up peer
to peer (P2P) online lending platforms.
The regulators’ efforts to control internet finance-relatedrisks continued in 2019. After the issuance of Opinions
on the Classified Disposal and Risk Prevention of P2P
Lending Institutions at the end of 2018, local financial
regulatory authorities started classifying P2P lending
institutions by risk status and preparing an action list for
institutions considered to be high risk.
Other than the few institutions which were identified tobe compliant and qualified, most P2P institutions wereclosed down by regulators. As a result, there were some
two-thirds fewer P2P lending institutions at the end of
2019. Hunan and Shandong provinces were among
those announcing province-wide bans on all P2P
lending services. Nearly all P2P lending institutions
suspected of being in breach of contract or illegal
fund-raising, among other crimes, were investigated by
the authorities, and anyone (whether managers or
employees) found guilty of illegal fund-raising wererequired by the police to hand over their salary andcommissions.
The financial regulators required the remaining
qualified P2P lending institutions to complete a filingprocess to continue in the same business or to convert
into consumer finance companies or small loan
companies. A distinction was drawn between informationintermediaries and lenders, who are regulated differently.
The regulation of P2P online loans set a precedent for
the regulation of other quasi-financial institutions, suchas finance guarantee companies and commercial
factoring businesses.

06

Virtual currency trading platforms and initial coin offerings (ICOs) arehighly regulated; regulators supported compliant commercial
blockchain applications.
In 2019, the regulatory authorities kept up toughregulatory pressure on blockchain assets, virtual
currency trading platforms and ICOs.
The PBOC, the National Internet Finance Association ofChina and local finance regulatory authorities issued asuccession of announcements and monitored virtual
currencies, as well as instituting regulatory measuresapplying to institutions engaged in virtual currency
operations. Regulators prohibited domestic institutions
from the advertising of, or redirecting clients to,
cross-border virtual currency trading services provided
to onshore residents, as well as imposing restrictions
on payment and settlement. In 2019, six virtual currency
trading platforms newly founded within China wereclosed down, 203 overseas virtual currency trading
platforms were blocked from domestic users, nearly
10,000 related WeChat and Alipay payment accounts
were closed, and several overseas virtual currency
exchanges announced that they would not provide
services to Chinese residents.

At the same time, regulators and reputable financial
institutions and FinTech companies indicated they
supported the development of blockchain technology
and its legitimate commercial applications. In 2019, the
CAC issued a list of 500 domestic blockchain
information service providers which had completed
filing. Based on information published for these filings,
it is the financial sector that makes most use ofblockchain technology, particularly in supply chain
finance (including the platforms established by banks
or FinTech companies) and electronic depository
receipts.
The PBOC also expanded the scope of its trade financeblockchain platform from the Bay Area (Guangdong,Hong Kong and Macao) to the whole country. It is
possible that the PBOC will link this platform withsimilar platforms of overseas regulators to establish apublic financing infrastructure for cross-border trade.

PRC Financial Regulation:
Annual Report (2020)
64

PRC Financial Regulation:
Annual Report (2020)
65

07

Higher FinTech standards adopted to facilitate advancement
and control of FinTech applications.
The PBOC issued the 2019 FinTech Product Certification
Rules both to implement the State Council’s
requirements on product quality certification and tofollow the requirements of the Cyber Security Law in2017 on cybersecurity. These latter requirements
extended certification requirements from payment
technology products to all FinTech products, which
may be enhanced to compulsory certification
requirements for all Fintech products. In 2019, the PBOC
and SAMR released the Catalogue of FinTech Products
Subject to Certification (First Batch), which covered client
software, voiceprint recognition systems, and cloudcomputing platforms.

In addition, the PBOC issued the Security Management
Specifications for Mobile Finance APPs in 2019 asrecommended standards for the financial sector. The
PBOC specifications include specific requirements formobile finance apps in terms of risk prevention,
information protection, filing on real-name basis,
supervision and administration. The National FinTech
Evaluation Center, established in Shenzhen, carries out
evaluations, risk monitoring, and development of
RegTech and compliance technology for finance apps.
The certification of FinTech products will help toachieve the regulator’s goal of “application of advanced
and controllable FinTech technology” by verifying andstandardizing FinTech products.

08

Regulators combated chaos in consumer finance and cracked down on“trap loans”.
In 2019, the consumer finance sector faced significant
compliance challenges as regulators tackled the issue
of internet financing-related risks. Following the focus
on cash loans businesses in 2017, regulations havesince been introduced to all stages of consumer
finance, from customer acquisition and risk control
through to management and debt collection.
- Some leading “loan supermarkets” (such as Sina
Aipuhui, Baicheng FinTech, and Credit Manager) were
investigated by the public security bodies for marketingfor unlicensed business partners or aggressive debt
collection by their partners.
- Four consumer finance companies were fined by
the PBOC or the CBIRC for violating credit investigationand loan management regulations. Huarong Consumer
Finance received multiple fines simultaneously fromboth the PBOC and the CBIRC.
- Many banks were punished for providing consumer
loans for investments or real estate purchases. As aresult, a number of banks chose to reduce or evensuspend personal consumer loans.

- The Ministry of Public Security made criminal “traploans” under which the lenders induced or forced
borrowers to sign loan agreements, then deliberately
said they were in default and then aggressively
collected these debts. As part of the special national
campaign to “combat crime and eliminate evil”, theSupreme People’s Court and the Supreme People’s
Procuratorate issued the Opinions on Several Issues
Concerning the Handling of “Trap Loan” Criminal Cases,
the Opinions on Several Issues Concerning Handling
Criminal Cases relating to “Soft Violence”, the Opinions
on Several Issues in Handling Criminal Cases of Illegal
Lending and several other documents, all of which
provide specific legal grounds for making "traploans" criminal.
In a debt recovery case brought by Ping An Puhui, thecourt found that Ping An Puhui and a third party smallloan company had extended many loans throughaffiliated companies in order to obtain interest
payments illegally and that their behavior constituted
economic crimes. This case gave rise to the discussion
as to whether the fees charged to borrowers in the formof loan assistance/financing guarantee service fees
were a disguised form of high interest.

PRC Financial Regulation:
Annual Report (2020)
64

PRC Financial Regulation:
Annual Report (2020)
65

07

Higher FinTech standards adopted to facilitate advancement
and control of FinTech applications.
The PBOC issued the 2019 FinTech Product Certification
Rules both to implement the State Council’s
requirements on product quality certification and tofollow the requirements of the Cyber Security Law in2017 on cybersecurity. These latter requirements
extended certification requirements from payment
technology products to all FinTech products, which
may be enhanced to compulsory certification
requirements for all Fintech products. In 2019, the PBOC
and SAMR released the Catalogue of FinTech Products
Subject to Certification (First Batch), which covered client
software, voiceprint recognition systems, and cloudcomputing platforms.

In addition, the PBOC issued the Security Management
Specifications for Mobile Finance APPs in 2019 asrecommended standards for the financial sector. The
PBOC specifications include specific requirements formobile finance apps in terms of risk prevention,
information protection, filing on real-name basis,
supervision and administration. The National FinTech
Evaluation Center, established in Shenzhen, carries out
evaluations, risk monitoring, and development of
RegTech and compliance technology for finance apps.
The certification of FinTech products will help toachieve the regulator’s goal of “application of advanced
and controllable FinTech technology” by verifying andstandardizing FinTech products.

08

Regulators combated chaos in consumer finance and cracked down on“trap loans”.
In 2019, the consumer finance sector faced significant
compliance challenges as regulators tackled the issue
of internet financing-related risks. Following the focus
on cash loans businesses in 2017, regulations havesince been introduced to all stages of consumer
finance, from customer acquisition and risk control
through to management and debt collection.
- Some leading “loan supermarkets” (such as Sina
Aipuhui, Baicheng FinTech, and Credit Manager) were
investigated by the public security bodies for marketingfor unlicensed business partners or aggressive debt
collection by their partners.
- Four consumer finance companies were fined by
the PBOC or the CBIRC for violating credit investigationand loan management regulations. Huarong Consumer
Finance received multiple fines simultaneously fromboth the PBOC and the CBIRC.
- Many banks were punished for providing consumer
loans for investments or real estate purchases. As aresult, a number of banks chose to reduce or evensuspend personal consumer loans.

- The Ministry of Public Security made criminal “traploans” under which the lenders induced or forced
borrowers to sign loan agreements, then deliberately
said they were in default and then aggressively
collected these debts. As part of the special national
campaign to “combat crime and eliminate evil”, theSupreme People’s Court and the Supreme People’s
Procuratorate issued the Opinions on Several Issues
Concerning the Handling of “Trap Loan” Criminal Cases,
the Opinions on Several Issues Concerning Handling
Criminal Cases relating to “Soft Violence”, the Opinions
on Several Issues in Handling Criminal Cases of Illegal
Lending and several other documents, all of which
provide specific legal grounds for making "traploans" criminal.
In a debt recovery case brought by Ping An Puhui, thecourt found that Ping An Puhui and a third party smallloan company had extended many loans throughaffiliated companies in order to obtain interest
payments illegally and that their behavior constituted
economic crimes. This case gave rise to the discussion
as to whether the fees charged to borrowers in the formof loan assistance/financing guarantee service fees
were a disguised form of high interest.

