PRC Financial
Regulation

2021

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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www.fangdalaw.com

PRC Financial Regulation:
Annual Report (2021)

PRC Financial Regulation:
Annual Report (2021)
01

Preamble
Contents
01
02
18
28
40
53
65
78

Preamble
GeneralBanking
Securities
Asset Management
FinTechInsurance

2020 will be remembered as a historic year for many reasons,regrettably and largely for the unprecedented pandemic
and the complicated and severe international situation.
Despite all these challenges, the Chinese financial sector
has undergone huge change over the past year, signaling
the determination of China's policy makers and regulators
to carry through fundamental financial reform and opening-up.
During the year, a number of laws of major significanceto the financial market including the Securities Law wereamended and implemented or published for public opinion,
laws and practice to eliminate “mandatory repayment”
continued to progress, the opening-up policy was further
implemented, regulation of internet finance were fully
incorporated into regulation of the whole financial sector,
and the "Yuan You Bao" event, which exposed poor risk
management, gave rise to a further crop of new challenges
for targeted risk control and regulation.
The year 2021 marks the beginning of China’s Fourteenth
Five-Year Plan, and heralds deepened regulatory reformand opening-up policies on an expanded scale. 2021 isalso the second year for our PRC Financial Regulation:
Annual Report series, which examines developments ofthe previous year and provides a glimpse into the future
to help businesses position themselves in China for theforthcoming year.
We have been working in the financial services sector for
many years and have in-depth knowledge of the China
market, and look forward to understanding the market,
embracing the changes, and grasping the future trends

with you. To this end, we have prepared this PRC Financial
Regulation: Annual Report to provide practical andforward-looking guidance, covering milestone events, main
regulatory developments and key trends in the banking,securities, asset management, FinTech and insurance sectors.
Fangda’s core mission is to provide effective, creative andtimely legal services to meet the commercial needs of ourclients. Our Financial Institutions Group comprises 30
top-quality lawyers who have extensive experience. Ourlawyers offer a full range of legal services related to financial
institutions and China’s financial markets. We advise both
domestic and overseas clients on the most cutting-edge
and complex legal issues in China's financial services sector.
We are at the forefront of significant initiatives in the sector,
leading on the market’s most significant transactions andnew product structures. With our deep understanding of
the market and our unparalleled experience of advisingon groundbreaking transactions, we are able to provide
creative solutions in a complex financial regulatoryenvironment. We look forward to sharing with you ourobservations that we have accumulated over years of practice.
We trust you, as market participants, have your thoroughand practical observations on the market and its development.
We are always happy to absorb feedback from those working
directly in the financial services sector and welcome any
comments or suggestions on the contents of this report
you may have.
We live in challenging times, but nevertheless we remain
optimistic and there is much to look forward to in 2021.

Authors

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&Atransactions, 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 (2021)

PRC Financial Regulation:
Annual Report (2021)
01

Preamble
Contents
01
02
18
28
40
53
65
78

Preamble
GeneralBanking
Securities
Asset Management
FinTechInsurance

2020 will be remembered as a historic year for many reasons,regrettably and largely for the unprecedented pandemic
and the complicated and severe international situation.
Despite all these challenges, the Chinese financial sector
has undergone huge change over the past year, signaling
the determination of China's policy makers and regulators
to carry through fundamental financial reform and opening-up.
During the year, a number of laws of major significanceto the financial market including the Securities Law wereamended and implemented or published for public opinion,
laws and practice to eliminate “mandatory repayment”
continued to progress, the opening-up policy was further
implemented, regulation of internet finance were fully
incorporated into regulation of the whole financial sector,
and the "Yuan You Bao" event, which exposed poor risk
management, gave rise to a further crop of new challenges
for targeted risk control and regulation.
The year 2021 marks the beginning of China’s Fourteenth
Five-Year Plan, and heralds deepened regulatory reformand opening-up policies on an expanded scale. 2021 isalso the second year for our PRC Financial Regulation:
Annual Report series, which examines developments ofthe previous year and provides a glimpse into the future
to help businesses position themselves in China for theforthcoming year.
We have been working in the financial services sector for
many years and have in-depth knowledge of the China
market, and look forward to understanding the market,
embracing the changes, and grasping the future trends

with you. To this end, we have prepared this PRC Financial
Regulation: Annual Report to provide practical andforward-looking guidance, covering milestone events, main
regulatory developments and key trends in the banking,securities, asset management, FinTech and insurance sectors.
Fangda’s core mission is to provide effective, creative andtimely legal services to meet the commercial needs of ourclients. Our Financial Institutions Group comprises 30
top-quality lawyers who have extensive experience. Ourlawyers offer a full range of legal services related to financial
institutions and China’s financial markets. We advise both
domestic and overseas clients on the most cutting-edge
and complex legal issues in China's financial services sector.
We are at the forefront of significant initiatives in the sector,
leading on the market’s most significant transactions andnew product structures. With our deep understanding of
the market and our unparalleled experience of advisingon groundbreaking transactions, we are able to provide
creative solutions in a complex financial regulatoryenvironment. We look forward to sharing with you ourobservations that we have accumulated over years of practice.
We trust you, as market participants, have your thoroughand practical observations on the market and its development.
We are always happy to absorb feedback from those working
directly in the financial services sector and welcome any
comments or suggestions on the contents of this report
you may have.
We live in challenging times, but nevertheless we remain
optimistic and there is much to look forward to in 2021.

Authors

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&Atransactions, 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 (2021)
02

PRC Financial Regulation:
Annual Report (2021) –General

PRC Financial Regulation:
Annual Report (2021)
032020 Key Dates

March 1
The amended PRC Securities Law took effect.

May 27
The Financial Stability and Development Commission
under the State Council issued 11 financial reform
measures.

July 17
The China Banking and Insurance Regulatory
Commission (CBIRC) and the China Securities
Regulatory Commission (CSRC) took over ninefinancial institutions controlled by Ming Tian Group.

October 23
The PBOC issued the draft amendment to the Law of
the People’s Bank of China.

November 2
The China Banking and Insurance Regulatory Commission(CBIRC) and the PBOC sought public opinion on the
consultation draft of the Interim Measures for the
Administration of Online Micro-lending Business.

November 23
The CBIRC agreed in principle for Baoshang Bank toenter into bankruptcy proceedings.

April 1The Chinese financial sector was fully opened up,
with all main types of financial institutions permitted
to be wholly owned by foreign investors.

May 28The National People’s Congress (NPC) passed the Civil
Code.

July 31
The People’s Bank of China (PBOC) declared the grace
period of the Asset Management New Rules would be
extended to the end of 2021.

November 1
The Decision of the State Council on Implementing Access
Administration of Financial Holding Companies and theInterim Measures for the Supervision and Administration of
Financial Holding Companies took effect.

November 15
The Regional Comprehensive Economic Partnership(RCEP) was signed by 15 member countries, with China
committing a further opening-up of financial industry.

December 19
The National Development and Reform Commission(NDRC) and the Ministry of Commerce (MOFCOM)
issued the Measures for the Security Review of Foreign
Investment, including “important financial services” inthe scope of security review of foreign investment.

PRC Financial Regulation:
Annual Report (2021)
02

PRC Financial Regulation:
Annual Report (2021) –General

PRC Financial Regulation:
Annual Report (2021)
032020 Key Dates

March 1
The amended PRC Securities Law took effect.

May 27
The Financial Stability and Development Commission
under the State Council issued 11 financial reform
measures.

July 17
The China Banking and Insurance Regulatory
Commission (CBIRC) and the China Securities
Regulatory Commission (CSRC) took over ninefinancial institutions controlled by Ming Tian Group.

October 23
The PBOC issued the draft amendment to the Law of
the People’s Bank of China.

November 2
The China Banking and Insurance Regulatory Commission(CBIRC) and the PBOC sought public opinion on the
consultation draft of the Interim Measures for the
Administration of Online Micro-lending Business.

November 23
The CBIRC agreed in principle for Baoshang Bank toenter into bankruptcy proceedings.

April 1The Chinese financial sector was fully opened up,
with all main types of financial institutions permitted
to be wholly owned by foreign investors.

May 28The National People’s Congress (NPC) passed the Civil
Code.

July 31
The People’s Bank of China (PBOC) declared the grace
period of the Asset Management New Rules would be
extended to the end of 2021.

November 1
The Decision of the State Council on Implementing Access
Administration of Financial Holding Companies and theInterim Measures for the Supervision and Administration of
Financial Holding Companies took effect.

November 15
The Regional Comprehensive Economic Partnership(RCEP) was signed by 15 member countries, with China
committing a further opening-up of financial industry.

December 19
The National Development and Reform Commission(NDRC) and the Ministry of Commerce (MOFCOM)
issued the Measures for the Security Review of Foreign
Investment, including “important financial services” inthe scope of security review of foreign investment.

PRC Financial Regulation:
Annual Report (2021)
04

PRC Financial Regulation:
Annual Report (2021)
05

2020 Regulatory Observations

1“Market-oriented Reform” and “Tight Regulation” continuing
as the main themes of financial regulation

As China accumulates regulatory experience and pursues
ongoing reform of the financial system, the underlying
trends of financial regulation in 2020 continued to bemarket-oriented reform and tight regulation.

Among other measures, setting up a cross-border financial
innovative regulatory sandbox in the Greater Bay Area, andinitiating digital RMB pilots, are clear indications of thedirection of market-oriented reform in the financial sector.

The regulatory authorities simplified administrative
procedures significantly and delegated much power in
2020, among them:

Although the pandemic brought lots of challenges, this did
not lead to any reduction of strict regulatory supervision by
the regulatory authorities in key areas. For example:· the PBOC set out, for the first time, the simplified
procedures in the newly amended measures for the
implementation of administrative licensing;· in October, the PBOC fined three state-owned commercial
banks for infringing the security of consumer financial
data, one of them being fined as much as RMB14 million;· the counter-cyclical factor was removed from the RMB
exchange rate mechanism;· the PBOC issued a consultation draft of the Administration
Measures of Combating Money Laundering and Financingof Terrorism by Financial Institutions;· with the new Securities Law taking effect, the needto pre-approve any change of non-main shareholdersof securities companies and other relevant changes
was removed;· the CSRC revised and abolished several securities andfutures rules and regulations, carried out a categorized
review of the re-financing of listed companies, andimplemented a new registration system for shares listedon the STAR market and the Shenzhen growth enterprisemarket (GEM) and for corporate bond issuances;· the CBIRC simplified the process for several administrative
licenses, including: cancelling the requirement of approval ofshareholders holding less than 5% of the shares of non-bankfinancial institutions; removing the requirement for foreign
financial institutions to have total assets of at least US$1
billion for investment in trust companies; and removing
the sector restrictions on the financial equity investment
by insurance funds.

· the CSRC continued to combat market manipulation,
insider trading, shadow margin financing, financial fraudof listed companies and other misconduct;· the CSRC determined the facts and fined ZONECOby using new technology to identify misconduct - acase that attracted much attention - and investigatedsuspicious stock transactions of Tianshan Animal andother listed companies;· by conducting a review of the market chaos, the CBIRC
examined a number of high-risk activities, including
real estate financing, shadow banking and cross-market
financial services. It also punished a number of banks
charging customers fees without authorization andinfringing financial consumers’ interests in the courseof enterprise-related services;· the CBIRC, through “window guidance”, instructedbanks to scale down structured deposits and trust
companies to reduce their trust financing business;and· P2P online lending institutions were eliminated in 2020.
Above all, there has been an ongoing trend of tight regulation.
As we predicted in our PRC Financial Regulation Annual
Report (2020), in the context of tight regulation, regulators
stepped up the practice of punishing individuals found to
be responsible in major cases of regulatory breaches.
When the CSRC and the CBIRC fined several securities
companies and banks for regulatory breaches, they alsoordered the involved individuals to be held internallyaccountable. In the only three administrative cases
involving punishment for money laundering disclosed by
the PBOC in 2020, the PBOC revealed, for the first time, thenames of the culpable individuals, as well as the fines
imposed on them.
We also saw increased levels of cooperation between the
different regulatory bodies. For example, following thedefault by Yongmei on bond repayments in November,the National Association of Financial Market Institutional
Investors (NAFMII) led a program to require issuers andintermediaries to conduct investigations on themselves,
and then handed over the evidence to, and coordinatedwith, the CSRC on formal investigations. This was under
the general requirement of China's Financial Stability andDevelopment Commission to exert more influence on thesafer operation of the financial market.
The approach by the regulators to combine market-oriented
reform with tighter regulation, as well as pragmatic law
enforcement which allows for some flexibility as new
regulations take effect, demonstrate the confidence andregulatory wisdom of the financial regulators in creating astable financial market. We expect this approach tocontinue serving as the main theme of the financial
regulation of China in the future.

PRC Financial Regulation:
Annual Report (2021)
04

PRC Financial Regulation:
Annual Report (2021)
05

2020 Regulatory Observations

1“Market-oriented Reform” and “Tight Regulation” continuing
as the main themes of financial regulation

As China accumulates regulatory experience and pursues
ongoing reform of the financial system, the underlying
trends of financial regulation in 2020 continued to bemarket-oriented reform and tight regulation.

Among other measures, setting up a cross-border financial
innovative regulatory sandbox in the Greater Bay Area, andinitiating digital RMB pilots, are clear indications of thedirection of market-oriented reform in the financial sector.

The regulatory authorities simplified administrative
procedures significantly and delegated much power in
2020, among them:

Although the pandemic brought lots of challenges, this did
not lead to any reduction of strict regulatory supervision by
the regulatory authorities in key areas. For example:· the PBOC set out, for the first time, the simplified
procedures in the newly amended measures for the
implementation of administrative licensing;· in October, the PBOC fined three state-owned commercial
banks for infringing the security of consumer financial
data, one of them being fined as much as RMB14 million;· the counter-cyclical factor was removed from the RMB
exchange rate mechanism;· the PBOC issued a consultation draft of the Administration
Measures of Combating Money Laundering and Financingof Terrorism by Financial Institutions;· with the new Securities Law taking effect, the needto pre-approve any change of non-main shareholdersof securities companies and other relevant changes
was removed;· the CSRC revised and abolished several securities andfutures rules and regulations, carried out a categorized
review of the re-financing of listed companies, andimplemented a new registration system for shares listedon the STAR market and the Shenzhen growth enterprisemarket (GEM) and for corporate bond issuances;· the CBIRC simplified the process for several administrative
licenses, including: cancelling the requirement of approval ofshareholders holding less than 5% of the shares of non-bankfinancial institutions; removing the requirement for foreign
financial institutions to have total assets of at least US$1
billion for investment in trust companies; and removing
the sector restrictions on the financial equity investment
by insurance funds.