PRC Financial Regulation:
Annual Report (2020)
66

PRC Financial Regulation:
Annual Report (2020)
672020 Regulatory Outlook

01

Multiple relationships will develop dynamically as the "four beams andeight pillars" of FinTech are set up. The main focus of the policies will beon bringing about cooperation between finance and technology
businesses, while clarifying the boundary between them, andencouraging initiatives by local governments, the market and industry
organizations as coordinated by the PBOC. All of these are aimed atproviding clear financial regulation, while stimulating the market.

The regulatory authorities will continue to adhere to theprinciple of "regulating as finance what is finance andregulating as technology what is technology", and tohave licensed-based regulation applying to financial
businesses. We expect that regulators will adopt a moretargeted approach in regulating the cooperation
between financial institutions and FinTech/internetcompanies once regulators have identified andapportioned legal risks in complex relationships: forexample, commercial banks will be required to refrainfrom outsourcing core functions and to have in placeenhanced risk controls for any outsourced non-corefunctions such as marketing, data security or use of loans,while restrictions may be loosened in some other areas,such as on the joint lending ratio.

To date, various cities such as Beijing and Shanghai havelaunched high-profile policies and measures to promote
the local development of FinTech, and Beijing haslaunched its regulatory sandbox. The regulatory sandbox
is designed to bring together many interested parties
from far afield, but implementation will be conducted at
a local level. As a result, local governments will be incharge of implementation of regulations (under theguidance of the PBOC). Since the main players fallingwithin the regulatory sandbox are financial institutions(though technology companies can act as service
providers), the local regulators will be given more power,
as opposed to have a coordination role. The regulatory
sandbox provides soft regulation over the whole life
cycle of a FinTech product, which, we believe, if operated
properly, will stimulate the healthy development of the
FinTech sector generally

02

The development of core technologies that improve financial services
will be supported by regulators, and foreign-invested technology
companies and FinTech companies will be encouraged.
Under the principle of “regulating as finance what isfinance and regulating as technology what is technology",
the Chinese regulatory authorities will continue to support
the development of core technologies that improvefinancial services. These technologies include AI, cloudcomputing, big data, and blockchain, among others.
Also, there is expected to be a filing system comprising a"white list" of FinTech companies. Such a welcoming
environment, combined with the post-2018 opening-upof the financial sector, should encourage more foreigntechnology companies to export their products to China
and establish businesses, including FinTech companies,
in China.
The Cryptography Law and the Foreign Investment Law
issued in 2019 was a response to foreign investors’
long-held concerns about technical and intellectual
property issues, reflecting the Chinese government's
protection of intellectual property and the national
treatment for foreign investors in procurement and inother areas. We have also noticed that many
foreign-invested FinTech companies in infrastructure forthe financial industry and financial services have been
set up or approved. These companies include payment
companies, payment clearing companies and AI
investment advisory businesses. Furthermore, it has
been made clear that Beijing's regulatory sandbox will
be opened to overseas investors.

This overall encouraging environment will not change in2020. However, given that FinTech is likely to be the coreof the financial sector in the future and assessing FinTech
risks will determine how far and how fast the FinTech
sector will be opened up, regulators will likely expect
more transparent communication with the market
players, which will assist the regulators to acknowledge
the emerging technology or technological applications.
This point is likely to be reflected in high-frequency
trading, AI investment advisory services and other areas.
The regulatory sandbox may become a vital space for allparties to balance the interests of different parties andcreate accurate risk measurement.

PRC Financial Regulation:
Annual Report (2020)
66

PRC Financial Regulation:
Annual Report (2020)
672020 Regulatory Outlook

01

Multiple relationships will develop dynamically as the "four beams andeight pillars" of FinTech are set up. The main focus of the policies will beon bringing about cooperation between finance and technology
businesses, while clarifying the boundary between them, andencouraging initiatives by local governments, the market and industry
organizations as coordinated by the PBOC. All of these are aimed atproviding clear financial regulation, while stimulating the market.

The regulatory authorities will continue to adhere to theprinciple of "regulating as finance what is finance andregulating as technology what is technology", and tohave licensed-based regulation applying to financial
businesses. We expect that regulators will adopt a moretargeted approach in regulating the cooperation
between financial institutions and FinTech/internetcompanies once regulators have identified andapportioned legal risks in complex relationships: forexample, commercial banks will be required to refrainfrom outsourcing core functions and to have in placeenhanced risk controls for any outsourced non-corefunctions such as marketing, data security or use of loans,while restrictions may be loosened in some other areas,such as on the joint lending ratio.

To date, various cities such as Beijing and Shanghai havelaunched high-profile policies and measures to promote
the local development of FinTech, and Beijing haslaunched its regulatory sandbox. The regulatory sandbox
is designed to bring together many interested parties
from far afield, but implementation will be conducted at
a local level. As a result, local governments will be incharge of implementation of regulations (under theguidance of the PBOC). Since the main players fallingwithin the regulatory sandbox are financial institutions(though technology companies can act as service
providers), the local regulators will be given more power,
as opposed to have a coordination role. The regulatory
sandbox provides soft regulation over the whole life
cycle of a FinTech product, which, we believe, if operated
properly, will stimulate the healthy development of the
FinTech sector generally

02

The development of core technologies that improve financial services
will be supported by regulators, and foreign-invested technology
companies and FinTech companies will be encouraged.
Under the principle of “regulating as finance what isfinance and regulating as technology what is technology",
the Chinese regulatory authorities will continue to support
the development of core technologies that improvefinancial services. These technologies include AI, cloudcomputing, big data, and blockchain, among others.
Also, there is expected to be a filing system comprising a"white list" of FinTech companies. Such a welcoming
environment, combined with the post-2018 opening-upof the financial sector, should encourage more foreigntechnology companies to export their products to China
and establish businesses, including FinTech companies,
in China.
The Cryptography Law and the Foreign Investment Law
issued in 2019 was a response to foreign investors’
long-held concerns about technical and intellectual
property issues, reflecting the Chinese government's
protection of intellectual property and the national
treatment for foreign investors in procurement and inother areas. We have also noticed that many
foreign-invested FinTech companies in infrastructure forthe financial industry and financial services have been
set up or approved. These companies include payment
companies, payment clearing companies and AI
investment advisory businesses. Furthermore, it has
been made clear that Beijing's regulatory sandbox will
be opened to overseas investors.

This overall encouraging environment will not change in2020. However, given that FinTech is likely to be the coreof the financial sector in the future and assessing FinTech
risks will determine how far and how fast the FinTech
sector will be opened up, regulators will likely expect
more transparent communication with the market
players, which will assist the regulators to acknowledge
the emerging technology or technological applications.
This point is likely to be reflected in high-frequency
trading, AI investment advisory services and other areas.
The regulatory sandbox may become a vital space for allparties to balance the interests of different parties andcreate accurate risk measurement.

PRC Financial Regulation:
Annual Report (2020)
68

PRC Financial Regulation:
Annual Report (2020)
69

03

The development of regulatory technology (RegTech) will enhance“look-through” regulatory capability and coordination, creating more
space for FinTech innovation.
In 2020, we expect the regulatory authorities to continue
to develop and apply RegTech. For example, technology
facilitating system embedding, application programing
interfaces (APIs) and other data collection methods will
not only reduce the burden on companies to comply
with data reporting but also help to ensure the accuracyof the data and give regulators timely information.
RegTech will also make possible “look-through”
regulation through the whole business process bycomparing data from different systems.

the application of technologies such as big data, cloudcomputing and AI, in their regulation activities, in orderto achieve real-time monitoring of the sector and to
adopt more RegTech in law enforcement. Further, we
expect the PBOC to lead the establishment of acomprehensive statistical system for the financial sector
covering different financial regulatory authorities,
financial infrastructure and financial activities, including
innovative FinTech products. Data sharing in this way will
help promote regulatory coordination.

In August 2018, the CSRC issued the Overall Technological
Development Program of the CSRC, which stated the goalof “Regulatory Technology (RegTech) 3.0” to be a highly
efficient regulatory big data platform. The CSRC also
called for the FinTech Regulation Bureau to beestablished as a new department. In 2020, we expect theCSRC, its subsidiary China Securities Information
Technology Service Co., Ltd., and other capital market
regulatory agencies and associations to further explore

Enhancing RegTech capability should allow for FinTech
innovation. For example, cross-border payments will bemade easier by connecting SAFE, customs, banking,payment, and cross-border e-commerce systems as data
are shared between businesses and regulatory
authorities.

04

FinTech regulation will be broadened, with the main focuses being on
consumer protection, information/data regulation, and secure identity
authentication.
2020 is the second year of the FinTech development
plan, and we expect more far-reaching changes in theregulation of FinTech. In addition to the Certification
Rules for FinTech Products and the Catalogue ofCertification of FinTech Products (First Batch), we expectthat the Regulatory Rules for Financial Innovative Products
will be issued. These rules will set minimum standards
and flexible administration requirements for FinTech
products. We also expect new rules covering the scopeof financial innovative products, open banking and thefinancial information (data) protection, and guidelines
on the usage of identity authentication technology, suchas facial recognition, in the financial sector. In addition, it
is also possible that the regulators will promulgate
regulations applying to cybersecurity and systemstability.

With the Personal Information Protection Law, the Data
Security Law and the Draft of Trial Measures for theProtection of Personal Financial Information (Data) all
expected to be issued this year, there are still
outstanding theoretical and practical issues that need tobe discussed and resolved:- data regulation: fundamental issues to be clarified
include balancing data flow needs with privacy/national
security protection, data ownership, data use andmanagement rights.
- sector development: how will the sector develop after
the crackdown on illegal activities in 2019?
- information islands: it is not certain whether the Interim
Measures for the Regulation of Financial Holding
Companies (Consultation Draft) will resolve the issue
of information islands within financial groups.
- monopolies: regulators will still need to address datamonopoly and technology monopoly.

PRC Financial Regulation:
Annual Report (2020)
68

PRC Financial Regulation:
Annual Report (2020)
69

03

The development of regulatory technology (RegTech) will enhance“look-through” regulatory capability and coordination, creating more
space for FinTech innovation.
In 2020, we expect the regulatory authorities to continue
to develop and apply RegTech. For example, technology
facilitating system embedding, application programing
interfaces (APIs) and other data collection methods will
not only reduce the burden on companies to comply
with data reporting but also help to ensure the accuracyof the data and give regulators timely information.
RegTech will also make possible “look-through”
regulation through the whole business process bycomparing data from different systems.

the application of technologies such as big data, cloudcomputing and AI, in their regulation activities, in orderto achieve real-time monitoring of the sector and to
adopt more RegTech in law enforcement. Further, we
expect the PBOC to lead the establishment of acomprehensive statistical system for the financial sector
covering different financial regulatory authorities,
financial infrastructure and financial activities, including
innovative FinTech products. Data sharing in this way will
help promote regulatory coordination.

In August 2018, the CSRC issued the Overall Technological
Development Program of the CSRC, which stated the goalof “Regulatory Technology (RegTech) 3.0” to be a highly
efficient regulatory big data platform. The CSRC also
called for the FinTech Regulation Bureau to beestablished as a new department. In 2020, we expect theCSRC, its subsidiary China Securities Information
Technology Service Co., Ltd., and other capital market
regulatory agencies and associations to further explore

Enhancing RegTech capability should allow for FinTech
innovation. For example, cross-border payments will bemade easier by connecting SAFE, customs, banking,payment, and cross-border e-commerce systems as data
are shared between businesses and regulatory
authorities.

04

FinTech regulation will be broadened, with the main focuses being on
consumer protection, information/data regulation, and secure identity
authentication.
2020 is the second year of the FinTech development
plan, and we expect more far-reaching changes in theregulation of FinTech. In addition to the Certification
Rules for FinTech Products and the Catalogue ofCertification of FinTech Products (First Batch), we expectthat the Regulatory Rules for Financial Innovative Products
will be issued. These rules will set minimum standards
and flexible administration requirements for FinTech
products. We also expect new rules covering the scopeof financial innovative products, open banking and thefinancial information (data) protection, and guidelines
on the usage of identity authentication technology, suchas facial recognition, in the financial sector. In addition, it
is also possible that the regulators will promulgate
regulations applying to cybersecurity and systemstability.

With the Personal Information Protection Law, the Data
Security Law and the Draft of Trial Measures for theProtection of Personal Financial Information (Data) all
expected to be issued this year, there are still
outstanding theoretical and practical issues that need tobe discussed and resolved:- data regulation: fundamental issues to be clarified
include balancing data flow needs with privacy/national
security protection, data ownership, data use andmanagement rights.
- sector development: how will the sector develop after
the crackdown on illegal activities in 2019?
- information islands: it is not certain whether the Interim
Measures for the Regulation of Financial Holding
Companies (Consultation Draft) will resolve the issue
of information islands within financial groups.
- monopolies: regulators will still need to address datamonopoly and technology monopoly.

PRC Financial Regulation:
Annual Report (2020)
7005

Regulators will continue to work to reduce or eliminate existingrisks, and enforcement will focus on compliance by internet
financial institutions when delivering financial services.
While rolling out licensing requirements on FinTech businesses, regulators will set their sights on shutting
down non-licensed financial businesses and other illegal financial activities. Meanwhile, so far as license
conditions for FinTech companies are concerned, we expect that regulatory enforcement will focus oncompliance issues in the companies’ business operations, such as anti-money laundering (AML), IT security,
corporate governance, and inter-company cooperation. There should also be increased regulatory attention
on the wide use of blockchain in the financial sector.

PRC Financial Regulation:
Annual Report (2020)
71

PRC Financial Regulation:
Annual Report (2020)
7005

Regulators will continue to work to reduce or eliminate existingrisks, and enforcement will focus on compliance by internet
financial institutions when delivering financial services.
While rolling out licensing requirements on FinTech businesses, regulators will set their sights on shutting
down non-licensed financial businesses and other illegal financial activities. Meanwhile, so far as license
conditions for FinTech companies are concerned, we expect that regulatory enforcement will focus oncompliance issues in the companies’ business operations, such as anti-money laundering (AML), IT security,
corporate governance, and inter-company cooperation. There should also be increased regulatory attention
on the wide use of blockchain in the financial sector.

PRC Financial Regulation:
Annual Report (2020)
71

PRC Financial Regulation:
Annual Report (2020)
72

PRC Financial Regulation:
Annual Report (2020)
Insurance

PRC Financial Regulation:
Annual Report (2020)732019 Key Dates
February
AIA Beijing Branch was approved to participate in thepilot program for integrated operations in
Beijing-Tianjin-Hebei region

April 28
The first foreign-invested insurance assets managementcompany, ICBC-AXA Assets Management Co., Ltd., wasapproved to commence its business operation

July 11
Dajia Insurance was established to acquire the equity,business, assets and liabilities of certain licensed entities
of Anbang

August 25
The Measures for the Administration of Related-Party
Transactions of Insurance Companies, “the harshest-ever”
measures, was issued, which expanded the scope of
related parties and further clarified the specific criteria formaking such determination

October 15

The Regulation of the People’s Republic of China on the
Administration of Foreign-Invested Insurance Companies
was amended by the State Council to relax the relevant
entry restrictions and qualification requirements for investors

November 11
The first foreign-invested insurance holding company,
Allianz (China) Insurance Holding Company Limited, wasapproved by the CBIRC to commence its business
operation

December 1
The amended Measures for the Administration of Health
Insurance took effectDecember 13
The Measures for the Regulation of Internet Insurance
Business (consultation draft) was issued

March 15

The first foreign-invested endowment insurance company,
Heng An Standard Endowment Insurance Co., Ltd., wasapproved to be established by the CBIRC

May 1
The CBIRC Chairman revealed 12 proposed new opening-up
measures for the banking and insurance industries, including
5 measures for the opening-up of the insurance industry

July 20
As a milestone in the opening-up of the insurance
industry, the Office of the Financial Stability andDevelopment Committee under the State Council
announced 11 policies on the further opening-up of
the financial sectors, and the CBIRC issued 7 new
opening-up policies

October 1

The Measures for the Administration of the Bancassurance
Business of Commercial Banks took effect to unify theregulation process of the bancassurance business

October 30
Huatai Insurance Group Co., Ltd. was approved by the
CBIRC to become the first Sino-foreign joint venture
insurance group in China

November 29
The amended Detailed Rules for the Implementation of theRegulation of the People’s Republic of China on the
Administration of Foreign-Invested Insurance Companies was
issued by CBIRC, relaxing the entry requirements forforeign-invested insurance companies, clarifying the
responsibilities and obligations of majority shareholders,and further aligning the regulatory regimes forforeign-invested and domestic insurance companies

December 6
The Notice concerning Clarification of the Timetable for the
Removal of Foreign Ownership Restrictions on Joint Venture
Insurance Companies was issued by CBIRC, announcingthat the foreign ownership restrictions on joint venture
insurance companies engaged in life insurance businesswould be formally removed from January 1, 2020 andforeign investors may hold up to 100% equity in joint
venture life insurance companies from that date

PRC Financial Regulation:
Annual Report (2020)
72

PRC Financial Regulation:
Annual Report (2020)
Insurance

PRC Financial Regulation:
Annual Report (2020)732019 Key Dates
February
AIA Beijing Branch was approved to participate in thepilot program for integrated operations in
Beijing-Tianjin-Hebei region

April 28
The first foreign-invested insurance assets managementcompany, ICBC-AXA Assets Management Co., Ltd., wasapproved to commence its business operation

July 11
Dajia Insurance was established to acquire the equity,business, assets and liabilities of certain licensed entities
of Anbang

August 25
The Measures for the Administration of Related-Party
Transactions of Insurance Companies, “the harshest-ever”
measures, was issued, which expanded the scope of
related parties and further clarified the specific criteria formaking such determination

October 15

The Regulation of the People’s Republic of China on the
Administration of Foreign-Invested Insurance Companies
was amended by the State Council to relax the relevant
entry restrictions and qualification requirements for investors

November 11
The first foreign-invested insurance holding company,
Allianz (China) Insurance Holding Company Limited, wasapproved by the CBIRC to commence its business
operation

December 1
The amended Measures for the Administration of Health
Insurance took effectDecember 13
The Measures for the Regulation of Internet Insurance
Business (consultation draft) was issued

March 15

The first foreign-invested endowment insurance company,
Heng An Standard Endowment Insurance Co., Ltd., wasapproved to be established by the CBIRC

May 1
The CBIRC Chairman revealed 12 proposed new opening-up
measures for the banking and insurance industries, including
5 measures for the opening-up of the insurance industry

July 20
As a milestone in the opening-up of the insurance
industry, the Office of the Financial Stability andDevelopment Committee under the State Council
announced 11 policies on the further opening-up of
the financial sectors, and the CBIRC issued 7 new
opening-up policies

October 1

The Measures for the Administration of the Bancassurance
Business of Commercial Banks took effect to unify theregulation process of the bancassurance business