· the CSRC continued to combat market manipulation,
insider trading, shadow margin financing, financial fraudof listed companies and other misconduct;· the CSRC determined the facts and fined ZONECOby using new technology to identify misconduct - acase that attracted much attention - and investigatedsuspicious stock transactions of Tianshan Animal andother listed companies;· by conducting a review of the market chaos, the CBIRC
examined a number of high-risk activities, including
real estate financing, shadow banking and cross-market
financial services. It also punished a number of banks
charging customers fees without authorization andinfringing financial consumers’ interests in the courseof enterprise-related services;· the CBIRC, through “window guidance”, instructedbanks to scale down structured deposits and trust
companies to reduce their trust financing business;and· P2P online lending institutions were eliminated in 2020.
Above all, there has been an ongoing trend of tight regulation.
As we predicted in our PRC Financial Regulation Annual
Report (2020), in the context of tight regulation, regulators
stepped up the practice of punishing individuals found to
be responsible in major cases of regulatory breaches.
When the CSRC and the CBIRC fined several securities
companies and banks for regulatory breaches, they alsoordered the involved individuals to be held internallyaccountable. In the only three administrative cases
involving punishment for money laundering disclosed by
the PBOC in 2020, the PBOC revealed, for the first time, thenames of the culpable individuals, as well as the fines
imposed on them.
We also saw increased levels of cooperation between the
different regulatory bodies. For example, following thedefault by Yongmei on bond repayments in November,the National Association of Financial Market Institutional
Investors (NAFMII) led a program to require issuers andintermediaries to conduct investigations on themselves,
and then handed over the evidence to, and coordinatedwith, the CSRC on formal investigations. This was under
the general requirement of China's Financial Stability andDevelopment Commission to exert more influence on thesafer operation of the financial market.
The approach by the regulators to combine market-oriented
reform with tighter regulation, as well as pragmatic law
enforcement which allows for some flexibility as new
regulations take effect, demonstrate the confidence andregulatory wisdom of the financial regulators in creating astable financial market. We expect this approach tocontinue serving as the main theme of the financial
regulation of China in the future.

PRC Financial Regulation:
Annual Report (2021)
06

2

PRC Financial Regulation:
Annual Report (2021)
07

Actively reducing financial risks and putting in place systems
for financial risk prevention and control

In 2020, China moved towards the goal of creating a society
which is “moderately prosperous”, marking the final year of
the 13th five-year plan. It was also the year that the Chinese
authorities took significant steps to put in place controls tominimize risks in the financial system.

financial regulators would use an iron fist, where required.
By allowing the market to provide solutions after using
administrative powers to control failing companies, theregulators signaled their clear preference for a market-based
approach to the operation of China’s financial system.

Against this background, a number of important high-risk
financial groups and financial institutions initiatedrestructuring, takeover and disposal procedures in 2020.

Since 2020, financial risk prevention has been implemented
by means of the dual-approach of developing theregulatory systems and enabling specific, identified
institutions to dispose of risky businesses.

· In February, the HNA Group, in effect a financial holding
company, was officially taken over.
· In April, the Bank of Gansu received provincial government
approval for its risk disposal plan.
· In July, the CBIRC and the CSRC announced the takeoverof nine key financial institutions within the Ming Tian
Group, including New Times Securities, Guosheng
Securities and Guosheng Futures.
· In December, Sichuan Trust was officially taken over,
one of many privately-owned trust companies thatfound themselves in financial distress and requiring
the intervention of local CBIRC bureaus to conduct
risk disposal.
Additionally, further actions were taken to continue thedisposals of risks of a number of high-risk financial
institutions. Anbang, Ming Tian and Huaxin were all
required to liquidate assets and ring-fence risky activities.
In November, the CBIRC agreed in principle for Baoshang
Bank to enter into bankruptcy proceedings, making thisthe first commercial bank in China's financial history to beliquidated in bankruptcy through judicial proceedings(rather than administrative shutdown procedures). In
addition, it was proposed that the Anbang Group beliquidated and closed; Jinzhou Bank completed financial
restructuring and capital increase; and Yongxing Securities,
Huaxin Securities’ successor company, officially opened
for business.
The efficient and effective disposals of high-risk financial
institutions made it crystal clear to the market that

On one hand, in order to fill in the regulatory gap ofmacro-prudential policies: the PBOC has actively developed amacro-prudential policy framework, and the draft
amendment to the Law of the People's Bank of China
expressly includes macro-prudential management as
one of the PBOC’s responsibilities. The PBOC and the
CBIRC will establish an assessment and identification
mechanism for systemically important banks and acounter-cyclical capital buffer mechanism. The PBOC
and five other departments have published a working
plan for the coordinated regulation of financial infrastructure.
On the other hand, financial regulators have actively
promulgated regulations so as to fill in gaps in theexisting system: important financial services have been
included in the scope of foreign investment security
review; business areas which were not previously
included in, or not formally included in, the regulatory
supervision have now been regulated, such as the draft
new online microcredit regulations; and there were
new regulations on financial holding companies. Eachof these measures had major impact in 2020.
The rectification work in areas including P2P, internet
asset management, equity crowdfunding, virtual currency
trading and internet foreign exchange trading is nearlycomplete. Regulations have been imposed on internet
finance products, including commercial banks' internet
loans and online insurance products.
All of these “system-building” initiatives will pave theway for risk prevention of financial institutions in the
future.

3

Shifting from the fictitious economy to the real economy, andintegrating industry and finance

Establishing a mechanism where the real economy iseffectively supported by finance has been important to
the design of China’s financial regulatory system inrecent years. The unique background of the 2020
Coronavirus pandemic further highlighted the urgency
and importance of finance serving the real economy.
In terms of the shift from the operation of a fictitious
economy: at the end of 2019, the CBIRC ruled that listedcompanies were no longer permitted to spin off
financial subsidiaries for the purpose of listing;according to the Report of Chinese Shadow Banking
issued by the CBIRC, the scale of shadow banking
shrunk by RMB16 trillion, and inter-bank cash
management was reduced by 90%, compared to thepeak; and the size of management trusts declined in 11
quarters successively as of the third quarter of 2020,
according to data from the China Trustee Association. In
the past year, the pressure to reduce entrusted
investment of banks, inter-bank investment, inter-bankdeposits, and trust channel business was maintained.
In terms of encouraging the financial sector to support
the real economy: the CBIRC required all banks andinsurance companies to review and assess how theirbusiness is benefiting the real economy and to makesure the funds they hold are put to productive use, as
well as preventing funds being circulated within thefinancial sector without entering the real economy.

In November, the CBIRC criticized four banking andinsurance institutions for increasing the financing costof their clients by bundle sales, and adding commission
fees and investment advisory fees, while not assistingsmall and microbusinesses by reducing fees. The CSRC
also announced six key missions to increase the percentage
of direct financing to businesses through: fully implementing
registration-based IPOs; accelerating the developmentof private equity funds; promoting long-term funds to
be injected into the market; and encouraging highly
reputable foreign securities and funds institutions to
conduct business in the PRC, all in the cause of building
up the real economy.

PRC Financial Regulation:
Annual Report (2021)
06

2

PRC Financial Regulation:
Annual Report (2021)
07

Actively reducing financial risks and putting in place systems
for financial risk prevention and control

In 2020, China moved towards the goal of creating a society
which is “moderately prosperous”, marking the final year of
the 13th five-year plan. It was also the year that the Chinese
authorities took significant steps to put in place controls tominimize risks in the financial system.

financial regulators would use an iron fist, where required.
By allowing the market to provide solutions after using
administrative powers to control failing companies, theregulators signaled their clear preference for a market-based
approach to the operation of China’s financial system.

Against this background, a number of important high-risk
financial groups and financial institutions initiatedrestructuring, takeover and disposal procedures in 2020.

Since 2020, financial risk prevention has been implemented
by means of the dual-approach of developing theregulatory systems and enabling specific, identified
institutions to dispose of risky businesses.

· In February, the HNA Group, in effect a financial holding
company, was officially taken over.
· In April, the Bank of Gansu received provincial government
approval for its risk disposal plan.
· In July, the CBIRC and the CSRC announced the takeoverof nine key financial institutions within the Ming Tian
Group, including New Times Securities, Guosheng
Securities and Guosheng Futures.
· In December, Sichuan Trust was officially taken over,
one of many privately-owned trust companies thatfound themselves in financial distress and requiring
the intervention of local CBIRC bureaus to conduct
risk disposal.
Additionally, further actions were taken to continue thedisposals of risks of a number of high-risk financial
institutions. Anbang, Ming Tian and Huaxin were all
required to liquidate assets and ring-fence risky activities.
In November, the CBIRC agreed in principle for Baoshang
Bank to enter into bankruptcy proceedings, making thisthe first commercial bank in China's financial history to beliquidated in bankruptcy through judicial proceedings(rather than administrative shutdown procedures). In
addition, it was proposed that the Anbang Group beliquidated and closed; Jinzhou Bank completed financial
restructuring and capital increase; and Yongxing Securities,
Huaxin Securities’ successor company, officially opened
for business.
The efficient and effective disposals of high-risk financial
institutions made it crystal clear to the market that

On one hand, in order to fill in the regulatory gap ofmacro-prudential policies: the PBOC has actively developed amacro-prudential policy framework, and the draft
amendment to the Law of the People's Bank of China
expressly includes macro-prudential management as
one of the PBOC’s responsibilities. The PBOC and the
CBIRC will establish an assessment and identification
mechanism for systemically important banks and acounter-cyclical capital buffer mechanism. The PBOC
and five other departments have published a working
plan for the coordinated regulation of financial infrastructure.
On the other hand, financial regulators have actively
promulgated regulations so as to fill in gaps in theexisting system: important financial services have been
included in the scope of foreign investment security
review; business areas which were not previously
included in, or not formally included in, the regulatory
supervision have now been regulated, such as the draft
new online microcredit regulations; and there were
new regulations on financial holding companies. Eachof these measures had major impact in 2020.
The rectification work in areas including P2P, internet
asset management, equity crowdfunding, virtual currency
trading and internet foreign exchange trading is nearlycomplete. Regulations have been imposed on internet
finance products, including commercial banks' internet
loans and online insurance products.
All of these “system-building” initiatives will pave theway for risk prevention of financial institutions in the
future.

3

Shifting from the fictitious economy to the real economy, andintegrating industry and finance

Establishing a mechanism where the real economy iseffectively supported by finance has been important to
the design of China’s financial regulatory system inrecent years. The unique background of the 2020
Coronavirus pandemic further highlighted the urgency
and importance of finance serving the real economy.
In terms of the shift from the operation of a fictitious
economy: at the end of 2019, the CBIRC ruled that listedcompanies were no longer permitted to spin off
financial subsidiaries for the purpose of listing;according to the Report of Chinese Shadow Banking
issued by the CBIRC, the scale of shadow banking
shrunk by RMB16 trillion, and inter-bank cash
management was reduced by 90%, compared to thepeak; and the size of management trusts declined in 11
quarters successively as of the third quarter of 2020,
according to data from the China Trustee Association. In
the past year, the pressure to reduce entrusted
investment of banks, inter-bank investment, inter-bankdeposits, and trust channel business was maintained.
In terms of encouraging the financial sector to support
the real economy: the CBIRC required all banks andinsurance companies to review and assess how theirbusiness is benefiting the real economy and to makesure the funds they hold are put to productive use, as
well as preventing funds being circulated within thefinancial sector without entering the real economy.

In November, the CBIRC criticized four banking andinsurance institutions for increasing the financing costof their clients by bundle sales, and adding commission
fees and investment advisory fees, while not assistingsmall and microbusinesses by reducing fees. The CSRC
also announced six key missions to increase the percentage
of direct financing to businesses through: fully implementing
registration-based IPOs; accelerating the developmentof private equity funds; promoting long-term funds to
be injected into the market; and encouraging highly
reputable foreign securities and funds institutions to
conduct business in the PRC, all in the cause of building
up the real economy.

PRC Financial Regulation:
Annual Report (2021)
08

4

PRC Financial Regulation:
Annual Report (2021)
09

Developing high-level reciprocal opening-up, and promoting
cross-border regulatory cooperation

As we predicted in the PRC Financial Regulation Annual
Report (2020), the opening-up continued apace. The ups
and downs in the Sino-US relationship and the pandemic
did not delay the process of further opening up thefinancial sector. In 2020, the financial opening-up policies
and implementation measures continued the trend overthe past three years and fully demonstrating thedetermination of “promoting reform by opening-up” at
the top level.
· After the negative list for foreign investment in thefinancial sector was removed, in February 2020,
Mastercard became the second foreign-invested card
settlement institution permitted to make preparations
to set up.
· In April, the CSRC removed the restriction on foreign
shareholding of securities companies pursuant to the
Sino-US Economic and Trade Agreement (First Phase).
· In May, the PBOC granted permission to Fitch Rating
to become the second foreign credit rating agency.
· In June, the CSRC approved J.P. Morgan Futures tobecome the first wholly foreign-owned futures company.
· In August, BlackRock was approved to set up the firstwholly foreign-owned fund management company.
· In September, the applications of Neuberger andFidelity to set up fund management companies were
accepted.
· In October, Standard Chartered’s application for setting
up the first wholly foreign-owned securities company
was received by the CSRC.
Other financial sector businesses were given approval forthe first time to be made accessible to foreign investors.
The first wholly foreign-owned money brokerage company
was approved in September. The Chinese subsidiary of S&P
became the first foreign credit rating agency to complete
securities credit rating filing with the CSRC (a new license
after the amended Securities Law).

Upon these foreign-invested institutions entering the
China financial services market, some will have the effectof spurring competition with domestic financial
institutions (e.g., credit rating agencies); it remains to be
seen how many of them will be successful in introducing
advanced offshore experience and technology (e.g., asset
management companies). However, we can expect morein the same vein in the future, with more qualified andcompetent foreign institutions further stimulating the
Chinese financial market.
In terms of cross-border capital market investment andfinancing: the pilot “cross-border wealth management
connect” was due to be launched in the Greater Bay Area.
In September, the new rules on the Qualified Foreign
Institutional Investor (QFII) were issued, which had theeffect of lowering the access requirement and enlarging
the investment scope of the QFII program. The State
Administration of Foreign Exchange (SAFE) has updated
the Qualified Domestic Institutional Investor (QDII) quotas
regularly, increasing it by three times since September
with a total new quota of US$12.7 billion to 71 institutions.
This was the first time in nearly a year and a half that theSAFE had increased the quota allotment. Shanghai hasannounced that it intends to expand the offshore
investment scope of QDIIs, and several cities haveincreased the scale of qualified domestic limited partner(QDLP)/qualified domestic investment enterprise (QDIE)
schemes. More QDLP pilot areas were introduced. In
October, SDIC Power became the fourth Chinese entity toissue GDRs under the "Shanghai-London Stock Connect"scheme following in the footsteps of Huatai Securities,
China Pacific Insurance and China Yangtze Power.
There were significant breakthroughs in terms ofcross-border financial cooperation, regulation andenforcement. There is scope for greater international
financial regulation as provided for under the frameworkof the new Securities Law. One example of cross-bordercooperation was the Luckin Coffee financial fraud case inwhich the CSRC, in accordance with the cross-bordersupervision operation with the International Organizationof Securities Commissions (IOSCO), assisted the US

Securities and Exchange Commission (SEC) in the
cross-border investigation. The CSRC worked with theEuropean Union on QCCP regulatory equivalence
assessment, and China’s four futures exchanges havebeen included in the European Securities and Markets
Authority (ESMA)’s third-country post-trade transparency
positive list.