October 30
Huatai Insurance Group Co., Ltd. was approved by the
CBIRC to become the first Sino-foreign joint venture
insurance group in China

November 29
The amended Detailed Rules for the Implementation of theRegulation of the People’s Republic of China on the
Administration of Foreign-Invested Insurance Companies was
issued by CBIRC, relaxing the entry requirements forforeign-invested insurance companies, clarifying the
responsibilities and obligations of majority shareholders,and further aligning the regulatory regimes forforeign-invested and domestic insurance companies

December 6
The Notice concerning Clarification of the Timetable for the
Removal of Foreign Ownership Restrictions on Joint Venture
Insurance Companies was issued by CBIRC, announcingthat the foreign ownership restrictions on joint venture
insurance companies engaged in life insurance businesswould be formally removed from January 1, 2020 andforeign investors may hold up to 100% equity in joint
venture life insurance companies from that date

PRC Financial Regulation:
Annual Report (2020)
74

PRC Financial Regulation:
Annual Report (2020)752019 Regulatory Observations

01

Unified regulation of the banking and insurance industries was in largepart implemented
Following the merger of the former CBRC and CIRC in
2018, the CBIRC took several actions and issued a numberof regulations in 2019 to unify the regulation of thebanking and insurance industries. After the merger, the
CBIRC established a new Corporate Governance Regulation
Department, which is designated to be responsible forformulating corporate governance rules for banking andinsurance institutions and coordinating regulatory
supervision of the two industries. In November 2019,
the Measures for the Regulatory Assessment of Corporate
Governance of Banking and Insurance Institutions (for trial
implementation) was issued by the CBIRC to establish aset of regulatory assessment indicators for corporate
governance of banking and insurance institutions.
These are tailored for the Chinese market while drawing
on international rules and practice. While emphasizing
the importance of corporate governance in future
regulation, it was made clear by the regulators that a
unified regulation regime would be applied to thecorporate governance of both commercial banks andcommercial insurance institutions. Despite the differencesin specific assessment indicators, commercial banks andcommercial insurance institutions will be subject tothe same set of regulatory systems in terms of assessment
procedures, rating methods and regulatory actions.
Given the similarity in the regulatory philosophies, rules
and tools for both the banking and insurance industries,
the trial implementation of unified regulation in corporate
governance was an attempt to apply comprehensive
regulation within the financial sectors.

Also, as the first step in the unification of regulatory
policies for specific banking and insurance products, in
mid-2019 the CBIRC issued the Notice of the General
Office of China Banking and Insurance Regulatory Commission
on Relevant Matters concerning the Registration ofAsset-Backed Plans to apply a registration management
system for asset-backed programs issued by insurance
assets management institutions following the issuanceof their first asset-backed program. This system aligned
the relevant regulatory practices in the banking andinsurance industries in this area. At the end of 2019, the
CBIRC unified the supervision and inspection of operationsof banking and insurance institutions by issuing the
Measures of China Banking and Insurance Regulatory
Commission for On-Site Inspection (for trial implementation).
All of this indicates a steady progress in the process of
unified regulation.

02

Insurance industry moved towards a full opening-up

As part of the continuing efforts for the opening-up of
the financial sectors, regulators introduced new initiatives
in 2019 including the “11 Measures” and the “New 12
Measures of the CBIRC”, which undoubtedly benefited
the insurance industry. A number of high-profile applications
for entering the market were approved, including theestablishment of the first foreign-invested insurance
holding company by Allianz, the establishment of thefirst foreign-invested endowment insurance company
by Heng An Standard Life Insurance (a Sino-British joint
venture), and the further acquisition of shares of Huatai
Insurance by ACE to convert it into the first Sino-foreign
joint venture insurance group.
In 2018, the CBIRC relaxed the ownership restrictions on
foreign-invested life insurance companies to allow
foreign investors to hold up to 51% equity interest. A
further notice was issued by the CBIRC at the end of2019 to formally remove foreign ownership restrictions
from January 1, 2020. With the amendment to theRegulation on the Administration of Foreign-Invested
Insurance Companies and its implementation rules inthe second half of 2019 by the State Council and the
CBIRC respectively, the entry restrictions on foreign-invested
insurance companies were also relaxed. In particular,
substantial progress was made in the reduction of“quantitative conditions” for foreign investors. These
measures include removing the rigid requirements forforeign investors of foreign-invested insurance companies
that they be insurance companies, have been engaged in
the insurance business for over 30 years, and have a
representative office in China for over 2 years, allowing
all types of foreign financial institutions to have a stakein foreign-invested insurance companies (previously,
only foreign insurance companies were allowed), andpermitting foreign insurance group companies toestablish foreign-invested insurance companies in
China. Opportunities were offered to a wider range of
foreign investors, and those with their own uniquefeatures, expertise and resources were encouraged tomake investments in the Chinese insurance market to
expand the diversity of market offerings. Insurance
brokerage companies, insurance assets managementcompanies and other licensed insurance institutions
were also covered by these opening-up measures,
though further clarification and implementation of thespecific measures would be required in the comingyear.

PRC Financial Regulation:
Annual Report (2020)
74

PRC Financial Regulation:
Annual Report (2020)752019 Regulatory Observations

01

Unified regulation of the banking and insurance industries was in largepart implemented
Following the merger of the former CBRC and CIRC in
2018, the CBIRC took several actions and issued a numberof regulations in 2019 to unify the regulation of thebanking and insurance industries. After the merger, the
CBIRC established a new Corporate Governance Regulation
Department, which is designated to be responsible forformulating corporate governance rules for banking andinsurance institutions and coordinating regulatory
supervision of the two industries. In November 2019,
the Measures for the Regulatory Assessment of Corporate
Governance of Banking and Insurance Institutions (for trial
implementation) was issued by the CBIRC to establish aset of regulatory assessment indicators for corporate
governance of banking and insurance institutions.
These are tailored for the Chinese market while drawing
on international rules and practice. While emphasizing
the importance of corporate governance in future
regulation, it was made clear by the regulators that a
unified regulation regime would be applied to thecorporate governance of both commercial banks andcommercial insurance institutions. Despite the differencesin specific assessment indicators, commercial banks andcommercial insurance institutions will be subject tothe same set of regulatory systems in terms of assessment
procedures, rating methods and regulatory actions.
Given the similarity in the regulatory philosophies, rules
and tools for both the banking and insurance industries,
the trial implementation of unified regulation in corporate
governance was an attempt to apply comprehensive
regulation within the financial sectors.

Also, as the first step in the unification of regulatory
policies for specific banking and insurance products, in
mid-2019 the CBIRC issued the Notice of the General
Office of China Banking and Insurance Regulatory Commission
on Relevant Matters concerning the Registration ofAsset-Backed Plans to apply a registration management
system for asset-backed programs issued by insurance
assets management institutions following the issuanceof their first asset-backed program. This system aligned
the relevant regulatory practices in the banking andinsurance industries in this area. At the end of 2019, the
CBIRC unified the supervision and inspection of operationsof banking and insurance institutions by issuing the
Measures of China Banking and Insurance Regulatory
Commission for On-Site Inspection (for trial implementation).
All of this indicates a steady progress in the process of
unified regulation.

02

Insurance industry moved towards a full opening-up

As part of the continuing efforts for the opening-up of
the financial sectors, regulators introduced new initiatives
in 2019 including the “11 Measures” and the “New 12
Measures of the CBIRC”, which undoubtedly benefited
the insurance industry. A number of high-profile applications
for entering the market were approved, including theestablishment of the first foreign-invested insurance
holding company by Allianz, the establishment of thefirst foreign-invested endowment insurance company
by Heng An Standard Life Insurance (a Sino-British joint
venture), and the further acquisition of shares of Huatai
Insurance by ACE to convert it into the first Sino-foreign
joint venture insurance group.
In 2018, the CBIRC relaxed the ownership restrictions on
foreign-invested life insurance companies to allow
foreign investors to hold up to 51% equity interest. A
further notice was issued by the CBIRC at the end of2019 to formally remove foreign ownership restrictions
from January 1, 2020. With the amendment to theRegulation on the Administration of Foreign-Invested
Insurance Companies and its implementation rules inthe second half of 2019 by the State Council and the
CBIRC respectively, the entry restrictions on foreign-invested
insurance companies were also relaxed. In particular,
substantial progress was made in the reduction of“quantitative conditions” for foreign investors. These
measures include removing the rigid requirements forforeign investors of foreign-invested insurance companies
that they be insurance companies, have been engaged in
the insurance business for over 30 years, and have a
representative office in China for over 2 years, allowing
all types of foreign financial institutions to have a stakein foreign-invested insurance companies (previously,
only foreign insurance companies were allowed), andpermitting foreign insurance group companies toestablish foreign-invested insurance companies in
China. Opportunities were offered to a wider range of
foreign investors, and those with their own uniquefeatures, expertise and resources were encouraged tomake investments in the Chinese insurance market to
expand the diversity of market offerings. Insurance
brokerage companies, insurance assets managementcompanies and other licensed insurance institutions
were also covered by these opening-up measures,
though further clarification and implementation of thespecific measures would be required in the comingyear.