PRC Financial Regulation:
Annual Report (2021)
08

4

PRC Financial Regulation:
Annual Report (2021)
09

Developing high-level reciprocal opening-up, and promoting
cross-border regulatory cooperation

As we predicted in the PRC Financial Regulation Annual
Report (2020), the opening-up continued apace. The ups
and downs in the Sino-US relationship and the pandemic
did not delay the process of further opening up thefinancial sector. In 2020, the financial opening-up policies
and implementation measures continued the trend overthe past three years and fully demonstrating thedetermination of “promoting reform by opening-up” at
the top level.
· After the negative list for foreign investment in thefinancial sector was removed, in February 2020,
Mastercard became the second foreign-invested card
settlement institution permitted to make preparations
to set up.
· In April, the CSRC removed the restriction on foreign
shareholding of securities companies pursuant to the
Sino-US Economic and Trade Agreement (First Phase).
· In May, the PBOC granted permission to Fitch Rating
to become the second foreign credit rating agency.
· In June, the CSRC approved J.P. Morgan Futures tobecome the first wholly foreign-owned futures company.
· In August, BlackRock was approved to set up the firstwholly foreign-owned fund management company.
· In September, the applications of Neuberger andFidelity to set up fund management companies were
accepted.
· In October, Standard Chartered’s application for setting
up the first wholly foreign-owned securities company
was received by the CSRC.
Other financial sector businesses were given approval forthe first time to be made accessible to foreign investors.
The first wholly foreign-owned money brokerage company
was approved in September. The Chinese subsidiary of S&P
became the first foreign credit rating agency to complete
securities credit rating filing with the CSRC (a new license
after the amended Securities Law).

Upon these foreign-invested institutions entering the
China financial services market, some will have the effectof spurring competition with domestic financial
institutions (e.g., credit rating agencies); it remains to be
seen how many of them will be successful in introducing
advanced offshore experience and technology (e.g., asset
management companies). However, we can expect morein the same vein in the future, with more qualified andcompetent foreign institutions further stimulating the
Chinese financial market.
In terms of cross-border capital market investment andfinancing: the pilot “cross-border wealth management
connect” was due to be launched in the Greater Bay Area.
In September, the new rules on the Qualified Foreign
Institutional Investor (QFII) were issued, which had theeffect of lowering the access requirement and enlarging
the investment scope of the QFII program. The State
Administration of Foreign Exchange (SAFE) has updated
the Qualified Domestic Institutional Investor (QDII) quotas
regularly, increasing it by three times since September
with a total new quota of US$12.7 billion to 71 institutions.
This was the first time in nearly a year and a half that theSAFE had increased the quota allotment. Shanghai hasannounced that it intends to expand the offshore
investment scope of QDIIs, and several cities haveincreased the scale of qualified domestic limited partner(QDLP)/qualified domestic investment enterprise (QDIE)
schemes. More QDLP pilot areas were introduced. In
October, SDIC Power became the fourth Chinese entity toissue GDRs under the "Shanghai-London Stock Connect"scheme following in the footsteps of Huatai Securities,
China Pacific Insurance and China Yangtze Power.
There were significant breakthroughs in terms ofcross-border financial cooperation, regulation andenforcement. There is scope for greater international
financial regulation as provided for under the frameworkof the new Securities Law. One example of cross-bordercooperation was the Luckin Coffee financial fraud case inwhich the CSRC, in accordance with the cross-bordersupervision operation with the International Organizationof Securities Commissions (IOSCO), assisted the US

Securities and Exchange Commission (SEC) in the
cross-border investigation. The CSRC worked with theEuropean Union on QCCP regulatory equivalence
assessment, and China’s four futures exchanges havebeen included in the European Securities and Markets
Authority (ESMA)’s third-country post-trade transparency
positive list.

PRC Financial Regulation:
Annual Report (2021)
105PRC Financial Regulation:
Annual Report (2021)
11

With separate supervision as the key theme, focus of
regulation being switched from institutions based regulation
to function based regulation, and there being further
emphasis on macro-prudential and innovative regulation

There was much debate over the possibility of commercial
banks being permitted to set up securities companies.
However, the position remained that each type ofbusiness will continue to be separately regulated. The
revised consultation draft of the Commercial Bank Law
also retained the requirement for separate regulation ofdifferent types of institutions. As we previously forecast, theregulatory authorities have actively explored a greater
focus on function-based regulation and greater coordinationof regulation in specific areas.
The Financial Stability and Development Commission
and the PBOC took the lead in coordinating regulationof financial institutions. The commission held approximately
40 meetings in 2020, four times as many as in 2019, andalso issued 11 financial reform measures to promote risk
disposal and the reform and development of thefinancial sector.
In terms of specific policy tools, in the amendment draft of
the Law of the People’s Bank of China, some of themultiple macro-prudential policies available to the PBOC
already fell into the regulation scope of the CBIRC. The
formal rules applying to financial holding companies, which
impose unified regulation on a group of institutions on
a look-through basis, add a new license on top of credit
reporting, credit rating, payment and other financial
licenses in charge by the PBOC.
At the specific financial products level, the trend wastowards closer cooperation and interconnection between
regulatory authorities. The Shanghai Stock Exchange
and Shenzhen Stock Exchange clarified the specificconditions under which banks can participate inexchange-traded bond market transactions. The PBOC
and the CSRC agreed to interconnect the infrastructureof the inter-bank bond market and the exchange-tradedbond market to create a unified market with a unified price.
Meanwhile, function-based regulation continued playing
an important role in 2020, and regulators emphasizedthat the financial sector is a licensed industry andrelevant activities must be licensed: in order to truly
address regulatory gaps and the scope for regulatory

arbitrage, emerging financial activities will be fully andproperly regulated and all financial products with thesame functions and the same legal relationships will be
regulated by the same regulatory authorities under thesame regulations.
In 2020, the regulatory authorities filled in the regulatory
gaps, and clarified the scope of regulatory overlapping
areas. Following confirmation under the new Securities
Law that the CSRC had all the regulatory power overasset management products, a consultation draft aboutmutual fund managers was issued, requiring wealthmanagement subsidiaries of commercial banks toobtain their own licenses. The CBIRC has formulated
specific regulations for micro-finance companies andfinancial leasing companies, following the change of
regulator of pawnbrokers and financial leasing companies to
CBIRC in recent years. In addition, the licensing requirement for
financial holding companies strengthened the regulationand management over financial institutions held by or
actually controlled by non-financial institutions. Overall,
gaps in regulations and guidance that had come about
largely for historical reasons were plugged.
It is worth noting that the regulatory authorities haveshown a willingness to innovate in special areas. One
example is the initiative to create fintech regulatory
sandboxes involving the “Ten Cities” pilot launched at
the end of 2019. Since then, nine “regulatory sandbox”
pilot cities have publicly announced 60 pilot projects
within one year. The new Securities Law, for the firsttime, established an administrative settlement system.
The Measures for the Implementation of Securities andFutures Administrative Settlement (Consultation Draft)
will promote administrative settlement in administrative
enforcement of securities and futures regulations.

6Top-level guidance, with coordination between central andlocal governments

As we stated in our PRC Financial Regulation Annual
Report (2020), financial reform has continued on thebasis of “top-level promotion and coordinated regulation”. In
2020, the Financial Stability and Development Commission
established offices in all provinces, within local PBOC
branches and under the leadership and operational
guidance of the central Financial Stability and Development
Commission. The local financial regulation framework
was established. In 2020, local governments led theprocess of risk disposal of financial institutions, including
several small and medium-sized banks and trust companies,
such as Sichuan Bank and Sichuan Trust. This echoed
the repeated instructions from the central governmentthat local governments exercise their responsibilities
for the day-to-day and case-by-case regulation of financial
institutions.
For financial leasing companies, the central government
sets the regulations and local governments are responsiblefor implementing those regulations and managing risk
disposals. The Regulations on the Prevention and Disposalof Illegal Fundraising (Draft) also provided that the provincial
governments had the overall responsibility for theprevention of illegal fundraising. On this basis, a number of
local financial service bureaus, such as those in Shandongand Hubei provinces, published lists of quasi-financial
institutions, including the financial leasing companies
and commercial factoring companies, and implemented alist-based management system.
At the policy level, local governments were given more
space for institutional innovation and regulatory flexibility.
For example, Shanghai issued the Opinions on Further
Accelerating the Construction of Shanghai International
Financial Center and Financial Support for the Integrated
Development of the Yangtze River Delta, Shenzhen issued

the Implementation Plan for the Comprehensive Reform
Pilot Program for the Construction of a Pilot Socialism
Demonstration Zone with Chinese Characteristics (2020-2025),
and Hainan issued new policies concerning its free tradezone. It will be interesting to see how local financial
regulatory authorities implement daily regulation andthe impact this will have within the existing regulatory
framework.

PRC Financial Regulation:
Annual Report (2021)
105PRC Financial Regulation:
Annual Report (2021)
11

With separate supervision as the key theme, focus of
regulation being switched from institutions based regulation
to function based regulation, and there being further
emphasis on macro-prudential and innovative regulation

There was much debate over the possibility of commercial
banks being permitted to set up securities companies.
However, the position remained that each type ofbusiness will continue to be separately regulated. The
revised consultation draft of the Commercial Bank Law
also retained the requirement for separate regulation ofdifferent types of institutions. As we previously forecast, theregulatory authorities have actively explored a greater
focus on function-based regulation and greater coordinationof regulation in specific areas.
The Financial Stability and Development Commission
and the PBOC took the lead in coordinating regulationof financial institutions. The commission held approximately
40 meetings in 2020, four times as many as in 2019, andalso issued 11 financial reform measures to promote risk
disposal and the reform and development of thefinancial sector.
In terms of specific policy tools, in the amendment draft of
the Law of the People’s Bank of China, some of themultiple macro-prudential policies available to the PBOC
already fell into the regulation scope of the CBIRC. The
formal rules applying to financial holding companies, which
impose unified regulation on a group of institutions on
a look-through basis, add a new license on top of credit
reporting, credit rating, payment and other financial
licenses in charge by the PBOC.
At the specific financial products level, the trend wastowards closer cooperation and interconnection between
regulatory authorities. The Shanghai Stock Exchange
and Shenzhen Stock Exchange clarified the specificconditions under which banks can participate inexchange-traded bond market transactions. The PBOC
and the CSRC agreed to interconnect the infrastructureof the inter-bank bond market and the exchange-tradedbond market to create a unified market with a unified price.
Meanwhile, function-based regulation continued playing
an important role in 2020, and regulators emphasizedthat the financial sector is a licensed industry andrelevant activities must be licensed: in order to truly
address regulatory gaps and the scope for regulatory

arbitrage, emerging financial activities will be fully andproperly regulated and all financial products with thesame functions and the same legal relationships will be
regulated by the same regulatory authorities under thesame regulations.
In 2020, the regulatory authorities filled in the regulatory
gaps, and clarified the scope of regulatory overlapping
areas. Following confirmation under the new Securities
Law that the CSRC had all the regulatory power overasset management products, a consultation draft aboutmutual fund managers was issued, requiring wealthmanagement subsidiaries of commercial banks toobtain their own licenses. The CBIRC has formulated
specific regulations for micro-finance companies andfinancial leasing companies, following the change of
regulator of pawnbrokers and financial leasing companies to
CBIRC in recent years. In addition, the licensing requirement for
financial holding companies strengthened the regulationand management over financial institutions held by or
actually controlled by non-financial institutions. Overall,
gaps in regulations and guidance that had come about
largely for historical reasons were plugged.
It is worth noting that the regulatory authorities haveshown a willingness to innovate in special areas. One
example is the initiative to create fintech regulatory
sandboxes involving the “Ten Cities” pilot launched at
the end of 2019. Since then, nine “regulatory sandbox”
pilot cities have publicly announced 60 pilot projects
within one year. The new Securities Law, for the firsttime, established an administrative settlement system.
The Measures for the Implementation of Securities andFutures Administrative Settlement (Consultation Draft)
will promote administrative settlement in administrative
enforcement of securities and futures regulations.

6Top-level guidance, with coordination between central andlocal governments

As we stated in our PRC Financial Regulation Annual
Report (2020), financial reform has continued on thebasis of “top-level promotion and coordinated regulation”. In
2020, the Financial Stability and Development Commission
established offices in all provinces, within local PBOC
branches and under the leadership and operational
guidance of the central Financial Stability and Development
Commission. The local financial regulation framework
was established. In 2020, local governments led theprocess of risk disposal of financial institutions, including
several small and medium-sized banks and trust companies,
such as Sichuan Bank and Sichuan Trust. This echoed
the repeated instructions from the central governmentthat local governments exercise their responsibilities
for the day-to-day and case-by-case regulation of financial
institutions.
For financial leasing companies, the central government
sets the regulations and local governments are responsiblefor implementing those regulations and managing risk
disposals. The Regulations on the Prevention and Disposalof Illegal Fundraising (Draft) also provided that the provincial
governments had the overall responsibility for theprevention of illegal fundraising. On this basis, a number of
local financial service bureaus, such as those in Shandongand Hubei provinces, published lists of quasi-financial
institutions, including the financial leasing companies
and commercial factoring companies, and implemented alist-based management system.
At the policy level, local governments were given more
space for institutional innovation and regulatory flexibility.
For example, Shanghai issued the Opinions on Further
Accelerating the Construction of Shanghai International
Financial Center and Financial Support for the Integrated
Development of the Yangtze River Delta, Shenzhen issued

the Implementation Plan for the Comprehensive Reform
Pilot Program for the Construction of a Pilot Socialism
Demonstration Zone with Chinese Characteristics (2020-2025),
and Hainan issued new policies concerning its free tradezone. It will be interesting to see how local financial
regulatory authorities implement daily regulation andthe impact this will have within the existing regulatory
framework.