PRC Financial Regulation:
Annual Report (2020)
76

PRC Financial Regulation:
Annual Report (2020)
77

03

The exit of Anbang and establishment of Dajia marks the first attemptof the “takeover by newly established company” model in the insurance
industry to deal with problem insurance companies
Since the takeover of high-profile insurance company
Anbang, a series of actions had been taken, including
capital injection by the China Insurance Security Fund,removal of non-compliant shareholders, reduction ofregistered capital, spin-off of assets, and businessre-focusing. As an important step of the takeover, threeshareholders of Anbang were approved by the CBIRC in
July 2019 to establish Dajia Insurance Group Co., Ltd.
with a registered capital of RMB20.36 billion, which wasexactly equivalent to the amount of Anbang’s
decreased capital. Under the restructuring plan, Dajia
Insurance acquired 100% of the equity interest in
Anbang Life Insurance, Anbang Endowment Insuranceand Anbang Assets Management from Anbang; Dajia
Property Insurance, which is a subsidiary of Dajia
Insurance Group and opened for business in December
2019, took over certain business, assets and liabilities ofAnbang Property Insurance. Upon the completion of
the restructuring, Anbang will not carry on any new
insurance business, but its payment obligations underthe existing policies will remain, and it will continue tofully perform its contractual obligations under the
relevant insurance contracts.

Anbang was not the first problem insurance company
that underwent such restructuring. In the wake of theapproach applied in dealing with New China Life
Insurance and China United Insurance, it is common for
the China Insurance Security Fund to take over anddispose of such companies. However, in the case ofAnbang, the relevant investors did not directly inject
capital into Anbang, but instead established a newcompany, Dajia Insurance Group, to take over certain
assets of Anbang Group. This model of “takeover by
newly established company” differentiated it from theother cases. In particular, Dajia did not acquire all theequity interest in the licensed Anbang Property
Insurance, but chose to establish Dajia Property
Insurance to acquire certain business and assets from
Anbang Property Insurance. Although this model had
been repeatedly applied in the restructuring of
problematic securities companies, it was first applied in
the insurance industry in the Anbang case. This would
provide effective protection to Dajia Insurance against
the legacy liabilities of Anbang after the completion of
the restructuring. However, this would mean that theliabilities remaining with Anbang upon the completionof the restructuring would be handled by the market,
and certain policyholders (especially large institutions) orordinary creditors might not be able to receive timely andadequate remedy as a result of Anbang’s insolvency.

04

The “look-through” regulation was adopted over shareholding and relatedtransactions

The Measures for the Administration of Equity Interests inInsurance Companies enacted last year explicitly put
forward the concept of “look-through” as a regulatory
approach, and established the “substance over form”
principle in regulation and examination while differentiating
different types of shareholders of insurance companies.
The Measures for the Administration of Related-Party
Transactions of Insurance Companies, “the harshest-ever”
measures, enacted in 2019, echoes this regulatory
approach.
With respect to the determination of a related party,
the new rules extend the scope of related parties toaddress such market irregularities as multi-layer nestingand “insurance companies serving as the ATMs of theirshareholders”. Although insurance companies still retain
certain discretion and room for making their own judgment
in determining their related parties, the new rules require
the determination of related parties to be made from
related individuals, subsidiaries of insurance companies
and other perspectives by taking the “look-through”
approach, which was absent in the previous rules.

Furthermore, the new rules provide for a number ofquantitative standards for determining the limit on related
party transactions and the amount of relevant capital
employed for such transactions. This reflects the resolutionof the regulatory authorities to examine more closely
related party transactions, and impose stricter requirements
on insurance companies in respect of their day-to-day
information collection and management of related-party
transactions.
However, the compositions of shareholders of different
insurance companies vary markedly, and many existing
investors of insurance companies are subject to complicatedshareholding arrangements and hold numerous
investment portfolios. Since the implementation of the
new rules, various problems have arisen in theimplementation of the specific standards. It is advisedthat insurance companies, in determining their own
actual controller, persons acting in concert, ultimate
beneficiaries of financial products and other relevant
persons, always focus on the transfer of relevant obligations
and resources and adopt the “substance over form”
principle so as to reduce compliance risk. At the sametime, we also hope that regulatory authorities will
provide specific guidance in respect of certain specifictypes of shareholders, such as funds.

PRC Financial Regulation:
Annual Report (2020)
76

PRC Financial Regulation:
Annual Report (2020)
77

03

The exit of Anbang and establishment of Dajia marks the first attemptof the “takeover by newly established company” model in the insurance
industry to deal with problem insurance companies
Since the takeover of high-profile insurance company
Anbang, a series of actions had been taken, including
capital injection by the China Insurance Security Fund,removal of non-compliant shareholders, reduction ofregistered capital, spin-off of assets, and businessre-focusing. As an important step of the takeover, threeshareholders of Anbang were approved by the CBIRC in
July 2019 to establish Dajia Insurance Group Co., Ltd.
with a registered capital of RMB20.36 billion, which wasexactly equivalent to the amount of Anbang’s
decreased capital. Under the restructuring plan, Dajia
Insurance acquired 100% of the equity interest in
Anbang Life Insurance, Anbang Endowment Insuranceand Anbang Assets Management from Anbang; Dajia
Property Insurance, which is a subsidiary of Dajia
Insurance Group and opened for business in December
2019, took over certain business, assets and liabilities ofAnbang Property Insurance. Upon the completion of
the restructuring, Anbang will not carry on any new
insurance business, but its payment obligations underthe existing policies will remain, and it will continue tofully perform its contractual obligations under the
relevant insurance contracts.

Anbang was not the first problem insurance company
that underwent such restructuring. In the wake of theapproach applied in dealing with New China Life
Insurance and China United Insurance, it is common for
the China Insurance Security Fund to take over anddispose of such companies. However, in the case ofAnbang, the relevant investors did not directly inject
capital into Anbang, but instead established a newcompany, Dajia Insurance Group, to take over certain
assets of Anbang Group. This model of “takeover by
newly established company” differentiated it from theother cases. In particular, Dajia did not acquire all theequity interest in the licensed Anbang Property
Insurance, but chose to establish Dajia Property
Insurance to acquire certain business and assets from
Anbang Property Insurance. Although this model had
been repeatedly applied in the restructuring of
problematic securities companies, it was first applied in
the insurance industry in the Anbang case. This would
provide effective protection to Dajia Insurance against
the legacy liabilities of Anbang after the completion of
the restructuring. However, this would mean that theliabilities remaining with Anbang upon the completionof the restructuring would be handled by the market,
and certain policyholders (especially large institutions) orordinary creditors might not be able to receive timely andadequate remedy as a result of Anbang’s insolvency.

04

The “look-through” regulation was adopted over shareholding and relatedtransactions

The Measures for the Administration of Equity Interests inInsurance Companies enacted last year explicitly put
forward the concept of “look-through” as a regulatory
approach, and established the “substance over form”
principle in regulation and examination while differentiating
different types of shareholders of insurance companies.
The Measures for the Administration of Related-Party
Transactions of Insurance Companies, “the harshest-ever”
measures, enacted in 2019, echoes this regulatory
approach.
With respect to the determination of a related party,
the new rules extend the scope of related parties toaddress such market irregularities as multi-layer nestingand “insurance companies serving as the ATMs of theirshareholders”. Although insurance companies still retain
certain discretion and room for making their own judgment
in determining their related parties, the new rules require
the determination of related parties to be made from
related individuals, subsidiaries of insurance companies
and other perspectives by taking the “look-through”
approach, which was absent in the previous rules.

Furthermore, the new rules provide for a number ofquantitative standards for determining the limit on related
party transactions and the amount of relevant capital
employed for such transactions. This reflects the resolutionof the regulatory authorities to examine more closely
related party transactions, and impose stricter requirements
on insurance companies in respect of their day-to-day
information collection and management of related-party
transactions.
However, the compositions of shareholders of different
insurance companies vary markedly, and many existing
investors of insurance companies are subject to complicatedshareholding arrangements and hold numerous
investment portfolios. Since the implementation of the
new rules, various problems have arisen in theimplementation of the specific standards. It is advisedthat insurance companies, in determining their own
actual controller, persons acting in concert, ultimate
beneficiaries of financial products and other relevant
persons, always focus on the transfer of relevant obligations
and resources and adopt the “substance over form”
principle so as to reduce compliance risk. At the sametime, we also hope that regulatory authorities will
provide specific guidance in respect of certain specifictypes of shareholders, such as funds.

PRC Financial Regulation:
Annual Report (2020)
78

PRC Financial Regulation:
Annual Report (2020)
7905

Regulation of intermediaries and sales channels was tightened“Irregularities of intermediaries” has always been a toppriority for regulation, and falsified intermediary business,
inflated costs and misleading sales have long been the
key non-compliant areas for insurance companies. 2018was marked as a “big year” of regulation thanks to themore than 1,400 penalty notices with a total amount offines being approximately RMB240 million issued during
the year. According to incomplete statistics, although
there were fewer penalty notices and the amount offines in 2019 were smaller, the proportion of the penalty
notices issued against professional intermediaries andpart-time insurance agencies remained stubbornly
high, and the local counterparts of the CBIRC across
China revoked more than 400 licenses for insuranceintermediaries in 2019.
In 2019, the CBIRC issued a series of rules to strengthen
the regulation of intermediary channels, with a particularfocus on such areas as the responsibilities of insurancecompanies in managing and controlling various typesof intermediary channels, compliance in the businessesof insurance intermediaries, and insurance services provided
on third party internet platforms. Selling insurance on
the internet has gradually developed into anothermajor channel in addition to direct selling, bancassurance
and professional intermediaries. The Measures for the
Regulation of Internet Insurance Business (consultation
draft) issued at the end of 2019 are intended to intensify
compliance in internet insurance while expanding thescope of products permitted for sale on the internet.
This represents the increasing convergence of regulatory
philosophies in regulating both online and offline
insurance sales.
In addition, stricter rules were enacted for traditionalbancassurance in 2019. The Measures for the Administration of
the Bancassurance Business of Commercial Banks
expressly set out the prohibited acts in the provision of
insurance agency services by commercial banks andtheir insurance sales personnel, a breach by a bank ofwhich may directly lead to revocation of the authorization
granted to the bank for providing agency services.

06

In products regulation, authorities come down hard on
non-compliant products while encouraging other products to themarketIn 2019, motor vehicle insurance was still the focus of
regulation in the property insurance sector. The Noticeon the Matters Relating to Further Enhancing the Regulationof Motor Vehicle Insurance was issued by the CBIRC in
January 2019, concentrating on the two major issues:
failure to use the applicable contract terms and fee rates
in compliance with the regulations; and false businessand financial data. Six months later, the CBIRC issued
another rule requiring more efforts on law enforcement
against violations of laws and regulations in motor
vehicle insurance. The scope and level of accountability
in the course of implementing the new rules continued
to be expanded and intensified, and orders to suspend
business and penalties imposed upon both a given
institution and the individuals involved often surfaced.
Underlying the tough regulation is the original intention
to curb cut-throat competition and extensive increaseof costs in the motor insurance industry, both objectives
that were not completely achieved by the previous fees
reforms, and also the deep problems that should be
solved by regulators in the future.
With respect to life insurance, the “Major Illness Mutual
Aid Program” that was popular at the end of 2018 wasdetermined as a non-insurance product, and a numberof red lines remain with the development of online
mutual aid insurance in China. The new measures forthe administration of health insurance were enacted in

the second half of 2019, and the most notable amendment
is that insurance companies will be allowed to adjust
their fee rates for long-term health insurance products
if pre-agreed conditions are triggered. This would
encourage insurance companies to provide consumers
with more long-term and continuous protection. The
new rules also dedicate one chapter to health management
raising the ratio of health management costs in the priceof a given product from 10% and 2% specified in the
Notice on the Matters Relating to Provision of HealthManagement Service by Health Insurance Products
issued in 2012 to a unified 20%, with a view to further
encouraging the combination of insurance products
and health management services.
In addition, the regulatory authorities are also encouraging
the re-insurance business, and the regulatory framework
governing agricultural insurance and other relevant
products has begun to take shape. There is little doubtthat the regulatory authorities are doing their utmost to
promote the development of insurance products thatcan meet the development needs of China’s market while
having zero tolerance over non-compliant products.

PRC Financial Regulation:
Annual Report (2020)
78

PRC Financial Regulation:
Annual Report (2020)
7905

Regulation of intermediaries and sales channels was tightened“Irregularities of intermediaries” has always been a toppriority for regulation, and falsified intermediary business,
inflated costs and misleading sales have long been the
key non-compliant areas for insurance companies. 2018was marked as a “big year” of regulation thanks to themore than 1,400 penalty notices with a total amount offines being approximately RMB240 million issued during
the year. According to incomplete statistics, although
there were fewer penalty notices and the amount offines in 2019 were smaller, the proportion of the penalty
notices issued against professional intermediaries andpart-time insurance agencies remained stubbornly
high, and the local counterparts of the CBIRC across
China revoked more than 400 licenses for insuranceintermediaries in 2019.
In 2019, the CBIRC issued a series of rules to strengthen
the regulation of intermediary channels, with a particularfocus on such areas as the responsibilities of insurancecompanies in managing and controlling various typesof intermediary channels, compliance in the businessesof insurance intermediaries, and insurance services provided
on third party internet platforms. Selling insurance on
the internet has gradually developed into anothermajor channel in addition to direct selling, bancassurance
and professional intermediaries. The Measures for the
Regulation of Internet Insurance Business (consultation
draft) issued at the end of 2019 are intended to intensify
compliance in internet insurance while expanding thescope of products permitted for sale on the internet.
This represents the increasing convergence of regulatory
philosophies in regulating both online and offline
insurance sales.
In addition, stricter rules were enacted for traditionalbancassurance in 2019. The Measures for the Administration of
the Bancassurance Business of Commercial Banks
expressly set out the prohibited acts in the provision of
insurance agency services by commercial banks andtheir insurance sales personnel, a breach by a bank ofwhich may directly lead to revocation of the authorization
granted to the bank for providing agency services.

06

In products regulation, authorities come down hard on
non-compliant products while encouraging other products to themarketIn 2019, motor vehicle insurance was still the focus of
regulation in the property insurance sector. The Noticeon the Matters Relating to Further Enhancing the Regulationof Motor Vehicle Insurance was issued by the CBIRC in
January 2019, concentrating on the two major issues:
failure to use the applicable contract terms and fee rates
in compliance with the regulations; and false businessand financial data. Six months later, the CBIRC issued
another rule requiring more efforts on law enforcement
against violations of laws and regulations in motor
vehicle insurance. The scope and level of accountability
in the course of implementing the new rules continued
to be expanded and intensified, and orders to suspend
business and penalties imposed upon both a given
institution and the individuals involved often surfaced.
Underlying the tough regulation is the original intention
to curb cut-throat competition and extensive increaseof costs in the motor insurance industry, both objectives
that were not completely achieved by the previous fees
reforms, and also the deep problems that should be
solved by regulators in the future.
With respect to life insurance, the “Major Illness Mutual
Aid Program” that was popular at the end of 2018 wasdetermined as a non-insurance product, and a numberof red lines remain with the development of online
mutual aid insurance in China. The new measures forthe administration of health insurance were enacted in

the second half of 2019, and the most notable amendment
is that insurance companies will be allowed to adjust
their fee rates for long-term health insurance products
if pre-agreed conditions are triggered. This would
encourage insurance companies to provide consumers
with more long-term and continuous protection. The
new rules also dedicate one chapter to health management
raising the ratio of health management costs in the priceof a given product from 10% and 2% specified in the
Notice on the Matters Relating to Provision of HealthManagement Service by Health Insurance Products
issued in 2012 to a unified 20%, with a view to further
encouraging the combination of insurance products
and health management services.
In addition, the regulatory authorities are also encouraging
the re-insurance business, and the regulatory framework
governing agricultural insurance and other relevant
products has begun to take shape. There is little doubtthat the regulatory authorities are doing their utmost to
promote the development of insurance products thatcan meet the development needs of China’s market while
having zero tolerance over non-compliant products.

PRC Financial Regulation:
Annual Report (2020)
80

PRC Financial Regulation:
Annual Report (2020)
81

07

Use of insurance funds was allowed for multiple purposes andequity investment was supported
At the beginning of 2019, the regulatory authorities issued
a series of rules encouraging the “entry of insurance funds
into the securities market”, which led to the return of
insurance funds to the A-share market that had previously
been the subject of much criticism. With respect to equity
investments, although the consultation draft of the newrule on equity investments that was released in 2018 failed
to be officially enacted (even after an extended period),
the regulatory authorities signaled that the restriction
on the scope of the industries in which insurance funds
can be invested would be removed and the “positivelist” for use of insurance funds would be converted to a“negative list”. In order to support more insurance funds
to be used for equity investments, the CBIRC simplified
the procedures for registration of equity investment
plans and privately offered insurance funds.
With respect to the bond market, the CBIRC issued the
Notice on the Matters Relating to the Investment of Insurance
Funds in Capital Supplementary Bonds Issued by Banks in
January 2019, which allows insurance funds to be invested
in tier 2 capital bonds and non-fixed-term capital bonds
issued by banks. This would add more options for theinvestment of insurance funds in long-term debts. While
there remain many restrictions on the qualification ofissuers, it is expected that the relevant threshold would
be lowered or cancelled in the future so that more insurance
funds are attracted to invest in capital bonds issued bysmall- and medium-sized banks and to supplement
their capital.

Moreover, in 2019, a registration-based system wasintroduced for asset-backed plans launched by insurance
asset managers, and insurance funds were allowed toinvest in credit derivatives (subject to certain conditions).
With respect to trust investment, the new rules encouraged
expanded cooperation between “insurance companies
and trust companies”, and implemented the regulatory
direction of de-channeling, eliminating multi-layer nesting,breaking guaranteed return and encouraging funds to
be invested in the real economy. These favorable policies
have expanded the areas in which insurance funds canbe invested, and according to the relevant statistics, thebalance of the utilized insurance funds as of the end of2019 increased by 12.9%, year-on-year. That being said,
there was only a slight change in the percentage of thebalance of various assets compared with that at the endof the previous year. This, coupled with the position takenby the regulatory authorities on encouraging higher
percentage of equity assets in total assets, indicates that
there will be more policy support forthcoming.