PRC Financial Regulation:
Annual Report (2021)
12

7

Rising requirements for equity and corporate governance infinancial institutions and quasi-financial institutions

As a traditionally highly-regulated industry, one of thecore directions of the reform of financial regulation is toimprove financial institutions’ internal governance andcompliance. Having effective governance also helps toprevent financial risk.
Many regulations were issued in 2020, covering theactivities of various financial institutions including securities
companies, fund management companies, trust companies
and commercial banks. These regulations relate to theequity management and the supervision of such companies,
with the purpose of raising the standard of corporate
governance of financial institutions. By way of examples,the proposed amendment to the Commercial Bank Law
adds a specific chapter covering corporate governanceof commercial banks; the draft rule for mutual fundmanagers, for the first time, requires independent directors
to comprise no less than one half of the board where
there is one controlling shareholder; non-financial companies
intending to become the controlling shareholder of

8

PRC Financial Regulation:
Annual Report (2021)
13

trust companies are subject to strict qualification
requirements; and the draft Measures on Equity Managementof Securities Companies newly introduced many provisions,
including prohibiting the use of the valuation adjustment
mechanism (VAM) in relation to the equity interests of
securities companies.
Enforcement was stepped up. In its review of the market
chaos, the CBIRC focused on the corporate governanceof financial institutions, including assessing equity
management, the effectiveness of the system of boardof directors, board of supervisors and senior management,
and the management of related transactions and theconsolidation of financial statements. One of the reasons
announced by the CSRC for taking over the financial
institutions of the Ming Tian Group was that the group
had concealed its actual controllers and shareholding
percentages, resulting in skewed internal governance.

Protecting personal information
security and safeguarding the legitimate
rights and interests of financial
consumers

The first statute to protect the rights and interests offinancial consumers, The Implementation Measures for
the Protection of the Rights and Interests of Financial
Consumers, was issued; investors were given greater
protection with the gradual implementation of the“special representative system” to settle disputes involving
securities under the new Securities Law; and regulations
were issued covering internet insurance sales and thesales of products by wealth management subsidiaries
of commercial banks, both of which aimed at preventing
illegal marketing and thus providing consumers withgreater protection.
For the purpose of protecting financial customers, theprotection of personal data in the digital era has been
the absolute imperative in the financial sector. The Ministryof Industry and Information Technology (MIIT) cracked

down on several financial apps for infringing the rights
and interests of users, involving multiple types of financial
institutions, including banks, funds and micro-financecompanies. Legislation was passed to help regulate useof personal financial information from various angles,
including the Technical Specifications for the Protectionof Personal Financial Information, the Data Security Law(Draft) and the Personal Information Protection Law (Draft).
At the enforcement level, regulators frequently imposedfines and publicly chastised those found to have breacheddata protection regulations. Failure in taking effective
measures to protect customer information security,
information leakage, and misuse of customer information
were listed as the key rectification areas by the CBIRC
in its review on market chaos.

2021 Regulatory Outlook

1

Maintaining financial stability, preventing and diffusingmajor financial risks

The bottom line of China’s financial regulation is to avoid
systemic financial risk, and this will continue to guide theformulation of specific financial regulatory policies in
2021. In the coming year, the global economy may
continue to face the issues such as uncertainty or evenrecurrence of the pandemic. In terms of preventing anddiffusing major financial risks, there still exists a large
number of high-risk financial institutions that need to be
sold off or otherwise disposed of, and the risks of large
non-financial enterprises are very likely to spread tofinancial institutions by way of bond defaults or increase in
distressed assets, among others. The risk disposal ofhigh-risk financial institutions and other large enterprisegroups will continue to be the regulatory focus in 2021.
From the legislative perspective, it is expected that theregulatory authorities will:· accelerate the promulgation of the implementation
rules for regulating financial holding companies;· issue the implementation rules for regulating systemicallyimportant financial institutions (including releasing
a list of, and imposing additional regulatory requirements
for, systemically important banks), and likely set
standards for systemically important securities andinsurance companies;· promote inter-bank bond market trading system; and· formally amend the Law of the People's Bank of China
and other fundamental financial laws, as part of theprocess of building a modern centralized banking
system.
As the grace period of the Asset Management New Rules
is now extended to the end of 2021, it remains to be

seen whether regulatory authorities will implement
differentiated regulatory measures on a case-by-casebasis to deal with individual financial institutions thatcannot meet requirements to improve their operations
by the end of 2021.
We also expect to see rules on how the regulators will
implement the security review of foreign investment inimportant financial services companies.

PRC Financial Regulation:
Annual Report (2021)
12

7

Rising requirements for equity and corporate governance infinancial institutions and quasi-financial institutions

As a traditionally highly-regulated industry, one of thecore directions of the reform of financial regulation is toimprove financial institutions’ internal governance andcompliance. Having effective governance also helps toprevent financial risk.
Many regulations were issued in 2020, covering theactivities of various financial institutions including securities
companies, fund management companies, trust companies
and commercial banks. These regulations relate to theequity management and the supervision of such companies,
with the purpose of raising the standard of corporate
governance of financial institutions. By way of examples,the proposed amendment to the Commercial Bank Law
adds a specific chapter covering corporate governanceof commercial banks; the draft rule for mutual fundmanagers, for the first time, requires independent directors
to comprise no less than one half of the board where
there is one controlling shareholder; non-financial companies
intending to become the controlling shareholder of

8

PRC Financial Regulation:
Annual Report (2021)
13

trust companies are subject to strict qualification
requirements; and the draft Measures on Equity Managementof Securities Companies newly introduced many provisions,
including prohibiting the use of the valuation adjustment
mechanism (VAM) in relation to the equity interests of
securities companies.
Enforcement was stepped up. In its review of the market
chaos, the CBIRC focused on the corporate governanceof financial institutions, including assessing equity
management, the effectiveness of the system of boardof directors, board of supervisors and senior management,
and the management of related transactions and theconsolidation of financial statements. One of the reasons
announced by the CSRC for taking over the financial
institutions of the Ming Tian Group was that the group
had concealed its actual controllers and shareholding
percentages, resulting in skewed internal governance.

Protecting personal information
security and safeguarding the legitimate
rights and interests of financial
consumers

The first statute to protect the rights and interests offinancial consumers, The Implementation Measures for
the Protection of the Rights and Interests of Financial
Consumers, was issued; investors were given greater
protection with the gradual implementation of the“special representative system” to settle disputes involving
securities under the new Securities Law; and regulations
were issued covering internet insurance sales and thesales of products by wealth management subsidiaries
of commercial banks, both of which aimed at preventing
illegal marketing and thus providing consumers withgreater protection.
For the purpose of protecting financial customers, theprotection of personal data in the digital era has been
the absolute imperative in the financial sector. The Ministryof Industry and Information Technology (MIIT) cracked

down on several financial apps for infringing the rights
and interests of users, involving multiple types of financial
institutions, including banks, funds and micro-financecompanies. Legislation was passed to help regulate useof personal financial information from various angles,
including the Technical Specifications for the Protectionof Personal Financial Information, the Data Security Law(Draft) and the Personal Information Protection Law (Draft).
At the enforcement level, regulators frequently imposedfines and publicly chastised those found to have breacheddata protection regulations. Failure in taking effective
measures to protect customer information security,
information leakage, and misuse of customer information
were listed as the key rectification areas by the CBIRC
in its review on market chaos.

2021 Regulatory Outlook

1

Maintaining financial stability, preventing and diffusingmajor financial risks

The bottom line of China’s financial regulation is to avoid
systemic financial risk, and this will continue to guide theformulation of specific financial regulatory policies in
2021. In the coming year, the global economy may
continue to face the issues such as uncertainty or evenrecurrence of the pandemic. In terms of preventing anddiffusing major financial risks, there still exists a large
number of high-risk financial institutions that need to be
sold off or otherwise disposed of, and the risks of large
non-financial enterprises are very likely to spread tofinancial institutions by way of bond defaults or increase in
distressed assets, among others. The risk disposal ofhigh-risk financial institutions and other large enterprisegroups will continue to be the regulatory focus in 2021.
From the legislative perspective, it is expected that theregulatory authorities will:· accelerate the promulgation of the implementation
rules for regulating financial holding companies;· issue the implementation rules for regulating systemicallyimportant financial institutions (including releasing
a list of, and imposing additional regulatory requirements
for, systemically important banks), and likely set
standards for systemically important securities andinsurance companies;· promote inter-bank bond market trading system; and· formally amend the Law of the People's Bank of China
and other fundamental financial laws, as part of theprocess of building a modern centralized banking
system.
As the grace period of the Asset Management New Rules
is now extended to the end of 2021, it remains to be

seen whether regulatory authorities will implement
differentiated regulatory measures on a case-by-casebasis to deal with individual financial institutions thatcannot meet requirements to improve their operations
by the end of 2021.
We also expect to see rules on how the regulators will
implement the security review of foreign investment inimportant financial services companies.

PRC Financial Regulation:
Annual Report (2021)
142

PRC Financial Regulation:
Annual Report (2021)
15

Deepening market-oriented financial reforms,
multi-dimensional financial opening-up to be expected

The year 2021 will be the year when market-oriented
financial reform reaches fruition. The registration-based
IPO system, based on the existing experience, is likely toapply to the whole market. Detailed rules and procedures for
NEEQ Select Tier companies (the equity market for small
and medium-sized enterprises) to transfer their listings
to the main board are expected to be published. The
authorities will further look into the “easy entry, strict exit”
approach to the listing and delisting of companies on
stock markets, and the reform of the new delisting
system is expected to be further implemented in 2021.
Further measures to reform the operation of the financial
sector include restructuring small and medium-sizedbanks and continuing the process of issuing licenses toprivate banks. The above policies, which might involve
either direct financial support to enterprises or facilitatingcompanies to obtain financial licenses, will support thedevelopment of the real economy under the banner ofmarket-oriented financial reforms.
We can also expect to see attention focused on how private
enterprises are financed, a situation that has been
exacerbated by the reduction in shadow banking andcontrols over private lending interest rates. It remains tobe seen whether substantive measures will be adopted in
2021 to give preferential treatment for the financing ofprivate enterprises, so as to solve the “dual-track”
differentiation applied to the financing of SOEs andprivate enterprises. The role of the financial sector to
support real economy will continue to be the long-term
strategy given the uncertainty facing the global economy
and the growing risks facing the financial sector generally.
Part and parcel of the market-oriented reforms is the
opening-up of the financial sector, by granting foreigncompanies the same treatment and regulation as domestic
companies (i.e. “national treatment”).
Following the lifting of restrictions on foreign shareholding in
the banking, securities, fund management, futures, andlife insurance businesses, we expect to see more
foreign-invested financial institutions being granted
access in 2021. The government will make it easier forforeign companies to access the capital markets by:further simplifying the channels and methods for foreign
investors to participate in China's capital markets following
the new QFII rules, an increasing interconnection between
domestic and overseas markets, increased access ofinternational investors to exchange-traded bond markets,and the introduction of more commodity and stock index
futures options.
There remain obstacles facing foreign financial services
companies. There is still invisible discrimination, andfor the purpose of macro-prudential management andmaintaining the overall stability of the financial market,
in practice it may be extremely difficult for foreigncompanies to obtain licenses to operate in certain areas,
including securing licenses for payments, credit ratingsand local financial asset management companies. There
are also other reasons which may make it less attractive
for foreign investors, such as foreign exchange restrictions.
Overall, we still expect the process of opening up thefinancial sector to foreign participation to continue andmove towards foreign businesses being given national
treatment, with some potential breakthroughs in 2021.

3

Tight regulation and zero tolerance being the main thrusts offinancial regulation in 2021

In 2021, financial law enforcement will be more stringent.
The revised draft of the Law of People's Bank of China
shows a trend of increasing penalties for illegal financial
activities. The Amendment to the Criminal Law (XI), which
will come into effect on 1 March 2021, coheres with theamended Securities Law and significantly increases thepenalties for financial crimes such as information disclosure
fraud and market manipulation. The legislation progressof the Futures Law will be accelerated, and the regulations
on the supervision of listed companies and private equity
funds are expected to be issued. The Regulations on thePrevention and Disposal of Illegal Fundraising will become
the first specific regulations on illegal fundraising after
its formal issuance. The above laws and policies all
demonstrate the determination of regulatory authorities
to strengthen the regulation over illegal and criminal
financial acts.
Following completion of the work to address P2P problems,
regulators will look to address any left over issues following
the closing of businesses. Unqualified persons andbusinesses suspected of illegal fundraising through live
broadcasting will also be cracked down upon. Non-bankfinancial institutions will be required to be licensed andmore regulations will apply to quasi-financial institutions
as if they were financial institutions.
At the same time, regulatory authorities will continue toexplore innovative ways to regulate and enforce. The
approach of administrative settlement may be further
expanded to the PBOC and the banking and insurance

regulatory system, which brings together regulatory
administration in a clearer structure from the experienceof the CSRC. In terms of law enforcement, there will be
more regulatory coordination. Under the unified commandand coordination of the Financial Stability and Development
Commission, the CSRC will set up a coordination working
group to combat illegal activities in the capital markets.
Regulatory Technology (RegTech) will become a powerful
instrument to improve the effectiveness of regulation.
Based on publicly available information, the PBOC is
actively building up a regulatory technology application
framework, the CSRC has established a new Technology
Regulatory Bureau, and the CBRC is redoubling efforts
to promote a regulatory big data platform.
For cross-border regulation, we may see supporting ruleson the extraterritorial application under the new Securities
Law. We look forward to more interaction and cooperation
between Chinese regulatory authorities and overseas
regulatory authorities in cross-border law enforcementin 2021.

PRC Financial Regulation:
Annual Report (2021)
142

PRC Financial Regulation:
Annual Report (2021)
15

Deepening market-oriented financial reforms,
multi-dimensional financial opening-up to be expected

The year 2021 will be the year when market-oriented
financial reform reaches fruition. The registration-based
IPO system, based on the existing experience, is likely toapply to the whole market. Detailed rules and procedures for
NEEQ Select Tier companies (the equity market for small
and medium-sized enterprises) to transfer their listings
to the main board are expected to be published. The
authorities will further look into the “easy entry, strict exit”
approach to the listing and delisting of companies on
stock markets, and the reform of the new delisting
system is expected to be further implemented in 2021.
Further measures to reform the operation of the financial
sector include restructuring small and medium-sizedbanks and continuing the process of issuing licenses toprivate banks. The above policies, which might involve
either direct financial support to enterprises or facilitatingcompanies to obtain financial licenses, will support thedevelopment of the real economy under the banner ofmarket-oriented financial reforms.
We can also expect to see attention focused on how private
enterprises are financed, a situation that has been
exacerbated by the reduction in shadow banking andcontrols over private lending interest rates. It remains tobe seen whether substantive measures will be adopted in
2021 to give preferential treatment for the financing ofprivate enterprises, so as to solve the “dual-track”
differentiation applied to the financing of SOEs andprivate enterprises. The role of the financial sector to
support real economy will continue to be the long-term
strategy given the uncertainty facing the global economy
and the growing risks facing the financial sector generally.
Part and parcel of the market-oriented reforms is the
opening-up of the financial sector, by granting foreigncompanies the same treatment and regulation as domestic
companies (i.e. “national treatment”).
Following the lifting of restrictions on foreign shareholding in
the banking, securities, fund management, futures, andlife insurance businesses, we expect to see more
foreign-invested financial institutions being granted
access in 2021. The government will make it easier forforeign companies to access the capital markets by:further simplifying the channels and methods for foreign
investors to participate in China's capital markets following
the new QFII rules, an increasing interconnection between
domestic and overseas markets, increased access ofinternational investors to exchange-traded bond markets,and the introduction of more commodity and stock index
futures options.
There remain obstacles facing foreign financial services
companies. There is still invisible discrimination, andfor the purpose of macro-prudential management andmaintaining the overall stability of the financial market,
in practice it may be extremely difficult for foreigncompanies to obtain licenses to operate in certain areas,
including securing licenses for payments, credit ratingsand local financial asset management companies. There
are also other reasons which may make it less attractive
for foreign investors, such as foreign exchange restrictions.
Overall, we still expect the process of opening up thefinancial sector to foreign participation to continue andmove towards foreign businesses being given national
treatment, with some potential breakthroughs in 2021.

3

Tight regulation and zero tolerance being the main thrusts offinancial regulation in 2021

In 2021, financial law enforcement will be more stringent.
The revised draft of the Law of People's Bank of China
shows a trend of increasing penalties for illegal financial
activities. The Amendment to the Criminal Law (XI), which
will come into effect on 1 March 2021, coheres with theamended Securities Law and significantly increases thepenalties for financial crimes such as information disclosure
fraud and market manipulation. The legislation progressof the Futures Law will be accelerated, and the regulations
on the supervision of listed companies and private equity
funds are expected to be issued. The Regulations on thePrevention and Disposal of Illegal Fundraising will become
the first specific regulations on illegal fundraising after
its formal issuance. The above laws and policies all
demonstrate the determination of regulatory authorities
to strengthen the regulation over illegal and criminal
financial acts.
Following completion of the work to address P2P problems,
regulators will look to address any left over issues following
the closing of businesses. Unqualified persons andbusinesses suspected of illegal fundraising through live
broadcasting will also be cracked down upon. Non-bankfinancial institutions will be required to be licensed andmore regulations will apply to quasi-financial institutions
as if they were financial institutions.
At the same time, regulatory authorities will continue toexplore innovative ways to regulate and enforce. The
approach of administrative settlement may be further
expanded to the PBOC and the banking and insurance

regulatory system, which brings together regulatory
administration in a clearer structure from the experienceof the CSRC. In terms of law enforcement, there will be
more regulatory coordination. Under the unified commandand coordination of the Financial Stability and Development
Commission, the CSRC will set up a coordination working
group to combat illegal activities in the capital markets.
Regulatory Technology (RegTech) will become a powerful
instrument to improve the effectiveness of regulation.
Based on publicly available information, the PBOC is
actively building up a regulatory technology application
framework, the CSRC has established a new Technology
Regulatory Bureau, and the CBRC is redoubling efforts
to promote a regulatory big data platform.
For cross-border regulation, we may see supporting ruleson the extraterritorial application under the new Securities
Law. We look forward to more interaction and cooperation
between Chinese regulatory authorities and overseas
regulatory authorities in cross-border law enforcementin 2021.

PRC Financial Regulation:
Annual Report (2021)
16

4

PRC Financial Regulation:
Annual Report (2021)
17

Fintech to be further regulated and licensed, with greater
protection for consumers

2020 was the watershed of fintech regulation, as theauthorities took the view that fintech should not beseen as separate from finance, especially from a risk
perspective. The focus of regulation in 2021 will be on
the requirements for licensed operation, antitrust
implications and the prevention of disorderly expansion,
all of which were flagged up in 2020. Those fintech
companies considered to have significant influence on
the “platform economy” may find themselves the subjectsof further stringent regulation.
The pandemic has certainly accelerated the “non-contact”
digitalization of financial institutions. In this connection,
fintech has undoubtedly helped to improve financial
services but it also blurs the boundaries between financial
institutions, posing new challenges to financial stability
and financial regulation. 2021 is the last year of the
Financial Technology (FinTech) Development Plan
(2019-2021). Following the 2020 path set out, regulation in
2021 will continue to emphasize that financial activities
must be licensed, and fintech services that fall into grey
areas between technology and finance will be regulated
as financial services companies, depending on their
specific businesses. Thus, it can be predicted that in
2021, more regulatory rules in the field of fintech will be
introduced, the regulatory framework under which
fintech companies operate will be developed, andadvanced financial technologies will be applied toregulate every aspect of fintech products including dataprotection, supply chain security and cross-business risk,
so as to establish the whole life cycle management

mechanism of fintech innovation products. This will also
serve to promote closer collaboration between fintech
companies and commercial banks and continue theredefinition of fintech as finance.
The protection of the rights and interests of small andmedium-sized investors and financial consumers has
always been the focus of regulation and law enforcement. In
2021, the framework of financial consumer protection,
especially the regulatory system involving fintech enterprises
will be further enhanced, including the ex-post protection
mechanism for small and medium-sized investors andfinancial consumers. On the basis of the framework of
personal information protection under the Civil Code,the information protection legislation, such as the Personal
Information Protection Law and the Cybersecurity Law, is
expected to be formally issued, and the PBOC will formulate
the Interim Measures for the Protection of Personal Financial
Information.

5

Judicial practice will further promote the implementation offinancial regulatory policies

Judicial practice will play a larger role in implementing
financial regulatory policies and preventing financial
risks. After the issue of the Asset Management New Rules,
the Hunan High Court issued a judgment declaring
guaranteed returns on the asset management productas void. This ruling clarified the judicial interpretation of
the guaranteed return clause commonly used in asset
management contracts, and was therefore of great
importance in invalidating the guaranteed return ofasset management products.
In 2020, several asset management companies were
punished for violation of regulations in connection withminimum return guarantees or no-investment loss
promises, and the financial regulatory authorities alsoemphasized many times that the provisions on
guaranteed return should be void. However, in judicial
practice, following the Minutes of the National Courts'
Ninth Conference on Civil and Commercial Trial Work,
which clearly stipulated that the guaranteed returnclause of asset management products were void, thisjudgment was the first case to implement such rule.
With the grace period of the Asset Management New
Rules being extended to the end of 2021, we expect that
there will be more judicial precedents concerning thenon-effectiveness of guaranteed return terms. By
having investors take the risk of their investments, theregulatory and judicial rulings decreeing guaranteed
returns to be void will aid the process of financial
institutions laying off risks and prevent the transfer ofrisks to financial institutions. Although the courts willcontinue to have discretion when it comes to judicial
rulings on guaranteed returns, the trend of eliminatingsuch practices is irreversible.
The implementation of the new Securities Law served topull together administrative law enforcement, civil
recovery and criminal punishment. In addition to thedevelopment of administrative and criminal controls,
investors can rely on greater protections to enforce
their rights, including the securities civil compensation
system and securities class actions. More progress canbe expected in this regard in 2021, thereby establishing aconnection and synergy between administrative law
enforcement, civil recovery, and criminal punishment.
After the Supreme Court issued the provisions on classactions involving securities claims, we can expect to see
the first such class action soon. This should serve as areference for courts to handle other mass financial civil
disputes.

PRC Financial Regulation:
Annual Report (2021)
16

4

PRC Financial Regulation:
Annual Report (2021)
17

Fintech to be further regulated and licensed, with greater
protection for consumers

2020 was the watershed of fintech regulation, as theauthorities took the view that fintech should not beseen as separate from finance, especially from a risk
perspective. The focus of regulation in 2021 will be on
the requirements for licensed operation, antitrust
implications and the prevention of disorderly expansion,
all of which were flagged up in 2020. Those fintech
companies considered to have significant influence on
the “platform economy” may find themselves the subjectsof further stringent regulation.
The pandemic has certainly accelerated the “non-contact”
digitalization of financial institutions. In this connection,
fintech has undoubtedly helped to improve financial
services but it also blurs the boundaries between financial
institutions, posing new challenges to financial stability
and financial regulation. 2021 is the last year of the
Financial Technology (FinTech) Development Plan
(2019-2021). Following the 2020 path set out, regulation in
2021 will continue to emphasize that financial activities
must be licensed, and fintech services that fall into grey
areas between technology and finance will be regulated
as financial services companies, depending on their
specific businesses. Thus, it can be predicted that in
2021, more regulatory rules in the field of fintech will be
introduced, the regulatory framework under which
fintech companies operate will be developed, andadvanced financial technologies will be applied toregulate every aspect of fintech products including dataprotection, supply chain security and cross-business risk,
so as to establish the whole life cycle management

mechanism of fintech innovation products. This will also
serve to promote closer collaboration between fintech
companies and commercial banks and continue theredefinition of fintech as finance.
The protection of the rights and interests of small andmedium-sized investors and financial consumers has
always been the focus of regulation and law enforcement. In
2021, the framework of financial consumer protection,
especially the regulatory system involving fintech enterprises
will be further enhanced, including the ex-post protection
mechanism for small and medium-sized investors andfinancial consumers. On the basis of the framework of
personal information protection under the Civil Code,the information protection legislation, such as the Personal
Information Protection Law and the Cybersecurity Law, is
expected to be formally issued, and the PBOC will formulate
the Interim Measures for the Protection of Personal Financial
Information.

5

Judicial practice will further promote the implementation offinancial regulatory policies

Judicial practice will play a larger role in implementing
financial regulatory policies and preventing financial
risks. After the issue of the Asset Management New Rules,
the Hunan High Court issued a judgment declaring
guaranteed returns on the asset management productas void. This ruling clarified the judicial interpretation of
the guaranteed return clause commonly used in asset
management contracts, and was therefore of great
importance in invalidating the guaranteed return ofasset management products.
In 2020, several asset management companies were
punished for violation of regulations in connection withminimum return guarantees or no-investment loss
promises, and the financial regulatory authorities alsoemphasized many times that the provisions on
guaranteed return should be void. However, in judicial
practice, following the Minutes of the National Courts'
Ninth Conference on Civil and Commercial Trial Work,
which clearly stipulated that the guaranteed returnclause of asset management products were void, thisjudgment was the first case to implement such rule.
With the grace period of the Asset Management New
Rules being extended to the end of 2021, we expect that
there will be more judicial precedents concerning thenon-effectiveness of guaranteed return terms. By
having investors take the risk of their investments, theregulatory and judicial rulings decreeing guaranteed
returns to be void will aid the process of financial
institutions laying off risks and prevent the transfer ofrisks to financial institutions. Although the courts willcontinue to have discretion when it comes to judicial
rulings on guaranteed returns, the trend of eliminatingsuch practices is irreversible.
The implementation of the new Securities Law served topull together administrative law enforcement, civil
recovery and criminal punishment. In addition to thedevelopment of administrative and criminal controls,
investors can rely on greater protections to enforce
their rights, including the securities civil compensation
system and securities class actions. More progress canbe expected in this regard in 2021, thereby establishing aconnection and synergy between administrative law
enforcement, civil recovery, and criminal punishment.
After the Supreme Court issued the provisions on classactions involving securities claims, we can expect to see
the first such class action soon. This should serve as areference for courts to handle other mass financial civil
disputes.

PRC Financial Regulation:
Annual Report (2021)
18

PRC Financial Regulation:
Annual Report (2021) –1
Banking

PRC Financial Regulation:
Annual Report (2021)
19

2020 Key Dates

Late April“Yuan You Bao” event (a crude oil futures trading
product sold by the Bank of China resulting insubstantial losses).

July 17
The CBIRC published the Interim Measures on Internet
Loans of Commercial Banks.

August 20
In a judicial interpretation, the Supreme Court set theceiling on the legal private lending rate at four times
that of the loan prime rate (LPR).

September 18
The People’s Bank of China (PBOC) published the
Measures on Financial Consumer Protection.

November 16
Baoshang Bank announced that it wrote down the full
RMB6.5 billion tier-two capital bonds, due to the fact of
it being “insolvent and unable to survive”. November
23: The CBIRC agreed in principle that Baoshang Bank
could enter into bankruptcy proceedings.

December 11 andDecember 21
New license of direct banks with independent legal
person status was issued again after three years: China
Merchants Topology Bank and China Post Hui Wanjia
Bank were approved for establishment.

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

July 4The China Banking and Insurance Regulatory Commission(CBIRC) published the first list of “banking and insurance
institutions shareholders in major violation of laws andregulations”.

August 11
BlackRock, CCB Wealth Management, and Fullerton
were approved to establish the second foreign-controlledwealth management company in China; September 24:
Huihua Wealth Management, the first foreign-controlledwealth management company in China created by
Amundi and Bank of China Wealth Management, wasapproved to open for business, and on December 10
it launched its first publicly offered product.

September 9
The CBIRC approved the preparation for the establishmentof Sichuan Bank through the merger of two pre-existing
local institutions.

Mid-October
The PBOC published the draft revisions on People's Bankof China Law and Commercial Bank Law for public comment.

December 3
The PBOC and the CBIRC jointly issued the Assessment
Measures for Systemically Important Banks.

December 25
The CBIRC published the consultation paper of Interim
Measures on Sales of Wealth Management Products by
Wealth Management Subsidiaries of Commercial Banksfor public comment.

PRC Financial Regulation:
Annual Report (2021)
18

PRC Financial Regulation:
Annual Report (2021) –1
Banking

PRC Financial Regulation:
Annual Report (2021)
19

2020 Key Dates

Late April“Yuan You Bao” event (a crude oil futures trading
product sold by the Bank of China resulting insubstantial losses).

July 17
The CBIRC published the Interim Measures on Internet
Loans of Commercial Banks.

August 20
In a judicial interpretation, the Supreme Court set theceiling on the legal private lending rate at four times
that of the loan prime rate (LPR).

September 18
The People’s Bank of China (PBOC) published the
Measures on Financial Consumer Protection.