08

Tighter regulation of compliance by institutions continued and more“concurrent sanctions” against institutions and individuals were
imposedAccording to statistics, the CBIRC at all levels issued
more than 800 penalty decisions throughout 2019
imposing fines amounting to RMB120 million, andmore than 110 penalty decisions were issued in December.
While this represents a sharp drop , in terms of number
and amount of penalties, from 2018, which is known as
the “harshest-ever regulation year”, 2019 remained ayear of “strict regulation” for the insurance industry
relative to the previous few years.
First of all, more areas were subject to sanctions. In
addition to intermediaries, as discussed above, a number ofproperty insurance companies were sanctioned due tonon-compliance in vehicle insurance business and false
accounting of operating expenses. Life insurancecompanies were penalized largely for mis-selling, cheating
insurance applicants and providing false information,
but sanctions were also imposed against insurance
sales agents advertising insurance products via
WeChat and other social media in violation of theapplicable regulations. With respect to the types of
non-compliance issues, sanctions were mainly
imposed on false accounting of operating expenses,
provision of false marketing information, offering

insured benefits as opposed to insurance benefits orproviding untrue client information. In addition, there
were some other non-compliance being sanctioned,
including failure to cooperate in regulatory
investigations.
Secondly, severe sanctions were increasingly imposed.
A number of institutions were restricted from carrying
out new business and even had their business licenses
revoked due to violations. It is worth noting that
another notable feature in 2019 is that more sanctions
were imposed on individuals or institutions andindividuals concurrently. According to the incomplete
statistics, in the first half of 2019, approximately 100
decisions were issued against individuals and anumber of decisions were against institutions andindividuals concurrently. As a result, dozens ofmanagement personnel were barred from acquiring
the qualification for management personnel of
insurance companies and held liable for their
institutions’ and their own non-compliance.

PRC Financial Regulation:
Annual Report (2020)
80

PRC Financial Regulation:
Annual Report (2020)
81

07

Use of insurance funds was allowed for multiple purposes andequity investment was supported
At the beginning of 2019, the regulatory authorities issued
a series of rules encouraging the “entry of insurance funds
into the securities market”, which led to the return of
insurance funds to the A-share market that had previously
been the subject of much criticism. With respect to equity
investments, although the consultation draft of the newrule on equity investments that was released in 2018 failed
to be officially enacted (even after an extended period),
the regulatory authorities signaled that the restriction
on the scope of the industries in which insurance funds
can be invested would be removed and the “positivelist” for use of insurance funds would be converted to a“negative list”. In order to support more insurance funds
to be used for equity investments, the CBIRC simplified
the procedures for registration of equity investment
plans and privately offered insurance funds.
With respect to the bond market, the CBIRC issued the
Notice on the Matters Relating to the Investment of Insurance
Funds in Capital Supplementary Bonds Issued by Banks in
January 2019, which allows insurance funds to be invested
in tier 2 capital bonds and non-fixed-term capital bonds
issued by banks. This would add more options for theinvestment of insurance funds in long-term debts. While
there remain many restrictions on the qualification ofissuers, it is expected that the relevant threshold would
be lowered or cancelled in the future so that more insurance
funds are attracted to invest in capital bonds issued bysmall- and medium-sized banks and to supplement
their capital.

Moreover, in 2019, a registration-based system wasintroduced for asset-backed plans launched by insurance
asset managers, and insurance funds were allowed toinvest in credit derivatives (subject to certain conditions).
With respect to trust investment, the new rules encouraged
expanded cooperation between “insurance companies
and trust companies”, and implemented the regulatory
direction of de-channeling, eliminating multi-layer nesting,breaking guaranteed return and encouraging funds to
be invested in the real economy. These favorable policies
have expanded the areas in which insurance funds canbe invested, and according to the relevant statistics, thebalance of the utilized insurance funds as of the end of2019 increased by 12.9%, year-on-year. That being said,
there was only a slight change in the percentage of thebalance of various assets compared with that at the endof the previous year. This, coupled with the position takenby the regulatory authorities on encouraging higher
percentage of equity assets in total assets, indicates that
there will be more policy support forthcoming.

08

Tighter regulation of compliance by institutions continued and more“concurrent sanctions” against institutions and individuals were
imposedAccording to statistics, the CBIRC at all levels issued
more than 800 penalty decisions throughout 2019
imposing fines amounting to RMB120 million, andmore than 110 penalty decisions were issued in December.
While this represents a sharp drop , in terms of number
and amount of penalties, from 2018, which is known as
the “harshest-ever regulation year”, 2019 remained ayear of “strict regulation” for the insurance industry
relative to the previous few years.
First of all, more areas were subject to sanctions. In
addition to intermediaries, as discussed above, a number ofproperty insurance companies were sanctioned due tonon-compliance in vehicle insurance business and false
accounting of operating expenses. Life insurancecompanies were penalized largely for mis-selling, cheating
insurance applicants and providing false information,
but sanctions were also imposed against insurance
sales agents advertising insurance products via
WeChat and other social media in violation of theapplicable regulations. With respect to the types of
non-compliance issues, sanctions were mainly
imposed on false accounting of operating expenses,
provision of false marketing information, offering

insured benefits as opposed to insurance benefits orproviding untrue client information. In addition, there
were some other non-compliance being sanctioned,
including failure to cooperate in regulatory
investigations.
Secondly, severe sanctions were increasingly imposed.
A number of institutions were restricted from carrying
out new business and even had their business licenses
revoked due to violations. It is worth noting that
another notable feature in 2019 is that more sanctions
were imposed on individuals or institutions andindividuals concurrently. According to the incomplete
statistics, in the first half of 2019, approximately 100
decisions were issued against individuals and anumber of decisions were against institutions andindividuals concurrently. As a result, dozens ofmanagement personnel were barred from acquiring
the qualification for management personnel of
insurance companies and held liable for their
institutions’ and their own non-compliance.

PRC Financial Regulation:
Annual Report (2020)
82

PRC Financial Regulation:
Annual Report (2020)
832020 Regulatory Outlook

01

Focus will be on dealing withhigh-risk insurance companies andrisk management of insurance
institutions

02

All-round opening-up is well on
the way to be achieved

03042020 is the final year of the uphill battle to prevent anddiffuse financial risks, and the insurance industry has a
key role to play. We expect that, in addition to Anbang
Insurance, the CBIRC will deal with several other high-risk
insurance companies focusing on external funds
operating on market terms, which will be different fromthat adopted for Anbang Insurance. In addition, theregulators are expected to maintain consistency in therelevant policies, making every endeavor to strengthenrisk management of insurance institutions and focusing
on such issues as governance structure, quality ofinvestment assets of insurance institutions. Further,priority will be given to the establishment of areinsurance market and the improvement of the relevant
systems.

Although a foreign shareholder was allowed to hold up
to 51% equity in a life insurance company as early as
2018, no application for the establishment offoreign-controlled life insurance company has been
approved, other than few legacy cases. AIA submitted its
application to convert its Shanghai Branch into a wholly
owned life insurance subsidiary in 2019 so as toterminate its operation in China as a branch, which had
lasted for almost 30 years. The first wholly-owned life
insurance company is ready to go. In addition, the timing
for opening up the insurance business has now been set
on April 1, 2020 under the Sino-US phase-one economic
and trade agreement. Therefore, the relevant
implementation rules will be issued imminently. We
expect that in the coming year several foreign insurance
institutions will apply for controlling stake in life
insurance companies and other foreign financial
institutions and insurance groups may take thisopportunity to participate in the insurance business andrelated business in China. The regulators are expected toadopt an open-door policy to welcome participationfrom more foreign investors while strictly enforcing therelevant qualification requirements.

Following a three-year period of strict law enforcement,
taking into account the overall economic situation andthe outbreak of new coronavirus at the beginning of
2020, we expect that the number and total amount ofpenalties to be imposed in 2020 will decline while thenumber of penalties with a fine of more than RMB1
million is likely to increase. In addition, we will likely see asignificant increase in the number of cases where theregulators hold institutions and individuals, including thesenior management, concurrently responsible forviolations. It is likely that an increasing number ofsanctions will be imposed on violations in certain areas,such as data, personal information and anti-money
laundering, in addition to those areas in which sanctions
are commonly seen. Further, protection of insurance
product consumers will become the focus of regulatory
authorities and the judiciary in law enforcement. Buildingon the strict regulation of insurance intermediaries in
2019, we expect that this year the regulators will attach
more attention to compliance of insurance sales agentsin marketing and strict control of licenses ofintermediaries, and that a regime regulating all types ofplayers in the intermediary business in respect of all theiractivities will take shape.

The unexpected new coronavirus was a setback to thegood start of 2020, but it has indirectly resulted in the fast
growth of the internet insurance business. The Measures
for the Regulation of Internet Insurance Business(consultation draft) issued in the middle of December
2019 are expected to be formally issued andimplemented in 2020. In consideration of the changes
and the emergence of new features in internet insurance
business in the past five years, we expect that the new
regulation will build on the provisions under the Interim
Measures for the Regulation of Internet Insurance Businessand make further classification or provide for further
rules in respect of such aspects as the relevant businessparticipants, licensing management, operating rules, risk
control, compliance management, and law enforcement
so as to reshape the underlying regulatory framework
governing internet insurance business. The regulation ofinternet insurance business is expected to stick to thebottom-line requirement for any insurance business tobe conducted by “institutions possessing the relevant
licenses and practitioners possessing the relevant
certificates”, to strengthen regulation of compliance andrisk management of insurance intermediaries engaging
in internet insurance business, to re-define the roles ofeach type of cooperating institutions and to provide full
protection for consumers’ rights and interests.
Considering the fact that decisions involving fines ofover RMB1 million were issued at the beginning of 2020,
we expect that the regulatory authorities will take more
law enforcement actions against internet insurance
business. In addition, it remains to be seen how thelegacy platform business will be resolved and the extent
to which the authorities will allow part-time agency
business after the issue of the new regulation.

Strict regulation will continue
and protection of insurance
consumers will be the focal point
for law enforcement

Regulating internet insurance
business will be on the agendaof regulatory authorities

PRC Financial Regulation:
Annual Report (2020)
82

PRC Financial Regulation:
Annual Report (2020)
832020 Regulatory Outlook

01

Focus will be on dealing withhigh-risk insurance companies andrisk management of insurance
institutions

02

All-round opening-up is well on
the way to be achieved

03042020 is the final year of the uphill battle to prevent anddiffuse financial risks, and the insurance industry has a
key role to play. We expect that, in addition to Anbang
Insurance, the CBIRC will deal with several other high-risk
insurance companies focusing on external funds
operating on market terms, which will be different fromthat adopted for Anbang Insurance. In addition, theregulators are expected to maintain consistency in therelevant policies, making every endeavor to strengthenrisk management of insurance institutions and focusing
on such issues as governance structure, quality ofinvestment assets of insurance institutions. Further,priority will be given to the establishment of areinsurance market and the improvement of the relevant
systems.

Although a foreign shareholder was allowed to hold up
to 51% equity in a life insurance company as early as
2018, no application for the establishment offoreign-controlled life insurance company has been
approved, other than few legacy cases. AIA submitted its
application to convert its Shanghai Branch into a wholly
owned life insurance subsidiary in 2019 so as toterminate its operation in China as a branch, which had
lasted for almost 30 years. The first wholly-owned life
insurance company is ready to go. In addition, the timing
for opening up the insurance business has now been set
on April 1, 2020 under the Sino-US phase-one economic
and trade agreement. Therefore, the relevant
implementation rules will be issued imminently. We
expect that in the coming year several foreign insurance
institutions will apply for controlling stake in life
insurance companies and other foreign financial
institutions and insurance groups may take thisopportunity to participate in the insurance business andrelated business in China. The regulators are expected toadopt an open-door policy to welcome participationfrom more foreign investors while strictly enforcing therelevant qualification requirements.

Following a three-year period of strict law enforcement,
taking into account the overall economic situation andthe outbreak of new coronavirus at the beginning of
2020, we expect that the number and total amount ofpenalties to be imposed in 2020 will decline while thenumber of penalties with a fine of more than RMB1
million is likely to increase. In addition, we will likely see asignificant increase in the number of cases where theregulators hold institutions and individuals, including thesenior management, concurrently responsible forviolations. It is likely that an increasing number ofsanctions will be imposed on violations in certain areas,such as data, personal information and anti-money
laundering, in addition to those areas in which sanctions
are commonly seen. Further, protection of insurance
product consumers will become the focus of regulatory
authorities and the judiciary in law enforcement. Buildingon the strict regulation of insurance intermediaries in
2019, we expect that this year the regulators will attach
more attention to compliance of insurance sales agentsin marketing and strict control of licenses ofintermediaries, and that a regime regulating all types ofplayers in the intermediary business in respect of all theiractivities will take shape.

The unexpected new coronavirus was a setback to thegood start of 2020, but it has indirectly resulted in the fast
growth of the internet insurance business. The Measures
for the Regulation of Internet Insurance Business(consultation draft) issued in the middle of December
2019 are expected to be formally issued andimplemented in 2020. In consideration of the changes
and the emergence of new features in internet insurance
business in the past five years, we expect that the new
regulation will build on the provisions under the Interim
Measures for the Regulation of Internet Insurance Businessand make further classification or provide for further
rules in respect of such aspects as the relevant businessparticipants, licensing management, operating rules, risk
control, compliance management, and law enforcement
so as to reshape the underlying regulatory framework
governing internet insurance business. The regulation ofinternet insurance business is expected to stick to thebottom-line requirement for any insurance business tobe conducted by “institutions possessing the relevant
licenses and practitioners possessing the relevant
certificates”, to strengthen regulation of compliance andrisk management of insurance intermediaries engaging
in internet insurance business, to re-define the roles ofeach type of cooperating institutions and to provide full
protection for consumers’ rights and interests.
Considering the fact that decisions involving fines ofover RMB1 million were issued at the beginning of 2020,
we expect that the regulatory authorities will take more
law enforcement actions against internet insurance
business. In addition, it remains to be seen how thelegacy platform business will be resolved and the extent
to which the authorities will allow part-time agency
business after the issue of the new regulation.

Strict regulation will continue
and protection of insurance
consumers will be the focal point
for law enforcement

Regulating internet insurance
business will be on the agendaof regulatory authorities

PRC Financial Regulation:
Annual Report (2020)
84

PRC Financial Regulation:
Annual Report (2020)
85

05

The regulatory regime governing insurance assets management businesswill be established, and the regulatory authorities will encourage thedevelopment of such businessIn comparison to the securities and funds, banking andtrust sectors, the size of assets management business run
by insurance institutions is significantly smaller. We
believe that the regulatory authorities will encourage
setting up insurance assets management institutions,and introducing other institutions to participate in thedevelopment of the insurance assets managementbusiness (e.g. involving private fund managers to act asinvestment advisors, and cooperating with wealthmanagement subsidiaries of commercial banks).
The Interim Measures for the Administration of Insurance
Assets Management Products (consultation draft) issued at
the end of November 2019 is expected to be officiallyreleased in 2020, which will lay the foundation for the
regulation of insurance assets management business.
Pursuant to the new rules on asset managementbusiness, the legal relationship between an asset manager
and an investor in insurance assets management products
should be defined as a trust relationship, and suchproducts will include a broad scope of permissible
investments, such as (in addition to standardized

products) asset-backed securities and equity securities.
Separately, under the above-mentioned consultation draft,insurance assets management products are categorized as
private products. It remains to be seen whether theseproducts will be permitted to be sold to the public.

PRC Financial Regulation:
Annual Report (2020)
84

PRC Financial Regulation:
Annual Report (2020)
85

05

The regulatory regime governing insurance assets management businesswill be established, and the regulatory authorities will encourage thedevelopment of such businessIn comparison to the securities and funds, banking andtrust sectors, the size of assets management business run
by insurance institutions is significantly smaller. We
believe that the regulatory authorities will encourage
setting up insurance assets management institutions,and introducing other institutions to participate in thedevelopment of the insurance assets managementbusiness (e.g. involving private fund managers to act asinvestment advisors, and cooperating with wealthmanagement subsidiaries of commercial banks).
The Interim Measures for the Administration of Insurance
Assets Management Products (consultation draft) issued at
the end of November 2019 is expected to be officiallyreleased in 2020, which will lay the foundation for the
regulation of insurance assets management business.
Pursuant to the new rules on asset managementbusiness, the legal relationship between an asset manager
and an investor in insurance assets management products
should be defined as a trust relationship, and suchproducts will include a broad scope of permissible
investments, such as (in addition to standardized

products) asset-backed securities and equity securities.
Separately, under the above-mentioned consultation draft,insurance assets management products are categorized as
private products. It remains to be seen whether theseproducts will be permitted to be sold to the public.

PRC Financial Regulation:
Annual Report (2020)
86

PRC Financial Regulation:
Annual Report (2020)

Authors

Jian Fang

Grace Yu

Siyuan Pan

Kristy Tang

Xiaoye Zhao

Rainie Zhang

Partner, Fangda Partners
jian.fang@fangdalaw.com

Partner, Fangda Partners
grace.yu@fangdalaw.com

Partner, Fangda Partners
siyuan.pan@fangdalaw.com

Fangda Partners
kristy.tang@fangdalaw.com

Fangda Partners
xiaoye.zhao@fangdalaw.com

Fangda Partners
rainie.zhang@fangdalaw.com

Luna Yang

Lily YanSam Wang

Fangkun Hu

Counsel, Fangda Partners
luna.yang@fangdalaw.com

Counsel, Fangda Partners
lily.yan@fangdalaw.com

Counsel, Fangda Partners
sam.wang@fangdalaw.com

Fangda Partners
fangkun.hu@fangdalaw.com

Tracy Lin

Yimei Qiao

Lawrence Zhu

Fangda Partners
yuan.lin@fangdalaw.com

Fangda Partners
yimei.qiao@fangdalaw.com

Fangda Partners
lawrence.zhu@fangdalaw.com

PRC Financial Regulation:
Annual Report (2020)
86

PRC Financial Regulation:
Annual Report (2020)

Authors

Jian Fang

Grace Yu

Siyuan Pan

Kristy Tang

Xiaoye Zhao

Rainie Zhang

Partner, Fangda Partners
jian.fang@fangdalaw.com

Partner, Fangda Partners
grace.yu@fangdalaw.com

Partner, Fangda Partners
siyuan.pan@fangdalaw.com

Fangda Partners
kristy.tang@fangdalaw.com

Fangda Partners
xiaoye.zhao@fangdalaw.com

Fangda Partners
rainie.zhang@fangdalaw.com

Luna Yang

Lily YanSam Wang

Fangkun Hu

Counsel, Fangda Partners
luna.yang@fangdalaw.com

Counsel, Fangda Partners
lily.yan@fangdalaw.com

Counsel, Fangda Partners
sam.wang@fangdalaw.com

Fangda Partners
fangkun.hu@fangdalaw.com

Tracy Lin

Yimei Qiao

Lawrence Zhu

Fangda Partners
yuan.lin@fangdalaw.com

Fangda Partners
yimei.qiao@fangdalaw.com

Fangda Partners
lawrence.zhu@fangdalaw.com

2020
PRC Financial
Regulation
Annual Report

Disclaimer：This report has been prepared for discussion only, and should not in any way be considered as formal legal opinions or advice given by Fangda Partners or
its lawyers. We are not responsible for any results of any actions (whether action or omission) taken in reliance upon the whole or any part of the contents of this report.
You are welcome to contact us for formal legal opinion or legal service on the relevant topic.

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