November 16
Baoshang Bank announced that it wrote down the full
RMB6.5 billion tier-two capital bonds, due to the fact of
it being “insolvent and unable to survive”. November
23: The CBIRC agreed in principle that Baoshang Bank
could enter into bankruptcy proceedings.

December 11 andDecember 21
New license of direct banks with independent legal
person status was issued again after three years: China
Merchants Topology Bank and China Post Hui Wanjia
Bank were approved for establishment.

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

July 4The China Banking and Insurance Regulatory Commission(CBIRC) published the first list of “banking and insurance
institutions shareholders in major violation of laws andregulations”.

August 11
BlackRock, CCB Wealth Management, and Fullerton
were approved to establish the second foreign-controlledwealth management company in China; September 24:
Huihua Wealth Management, the first foreign-controlledwealth management company in China created by
Amundi and Bank of China Wealth Management, wasapproved to open for business, and on December 10
it launched its first publicly offered product.

September 9
The CBIRC approved the preparation for the establishmentof Sichuan Bank through the merger of two pre-existing
local institutions.

Mid-October
The PBOC published the draft revisions on People's Bankof China Law and Commercial Bank Law for public comment.

December 3
The PBOC and the CBIRC jointly issued the Assessment
Measures for Systemically Important Banks.

December 25
The CBIRC published the consultation paper of Interim
Measures on Sales of Wealth Management Products by
Wealth Management Subsidiaries of Commercial Banksfor public comment.

PRC Financial Regulation:
Annual Report (2021)
20

PRC Financial Regulation:
Annual Report (2021)
21

2020 Regulatory Observations

1

Banking sector continuing to open up,
reinforced by supporting policies

Foreign banks and institutions responded positively tothe various measures introduced in 2019 that further
opened up the banking sector. Through 2020, foreign
investors invested in various banks or bank subsidiaries.
For example, the direct sales bank CITIC Baixin Bank
introduced Canada Pension Fund Investment Company tobecome a major shareholder; Temasek's Fullerton
Financial Holdings established a joint venture with the
Bank of China to create a network of village and townshipbanks in the name of BOC Fullerton Community Bank;and approval was given to Blackrock, CCB and Fullerton toestablish China's second foreign-controlled wealthmanagement company.

2

In late 2020, the CBIRC issued the Implementing Measures on
Administrative Permission Matters of Trust Companies, whichremoved the requirement that foreign financial
institutions must have at least US$1 billion in total assets
to invest in trust companies. The Shanghai Financial
Court made the first ruling in China to recognize andenforce a Hong Kong court's ruling upholding the validityof a “keepwell agreement” in favor of offshore creditors.
This was an important milestone in China's financial
environment as it continues to operate more on thebasis of market principles and in closer alignment withinternational rules.

Two major banking laws amended,
strengthening PBOC’s macro-prudential
regulation

Draft revisions to both the People's Bank of China Law
and the Commercial Bank Law were made in October
2020. The revisions aimed to turn into law well-establisheddevelopments in the banking sector and new regulatory
practices. These include: clarifying the different functionsof the PBOC and the CBIRC in banking regulation; clarifying
and strengthening the PBOC’s role in regulation ofsystemically important banks, financial holding companies

and macro-prudential policies; affirming the central bank'srole in maintaining financial stability; and laying down
requirements on organizations to dispose of financial
risk. The two revision drafts also proposed significantly
increased penalties for financial violations of the laws,
as well as providing for new banking developments
such as the issuance of digital currency.

3

The “Yuan You Bao” event exposing Bank of China’s
risk management failings, leading to tighter
regulation of complex financial products

4

Regulators exploring market-based approaches todispose of at-risk banks and calling a halt to“mandatory repayments”

On April 22, 2020, a Bank of China wealth management
product, "Yuan You Bao", caused investors to suffer massive
losses as a result of price fluctuation and a negative
settlement price of overseas crude oil futures to which
the product was linked. This caused widespread concern.
In addition to the sharp drop in demand for crude oil
due to the spread of the pandemic overseas, the bank's
risk management and investment expertise for the financial
product was considered to be one of the main factorsthat caused the event. The "Yuan You Bao" event sounded

The disposal of Hengfeng Bank in 2019 marked the startof regulators exploring how best to sell or otherwise
dispose of “at-risk” banks, using a combination ofadministrative controls and market solutions, as well as
engaging the participation of local governments. The
Hengfeng disposal was followed by a series of cases
through 2020, including: the CBIRC's instruction to Baoshang
Bank to write down in full the bank’s RMB6.5 billion tier2 capital bonds; the CBIRC’s consent in principle for
Baoshang Bank to enter into bankruptcy proceedings

an alarm for banks engaged in commodity trading. At
the same time, it brought pressure on regulators totighten their regulation of complex financial products,
including clarifying their legal definition and increasing
the accountability of those institutions issuing and sellingthem.

and the selection of Huishang Bank to acquire four of
Baoshang Bank’s branches. The above cases reflect
regulators’ determination to put an end to “mandatory
repayments”. Allowing at-risk banks carrying out businessin extremely poor operating conditions to exit the market
through normal bankruptcy procedures (despite using
some public funds to protect individual creditors) indicatesthe regulators’ attitude towards adopting moremarket-oriented solutions.

PRC Financial Regulation:
Annual Report (2021)
20

PRC Financial Regulation:
Annual Report (2021)
21

2020 Regulatory Observations

1

Banking sector continuing to open up,
reinforced by supporting policies

Foreign banks and institutions responded positively tothe various measures introduced in 2019 that further
opened up the banking sector. Through 2020, foreign
investors invested in various banks or bank subsidiaries.
For example, the direct sales bank CITIC Baixin Bank
introduced Canada Pension Fund Investment Company tobecome a major shareholder; Temasek's Fullerton
Financial Holdings established a joint venture with the
Bank of China to create a network of village and townshipbanks in the name of BOC Fullerton Community Bank;and approval was given to Blackrock, CCB and Fullerton toestablish China's second foreign-controlled wealthmanagement company.

2

In late 2020, the CBIRC issued the Implementing Measures on
Administrative Permission Matters of Trust Companies, whichremoved the requirement that foreign financial
institutions must have at least US$1 billion in total assets
to invest in trust companies. The Shanghai Financial
Court made the first ruling in China to recognize andenforce a Hong Kong court's ruling upholding the validityof a “keepwell agreement” in favor of offshore creditors.
This was an important milestone in China's financial
environment as it continues to operate more on thebasis of market principles and in closer alignment withinternational rules.

Two major banking laws amended,
strengthening PBOC’s macro-prudential
regulation

Draft revisions to both the People's Bank of China Law
and the Commercial Bank Law were made in October
2020. The revisions aimed to turn into law well-establisheddevelopments in the banking sector and new regulatory
practices. These include: clarifying the different functionsof the PBOC and the CBIRC in banking regulation; clarifying
and strengthening the PBOC’s role in regulation ofsystemically important banks, financial holding companies

and macro-prudential policies; affirming the central bank'srole in maintaining financial stability; and laying down
requirements on organizations to dispose of financial
risk. The two revision drafts also proposed significantly
increased penalties for financial violations of the laws,
as well as providing for new banking developments
such as the issuance of digital currency.

3

The “Yuan You Bao” event exposing Bank of China’s
risk management failings, leading to tighter
regulation of complex financial products

4

Regulators exploring market-based approaches todispose of at-risk banks and calling a halt to“mandatory repayments”

On April 22, 2020, a Bank of China wealth management
product, "Yuan You Bao", caused investors to suffer massive
losses as a result of price fluctuation and a negative
settlement price of overseas crude oil futures to which
the product was linked. This caused widespread concern.
In addition to the sharp drop in demand for crude oil
due to the spread of the pandemic overseas, the bank's
risk management and investment expertise for the financial
product was considered to be one of the main factorsthat caused the event. The "Yuan You Bao" event sounded

The disposal of Hengfeng Bank in 2019 marked the startof regulators exploring how best to sell or otherwise
dispose of “at-risk” banks, using a combination ofadministrative controls and market solutions, as well as
engaging the participation of local governments. The
Hengfeng disposal was followed by a series of cases
through 2020, including: the CBIRC's instruction to Baoshang
Bank to write down in full the bank’s RMB6.5 billion tier2 capital bonds; the CBIRC’s consent in principle for
Baoshang Bank to enter into bankruptcy proceedings

an alarm for banks engaged in commodity trading. At
the same time, it brought pressure on regulators totighten their regulation of complex financial products,
including clarifying their legal definition and increasing
the accountability of those institutions issuing and sellingthem.

and the selection of Huishang Bank to acquire four of
Baoshang Bank’s branches. The above cases reflect
regulators’ determination to put an end to “mandatory
repayments”. Allowing at-risk banks carrying out businessin extremely poor operating conditions to exit the market
through normal bankruptcy procedures (despite using
some public funds to protect individual creditors) indicatesthe regulators’ attitude towards adopting moremarket-oriented solutions.

PRC Financial Regulation:
Annual Report (2021)
22

5Commercial banks' internet loans starting to beformally regulated, while internet deposit
business coming to a sharp stop

The Interim Measures on Internet Loans of Commercial
Banks issued in July 2020 clarified the standard regulatory
rules relating to joint loans extended by commercial
banks as part of their online loan business and collaborating
institutions. These measures were the first formal
regulations in effect recognizing how developed theonline loan business had become and affirming the legal
position of joint internet loans at the regulatory level.
Regulators also stopped the banks’ business of collecting
individuals’ depositing funds via online platforms. Although
the PBOC and the CBIRC have yet to issue formal notices ordocuments on such internet deposit products, many
internet platforms (including Alipay, Tencent Wealth6

PRC Financial Regulation:
Annual Report (2021)
23

Management, and JD Finance) removed such products
following a speech by a PBOC official at the financial
forum in mid-December 2020, which gave strong signals
about the regulators’ intentions. Following that, on
December 24, the CBIRC Zhejiang Office issued a Notice on
Further Regulating Certain Issues in the Deposit Market in the
Jurisdiction, calling a halt to the cooperation between
banks and internet platforms to attract and solicit deposits.
Internet deposit products give rise to a range ofcompliance issues, including high interest rates being
charged, cross-regional solicitation of deposits byregional banks, and abuse of the deposit insurance
mark. It remains to be seen how regulators will regulatebanks’ internet platform deposit business in the future.

Licensed consumer and auto finance institutions
approved to expand their financing channels

Consumer finance and auto finance benefited fromnew regulations that were issued during the year. In
November 2020, the CBIRC General Office’s Notice on
Enhancing the Sustainable Development Capability and
Improving the Quality and Effectiveness of Financial
Services for Consumer Finance Companies and Auto
Finance Companies was issued. Companies offering
consumer finance and auto finance were permitted toreduce the provision rate for non-performing loans (NPLs)
from 150% to 130%. The policy also supports such two
types of companies to transfer the income rights attachedto these credit assets through the Credit Assets Registrationand Exchange System, and allows them to issue tier-2
bonds on the interbank market. The regulators’ support

to the consumer finance and auto finance industries
and the regulators’ strict regulation on the small loan
industry will lead to a change in the loan market, andconsumer finance and auto finance companies havenew development opportunities as a result of such changes.

7

Strict regulation of the banking sector becoming the norm,
commercial bank shareholders fined, and anti-money
laundering penalties significantly increased

Since 2017 when the China Banking Regulatory
Commission (reformed and renamed as CBIRC in 2018)
first started to address the erratic and disorderly eventsin the banking market, strict regulation has gradually
become the norm. In 2020, the CBIRC updated various
rules such as the CBIRC Administrative Penalty Measures andthe Code of Professional Conduct for Banking Practitioners
as part of its ongoing endeavors to strengthen theindustry regulation. In June 2020, the CBIRC Altay Office (inXinjiang Province) issued the first penalty notice against
a shareholder of a bank for holding more than 5% of theequity of a commercial bank without approval. This was
the first publicly disclosed case of penalty on shareholders
of a commercial bank; previously, only banks themselves

8

were punished for equity-related violations. In July
2020, the CBIRC published a list of shareholders who
were found to have been in breach of regulations andindicated that publishing such lists would be a regularoccurrence in the future.
Other developments include revisions to the Anti-Money
Laundering Law and increased penalties imposed by the
PBOC on those found to have been in breach ofanti-money laundering regulations. The total amount ofpenalties levied in the first four months of 2020 alone
exceeded those for the whole of 2019. This is all part of
the PBOC’s determination to take a firmer line on money
laundering.

Regulators continuing to focus on financial consumer
protection, introducing the first substantial financial
consumer protection regulation

In June 2020, the CBIRC issued the Notice on the "LookBack" Work on the Rectification of Market Disorder in the
Banking and Insurance Industry, which listed financial
institutions' failure to take effective measures to protect
customer information, and financial institutions’ leakage
and misuse of customer information as key priorities. In
September 2020, the PBOC issued the Measures on
Financial Consumer Protection, which were the first
regulations issued at Ministry level on financial consumer
protection. In addition, banking regulators have introduced
stronger, multi-dimensional regulations for personal
financial data security, and have issued several technicalstandards, guidelines and specifications for personal
financial data protection technology, including the

Personal Financial Information Protection Technical
Specification and Financial Data Security-Guidelines for
Data Security Classification. In practice, regulators have
paid close attention to commercial banks’ product issuanceand distribution, internal processes, and personal financial
data storage. Regulators have also increased the frequency
and levels of fines imposed on those in breach of
regulations. For example, in October 2020, the PBOC
publicly reported six cases where the branches of threelarge state-owned banks were found to have infringed
consumer financial data, the fines for which were overtens of millions renminbi.

PRC Financial Regulation:
Annual Report (2021)
22

5Commercial banks' internet loans starting to beformally regulated, while internet deposit
business coming to a sharp stop

The Interim Measures on Internet Loans of Commercial
Banks issued in July 2020 clarified the standard regulatory
rules relating to joint loans extended by commercial
banks as part of their online loan business and collaborating
institutions. These measures were the first formal
regulations in effect recognizing how developed theonline loan business had become and affirming the legal
position of joint internet loans at the regulatory level.
Regulators also stopped the banks’ business of collecting
individuals’ depositing funds via online platforms. Although
the PBOC and the CBIRC have yet to issue formal notices ordocuments on such internet deposit products, many
internet platforms (including Alipay, Tencent Wealth6

PRC Financial Regulation:
Annual Report (2021)
23

Management, and JD Finance) removed such products
following a speech by a PBOC official at the financial
forum in mid-December 2020, which gave strong signals
about the regulators’ intentions. Following that, on
December 24, the CBIRC Zhejiang Office issued a Notice on
Further Regulating Certain Issues in the Deposit Market in the
Jurisdiction, calling a halt to the cooperation between
banks and internet platforms to attract and solicit deposits.
Internet deposit products give rise to a range ofcompliance issues, including high interest rates being
charged, cross-regional solicitation of deposits byregional banks, and abuse of the deposit insurance
mark. It remains to be seen how regulators will regulatebanks’ internet platform deposit business in the future.

Licensed consumer and auto finance institutions
approved to expand their financing channels

Consumer finance and auto finance benefited fromnew regulations that were issued during the year. In
November 2020, the CBIRC General Office’s Notice on
Enhancing the Sustainable Development Capability and
Improving the Quality and Effectiveness of Financial
Services for Consumer Finance Companies and Auto
Finance Companies was issued. Companies offering
consumer finance and auto finance were permitted toreduce the provision rate for non-performing loans (NPLs)
from 150% to 130%. The policy also supports such two
types of companies to transfer the income rights attachedto these credit assets through the Credit Assets Registrationand Exchange System, and allows them to issue tier-2
bonds on the interbank market. The regulators’ support

to the consumer finance and auto finance industries
and the regulators’ strict regulation on the small loan
industry will lead to a change in the loan market, andconsumer finance and auto finance companies havenew development opportunities as a result of such changes.

7

Strict regulation of the banking sector becoming the norm,
commercial bank shareholders fined, and anti-money
laundering penalties significantly increased

Since 2017 when the China Banking Regulatory
Commission (reformed and renamed as CBIRC in 2018)
first started to address the erratic and disorderly eventsin the banking market, strict regulation has gradually
become the norm. In 2020, the CBIRC updated various
rules such as the CBIRC Administrative Penalty Measures andthe Code of Professional Conduct for Banking Practitioners
as part of its ongoing endeavors to strengthen theindustry regulation. In June 2020, the CBIRC Altay Office (inXinjiang Province) issued the first penalty notice against
a shareholder of a bank for holding more than 5% of theequity of a commercial bank without approval. This was
the first publicly disclosed case of penalty on shareholders
of a commercial bank; previously, only banks themselves

8

were punished for equity-related violations. In July
2020, the CBIRC published a list of shareholders who
were found to have been in breach of regulations andindicated that publishing such lists would be a regularoccurrence in the future.
Other developments include revisions to the Anti-Money
Laundering Law and increased penalties imposed by the
PBOC on those found to have been in breach ofanti-money laundering regulations. The total amount ofpenalties levied in the first four months of 2020 alone
exceeded those for the whole of 2019. This is all part of
the PBOC’s determination to take a firmer line on money
laundering.

Regulators continuing to focus on financial consumer
protection, introducing the first substantial financial
consumer protection regulation

In June 2020, the CBIRC issued the Notice on the "LookBack" Work on the Rectification of Market Disorder in the
Banking and Insurance Industry, which listed financial
institutions' failure to take effective measures to protect
customer information, and financial institutions’ leakage
and misuse of customer information as key priorities. In
September 2020, the PBOC issued the Measures on
Financial Consumer Protection, which were the first
regulations issued at Ministry level on financial consumer
protection. In addition, banking regulators have introduced
stronger, multi-dimensional regulations for personal
financial data security, and have issued several technicalstandards, guidelines and specifications for personal
financial data protection technology, including the

Personal Financial Information Protection Technical
Specification and Financial Data Security-Guidelines for
Data Security Classification. In practice, regulators have
paid close attention to commercial banks’ product issuanceand distribution, internal processes, and personal financial
data storage. Regulators have also increased the frequency
and levels of fines imposed on those in breach of
regulations. For example, in October 2020, the PBOC
publicly reported six cases where the branches of threelarge state-owned banks were found to have infringed
consumer financial data, the fines for which were overtens of millions renminbi.

PRC Financial Regulation:
Annual Report (2021)
24

PRC Financial Regulation:
Annual Report (2021)
25

2021 Regulatory Outlook

1

Banking sector will continue toopen up, with increased foreign
participation

In 2020, despite a challenging international politicalenvironment, both the central government and the regulatorsemphasized that China’s finance sector would continue toopen up. We expect that the pace of financial opening-up
and marketization will remain unchanged in 2021, andforeign investors will continue to be active in increasing
their presence in China by investing in domestic banks,
investing/jointly establishing or controlling banks’ wealthmanagement subsidiaries, or even acquiring financial

2

holding companies. We also expect that there will be moreroom for cooperation and mutual collaboration between
domestic and foreign financial institutions, following recent
policy measures to promote internationalization of the
RMB, support the development of capital markets, andguide and encourage foreign banks to cooperate with
their offshore parent banks to help Chinese enterprises"go global".

Personal financial information protection willcontinue to be strongly regulated, and supporting
regulations and policies will be put in place

The Measures on Financial Consumer Protection issued in
September 2020 were the first regulations issued at Ministrylevel on financial consumer protection. The significant
fines in the amount of tens of millions also reflected theregulators’ determination to crack down on infringementsof consumer financial data. However, more detailed
implementation rules on consumer financial data protection
are yet to be introduced. For example, the standards andrequirements on how to protect each category of data inthe data security classification guidelines are not yet clearly
defined. We expect that in 2021 regulators will continue tomaintain the same strong and frequent enforcement of,and penalties related to, infringement of consumer financial
information in the banking sector in a similar way that was
implemented 2020. We also expect that regulators will continue
to explore ways of protecting personal financial
information, formulate further regulations covering
data security protection, establish data security
protection guidelines and a risk-based data security
management system, clarify data classification andprotection strategies, regulate the collection, sharing
and use of personal information, and improve regulatory
and technical protection measures.

3

The disposal of non-performing assets will intensify, andregulators may introduce related supporting rules

In 2020, the scale of non-performing banking assets
continued to grow, in part due to the economic downturn asa result of the COVID-19 pandemic and in part as a resultof accrued risks generated in the past due to poor risk
management. Considering it takes time for non-performing
loans (NPLs) to be exposed, we expect the number andscale of NPLs will continue to accelerate. Banks’ disposingof non-performing assets in an orderly manner will continue
to be a top priority for regulators in the coming year. As
the CBIRC has been closely monitoring, analyzing, andassessing NPLs and conducting stress tests, we expectthat the regulators will monitor and require small andmedium-sized banks to dispose their non-performing assets
more frequently, mitigating the risk in an orderly manner.
According to the Notice on the Pilot Non-Performing
Loans Transfer Program (Consultation Draft) and the
Implementation Plan for the Pilot Non-Performing Loans

Transfer Program circulated by the CBIRC in 2020, pilot
programs may be set up to allow banks to dispose of NPLs
owed by enterprises, which are currently only allowed
to be transferred in bulk and NPLs owed by individuals
which are currently prohibited from being transferred.
The pilot programs may be carried out through China
Credit Assets Registry & Exchange Co., Ltd as one of thepilot NPL disposal channels. We expect that China Credit
Assets Registry & Exchange Co., Ltd will issue supporting
operational rules to accommodate the specific work entailed
in the pilots, such as non-performing loan asset registration,
listing, transfer services, information disclosure and market
monitoring. On top of this, we expect new supporting
rules and guidelines at the central government level will
be issued, including permitting write-offs and bulk
transfer of non-performing assets and the disposal ofcreditor-held assets for debt payments.

PRC Financial Regulation:
Annual Report (2021)
24

PRC Financial Regulation:
Annual Report (2021)
25

2021 Regulatory Outlook

1

Banking sector will continue toopen up, with increased foreign
participation

In 2020, despite a challenging international politicalenvironment, both the central government and the regulatorsemphasized that China’s finance sector would continue toopen up. We expect that the pace of financial opening-up
and marketization will remain unchanged in 2021, andforeign investors will continue to be active in increasing
their presence in China by investing in domestic banks,
investing/jointly establishing or controlling banks’ wealthmanagement subsidiaries, or even acquiring financial

2

holding companies. We also expect that there will be moreroom for cooperation and mutual collaboration between
domestic and foreign financial institutions, following recent
policy measures to promote internationalization of the
RMB, support the development of capital markets, andguide and encourage foreign banks to cooperate with
their offshore parent banks to help Chinese enterprises"go global".

Personal financial information protection willcontinue to be strongly regulated, and supporting
regulations and policies will be put in place

The Measures on Financial Consumer Protection issued in
September 2020 were the first regulations issued at Ministrylevel on financial consumer protection. The significant
fines in the amount of tens of millions also reflected theregulators’ determination to crack down on infringementsof consumer financial data. However, more detailed
implementation rules on consumer financial data protection
are yet to be introduced. For example, the standards andrequirements on how to protect each category of data inthe data security classification guidelines are not yet clearly
defined. We expect that in 2021 regulators will continue tomaintain the same strong and frequent enforcement of,and penalties related to, infringement of consumer financial
information in the banking sector in a similar way that was
implemented 2020. We also expect that regulators will continue
to explore ways of protecting personal financial
information, formulate further regulations covering
data security protection, establish data security
protection guidelines and a risk-based data security
management system, clarify data classification andprotection strategies, regulate the collection, sharing
and use of personal information, and improve regulatory
and technical protection measures.

3

The disposal of non-performing assets will intensify, andregulators may introduce related supporting rules

In 2020, the scale of non-performing banking assets
continued to grow, in part due to the economic downturn asa result of the COVID-19 pandemic and in part as a resultof accrued risks generated in the past due to poor risk
management. Considering it takes time for non-performing
loans (NPLs) to be exposed, we expect the number andscale of NPLs will continue to accelerate. Banks’ disposingof non-performing assets in an orderly manner will continue
to be a top priority for regulators in the coming year. As
the CBIRC has been closely monitoring, analyzing, andassessing NPLs and conducting stress tests, we expectthat the regulators will monitor and require small andmedium-sized banks to dispose their non-performing assets
more frequently, mitigating the risk in an orderly manner.
According to the Notice on the Pilot Non-Performing
Loans Transfer Program (Consultation Draft) and the
Implementation Plan for the Pilot Non-Performing Loans

Transfer Program circulated by the CBIRC in 2020, pilot
programs may be set up to allow banks to dispose of NPLs
owed by enterprises, which are currently only allowed
to be transferred in bulk and NPLs owed by individuals
which are currently prohibited from being transferred.
The pilot programs may be carried out through China
Credit Assets Registry & Exchange Co., Ltd as one of thepilot NPL disposal channels. We expect that China Credit
Assets Registry & Exchange Co., Ltd will issue supporting
operational rules to accommodate the specific work entailed
in the pilots, such as non-performing loan asset registration,
listing, transfer services, information disclosure and market
monitoring. On top of this, we expect new supporting
rules and guidelines at the central government level will
be issued, including permitting write-offs and bulk
transfer of non-performing assets and the disposal ofcreditor-held assets for debt payments.

PRC Financial Regulation:
Annual Report (2021)
26

4

PRC Financial Regulation:
Annual Report (2021)
27

Regulators will take a firmer line in regulating non-traditional
credit business, and may introduce new regulations forinternet deposits and loans

In recent years, different banks have been cooperatingwith internet platforms and other third-party intermediaries
to make the most of online opportunities, including
introducing new customers, co-funding loan provisions
and selling loans and deposit products. This type ofactivity has seen rapid growth, but lacking regulatory
systematic oversight. In 2020, the CBIRC adopted theInterim Measures on Internet Loans of Commercial Banks
and a series of other new regulations (e.g. the consultation
paper of the new regulations for online small loan
services) to expand the regulatory scope applicable tothe internet loan business between commercial banks
and their collaborating institutions. Such initiatives
affirmed the legitimacy of lending collaboration between
commercial banks and internet platforms, set boundaries
on the dimension and breadth of such collaboration,
and also reflected the regulators’ position on the strong
regulation of these credit businesses (including internet
credit business) and joint loans businesses which did
not fall within the scope of traditional commercial
banks' offline financing.

Based on the impact of the new regulations on internet
loans and online small loan services on the market, we
expect the joint loan market which currently is of thescale of trillions of RMB, will be significantly reshaped.
We expect that regulators in 2021 will promote theconduct of small loan businesses by banks, consumer
finance companies and other banking institutions. In
respect of the internet deposit business, there has been
no formal regulation or guidance from the PBOC or the
CBIRC, however, following the removal of internet deposit
products at the end of 2020 and the issuance of somelocal supporting regulations, we expect there will becentral-level regulations issued, which will likely
establish a long-term regulatory mechanism by setting
entry-level qualifications and standards, setting limits
on scale and qualification for internet deposit business,and improving prudential regulation indicators. We
expect that regulators will continue to focus on risk
control of private lending and the internet deposit/lending
business in 2021, ensuring that commercial banks withinternet deposit and lending businesses restructure
their operations to meet the regulatory requirements,
aiming to improve and standardize the internet deposit
and lending market for commercial banks.

5Bank wealth management subsidiaries will further expand,
and policies will be introduced to encourage moreparticipation of commercial banks in capital markets

Since 2020, the CBIRC repeatedly emphasized its support
for the development of China’s capital markets by various
measures, including guiding and encouraging new
institutional investors to invest, approving the formationof more bank wealth management subsidiaries, andallowing foreign professional institutions to establish
foreign-controlled wealth management companies, inorder to enable commercial banks to be more involvedin the process of conversion of savings into investments
and capital. In practice, commercial banks' wealthmanagement subsidiaries were expanding in the termsof the scale of business. The Interim Measures on Sales ofWealth Management Products by Wealth Management
Subsidiaries of Commercial Banks (Consultation Draft), a
supporting regulation of the Measures for the Administrationof Wealth Management Subsidiary Companies of Commercial
Banks, was also published for public comments on December
25, 2020. The Interim Measures provided clear rules on
the eligibility of institution engaging in the sales of wealthmanagement products, administration of the sales of
wealth management products, investor rights’ protection,and supervision and liabilities. The Interim Measuresemphasized, in particular, that without the permission
from regulatory authorities no non-financial institutions or
individuals were allowed to sell wealth management
products directly or in disguised form.

It is expected that the CBIRC will formally issue the Interim
Measures on Sales of Wealth Management Products by
Wealth Management Subsidiaries of Commercial Banks
in 2021, and will continue to formulate supporting rules
on banks' wealth management subsidiaries. Furthermore,considering the recent regulatory policies promoting
the issuance of equity-based asset management products,
encouraging wealth management subsidiaries to increase
securities investment, and promoting cooperation between
banks and fund/insurance companies, we expect specificpolicies encouraging commercial banks to participate
more in the capital markets to be introduced in 2021.
As the market develops, both domestic and international
institutions will face more opportunities and challenges
especially in terms of product design, cooperation, andbusiness development of wealth management subsidiaries.

PRC Financial Regulation:
Annual Report (2021)
26

4

PRC Financial Regulation:
Annual Report (2021)
27

Regulators will take a firmer line in regulating non-traditional
credit business, and may introduce new regulations forinternet deposits and loans

In recent years, different banks have been cooperatingwith internet platforms and other third-party intermediaries
to make the most of online opportunities, including
introducing new customers, co-funding loan provisions
and selling loans and deposit products. This type ofactivity has seen rapid growth, but lacking regulatory
systematic oversight. In 2020, the CBIRC adopted theInterim Measures on Internet Loans of Commercial Banks
and a series of other new regulations (e.g. the consultation
paper of the new regulations for online small loan
services) to expand the regulatory scope applicable tothe internet loan business between commercial banks
and their collaborating institutions. Such initiatives
affirmed the legitimacy of lending collaboration between
commercial banks and internet platforms, set boundaries
on the dimension and breadth of such collaboration,
and also reflected the regulators’ position on the strong
regulation of these credit businesses (including internet
credit business) and joint loans businesses which did
not fall within the scope of traditional commercial
banks' offline financing.

Based on the impact of the new regulations on internet
loans and online small loan services on the market, we
expect the joint loan market which currently is of thescale of trillions of RMB, will be significantly reshaped.
We expect that regulators in 2021 will promote theconduct of small loan businesses by banks, consumer
finance companies and other banking institutions. In
respect of the internet deposit business, there has been
no formal regulation or guidance from the PBOC or the
CBIRC, however, following the removal of internet deposit
products at the end of 2020 and the issuance of somelocal supporting regulations, we expect there will becentral-level regulations issued, which will likely
establish a long-term regulatory mechanism by setting
entry-level qualifications and standards, setting limits
on scale and qualification for internet deposit business,and improving prudential regulation indicators. We
expect that regulators will continue to focus on risk
control of private lending and the internet deposit/lending
business in 2021, ensuring that commercial banks withinternet deposit and lending businesses restructure
their operations to meet the regulatory requirements,
aiming to improve and standardize the internet deposit
and lending market for commercial banks.

5Bank wealth management subsidiaries will further expand,
and policies will be introduced to encourage moreparticipation of commercial banks in capital markets

Since 2020, the CBIRC repeatedly emphasized its support
for the development of China’s capital markets by various
measures, including guiding and encouraging new
institutional investors to invest, approving the formationof more bank wealth management subsidiaries, andallowing foreign professional institutions to establish
foreign-controlled wealth management companies, inorder to enable commercial banks to be more involvedin the process of conversion of savings into investments
and capital. In practice, commercial banks' wealthmanagement subsidiaries were expanding in the termsof the scale of business. The Interim Measures on Sales ofWealth Management Products by Wealth Management
Subsidiaries of Commercial Banks (Consultation Draft), a
supporting regulation of the Measures for the Administrationof Wealth Management Subsidiary Companies of Commercial
Banks, was also published for public comments on December
25, 2020. The Interim Measures provided clear rules on
the eligibility of institution engaging in the sales of wealthmanagement products, administration of the sales of
wealth management products, investor rights’ protection,and supervision and liabilities. The Interim Measuresemphasized, in particular, that without the permission
from regulatory authorities no non-financial institutions or
individuals were allowed to sell wealth management
products directly or in disguised form.

It is expected that the CBIRC will formally issue the Interim
Measures on Sales of Wealth Management Products by
Wealth Management Subsidiaries of Commercial Banks
in 2021, and will continue to formulate supporting rules
on banks' wealth management subsidiaries. Furthermore,considering the recent regulatory policies promoting
the issuance of equity-based asset management products,
encouraging wealth management subsidiaries to increase
securities investment, and promoting cooperation between
banks and fund/insurance companies, we expect specificpolicies encouraging commercial banks to participate
more in the capital markets to be introduced in 2021.
As the market develops, both domestic and international
institutions will face more opportunities and challenges
especially in terms of product design, cooperation, andbusiness development of wealth management subsidiaries.

PRC Financial Regulation:
Annual Report (2021)
28

PRC Financial Regulation:
Annual Report (2021) –Securities

PRC Financial Regulation:
Annual Report (2021)
29

2020 Key Dates

March 1
The amended Securities Law came into effect.

April 1
Foreign ownership limitation in securities companies
was officially lifted.

June 18
The CSRC approved the change of equity structure for
JP Morgan Futures, making it the first wholly foreign-owned
futures company in China.

July 19
The PBOC and the CSRC agreed to connect the infrastructuresof interbank and exchange bond markets.

October 10
The CSRC announced to have received the applicationfor establishing the first wholly foreign-owned securities
company, Standard Chartered Securities, in China.

December 26
The NPC Standing Committee adopted Amendment XI
to the Criminal Law, substantially sharpening criminal
penalties for securities- and futures-related crimes.

March 27First batch of six securities companies, including CICC,
were included in the pilot “consolidated regulation”
program.

June 12The China Securities Regulatory Commission (CSRC)
issued a series of measures to reform ChiNext andpilot the IPO registration system.

July 17
The CSRC took over New Times Securities, Guosheng
Securities, and Guosheng Futures.

July 31
The Supreme People’s Court issued Provisions on Several
Issues Concerning Representative Litigation in Securities
Disputes.

November 1
The Administrative Measures for Domestic Securities andFutures Investments by Qualified Foreign Institutional
Investors (QFII) and RMB Qualified Foreign Institutional
Investors (RQFII) and supporting rules came into effect.

December 31
Hangzhou Intermediate Court issued the first instancejudgment for the Wuyang bond fraudulent issuancecase, ruling that intermediary agencies must also bear
joint and several liabilities.

PRC Financial Regulation:
Annual Report (2021)
28

PRC Financial Regulation:
Annual Report (2021) –Securities

PRC Financial Regulation:
Annual Report (2021)
29

2020 Key Dates

March 1
The amended Securities Law came into effect.

April 1
Foreign ownership limitation in securities companies
was officially lifted.

June 18
The CSRC approved the change of equity structure for
JP Morgan Futures, making it the first wholly foreign-owned
futures company in China.

July 19
The PBOC and the CSRC agreed to connect the infrastructuresof interbank and exchange bond markets.

October 10
The CSRC announced to have received the applicationfor establishing the first wholly foreign-owned securities
company, Standard Chartered Securities, in China.

December 26
The NPC Standing Committee adopted Amendment XI
to the Criminal Law, substantially sharpening criminal
penalties for securities- and futures-related crimes.

March 27First batch of six securities companies, including CICC,
were included in the pilot “consolidated regulation”
program.

June 12The China Securities Regulatory Commission (CSRC)
issued a series of measures to reform ChiNext andpilot the IPO registration system.

July 17
The CSRC took over New Times Securities, Guosheng
Securities, and Guosheng Futures.

July 31
The Supreme People’s Court issued Provisions on Several
Issues Concerning Representative Litigation in Securities
Disputes.

November 1
The Administrative Measures for Domestic Securities andFutures Investments by Qualified Foreign Institutional
Investors (QFII) and RMB Qualified Foreign Institutional
Investors (RQFII) and supporting rules came into effect.

December 31
Hangzhou Intermediate Court issued the first instancejudgment for the Wuyang bond fraudulent issuancecase, ruling that intermediary agencies must also bear
joint and several liabilities.

PRC Financial Regulation:
Annual Report (2021)
30

PRC Financial Regulation:
Annual Report (2021)
31

2020 Regulatory Observations

1

The amended Securities Law officially came into effect and,
together with the supporting regulations, strengthening thefoundation of the rule of law in the securities market

On March 1, 2020, the amended Securities Law officiallycame into effect. The CSRC thereafter made significant
amendments and improvements to the supporting
regulations, with a total of 68 securities and futures-related
regulations amended in 2020. At the same time, theCSRC continued to publish new rules or consultation
papers to support the implementation of amended
Securities Law. Such supporting regulations cover various
securities-related areas, such as securities issuance,
trading, information disclosure, refinancing, ongoingsupervision and delisting. For example: the CSRC issued aseries of measures to reform ChiNext, a subsidiary board
under the Shenzhen Stock Exchange, to pilot theregistration system for IPOs, and promulgated the Measureson the Administration of Convertible Corporate Bonds; theCSRC also sought public opinion on consultation
papers such as the Measures on Administrative Penalties
for Securities and Futures-Related Violations of Law,
Implementation Measures for Securities and Futures-Related
Administrative Settlement Mechanism, and the amended
Regulation on the Administration of Equities of Securities
Companies; and the CSRC amended the Rules on Proceduresfor the Formulation of Securities and Futures Regulations
with the goal of improving the securities and futures
legislation framework. Other bodies adjusted their rules
to become synchronized with the overall revisions,
including the CSRC local branches, the Shanghai and
Shenzhen Stock Exchanges, and the Securities Association ofChina (SAC).

· implementing in full the registration-based system
for securities issuance, based on the example of reforms
introduced by the Shanghai Stock Exchange STARboard (see also 4. below);

The implementation of the amended Securities Law has
introduced or improved a number of key fundamental
systems or procedures of China’s capital markets, further
strengthening the foundation of the rule of law, including:

The amended Securities Law is an integral part of China’s
capital markets structure, addressing all aspects of theoperating and organization of the market and thereby
offering far-reaching impact.

· requiring higher levels of information disclosure forlisted companies, covering disclosure of “material
matters”, disclosure of changes in equity, and short-term
trading, aligning requirements with those neededby the Shanghai and Shenzhen Stock Exchanges;· adjusting the regulations and specific arrangements
applying to different types of securities service providers
from approval to filing, with detailed rules set out in
the Regulation on the Administration of Filing of Securities
Service Providers Engaging in Securities Service Business;· substantially increasing costs for those carrying out
securities-related violations, with the Amendment XI
to the Criminal Law adopted in late 2020 also substantially
increasing the criminal penalties for securities-related
offences; and· enhancing investor protection through a number ofmeasures, including ensuring investor suitability
management, advance compensation to investors
before litigation is complete, allowing for “representative
litigation” (China’s class action-type litigation) in securities
disputes, and introducing multi-forum dispute resolution.

2

Regulators refining the classification of different types of
securities companies, and encouraging greater specialization

Following on from the 2019 Regulation on the Administrationof Equities of Securities Companies, regulators took further
steps in the new Securities Law to complete the categorizationof the different types of securities companies, with theaim of encouraging the specialized development of
securities companies and therefore the market as a whole.
This is the first time that the CSRC has classified securities
companies according to business risk and capitalrequirements.

In May 2020, the CSRC solicited public opinion on thedraft amended Regulation on Classified Regulation of
Securities Companies, where the classification systememphasized/recognized the business capacities in nicheareas and the revenue of securities companies. The
purpose was to encourage greater specialization bydifferent securities companies, especially small andmedium-sized companies, who could develop nicheareas of business.

The 2019 Regulation classified securities companies into
“professional” and “comprehensive” securities companies,
depending on which business they are in. The shareholders
of professional securities companies need to satisfy all
basic statutory conditions, while the major and controllingshareholders of comprehensive securities companies
are required to have a higher level of governance andrisk compensation capability than those of professional
securities companies. In line with such classification,
the amended Securities Law listed “securities lending/borrowing”
and “market-making” as “base securities business types”,
alongside other base securities business types such as“brokerage” and “underwriting”.

Leading and larger securities companies were also given
regulatory support. In particular, under the Provisions
on the Calculation Basis for Risk Control Indicators of
Securities Companies, companies with Class A, Rank AA
ratings or above for three consecutive years had theirrisk capital reserve adjustment ratio lowered (from 0.7
to 0.5). In April 2020, under the pilot “consolidated
regulation” program, securities companies taking partin the program were permitted to operate on the basisof more flexible risk control indicators, which would
take into account the consolidated data of any parent
company and subsidiaries when filing regulatory statementsof risk control indicators, as well as lower the relevant
ratios.

PRC Financial Regulation:
Annual Report (2021)
30

PRC Financial Regulation:
Annual Report (2021)
31

2020 Regulatory Observations

1

The amended Securities Law officially came into effect and,
together with the supporting regulations, strengthening thefoundation of the rule of law in the securities market

On March 1, 2020, the amended Securities Law officiallycame into effect. The CSRC thereafter made significant
amendments and improvements to the supporting
regulations, with a total of 68 securities and futures-related
regulations amended in 2020. At the same time, theCSRC continued to publish new rules or consultation
papers to support the implementation of amended
Securities Law. Such supporting regulations cover various
securities-related areas, such as securities issuance,
trading, information disclosure, refinancing, ongoingsupervision and delisting. For example: the CSRC issued aseries of measures to reform ChiNext, a subsidiary board
under the Shenzhen Stock Exchange, to pilot theregistration system for IPOs, and promulgated the Measureson the Administration of Convertible Corporate Bonds; theCSRC also sought public opinion on consultation
papers such as the Measures on Administrative Penalties
for Securities and Futures-Related Violations of Law,
Implementation Measures for Securities and Futures-Related
Administrative Settlement Mechanism, and the amended
Regulation on the Administration of Equities of Securities
Companies; and the CSRC amended the Rules on Proceduresfor the Formulation of Securities and Futures Regulations
with the goal of improving the securities and futures
legislation framework. Other bodies adjusted their rules
to become synchronized with the overall revisions,
including the CSRC local branches, the Shanghai and
Shenzhen Stock Exchanges, and the Securities Association ofChina (SAC).

· implementing in full the registration-based system
for securities issuance, based on the example of reforms
introduced by the Shanghai Stock Exchange STARboard (see also 4. below);

The implementation of the amended Securities Law has
introduced or improved a number of key fundamental
systems or procedures of China’s capital markets, further
strengthening the foundation of the rule of law, including:

The amended Securities Law is an integral part of China’s
capital markets structure, addressing all aspects of theoperating and organization of the market and thereby
offering far-reaching impact.

· requiring higher levels of information disclosure forlisted companies, covering disclosure of “material
matters”, disclosure of changes in equity, and short-term
trading, aligning requirements with those neededby the Shanghai and Shenzhen Stock Exchanges;· adjusting the regulations and specific arrangements
applying to different types of securities service providers
from approval to filing, with detailed rules set out in
the Regulation on the Administration of Filing of Securities
Service Providers Engaging in Securities Service Business;· substantially increasing costs for those carrying out
securities-related violations, with the Amendment XI
to the Criminal Law adopted in late 2020 also substantially
increasing the criminal penalties for securities-related
offences; and· enhancing investor protection through a number ofmeasures, including ensuring investor suitability
management, advance compensation to investors
before litigation is complete, allowing for “representative
litigation” (China’s class action-type litigation) in securities
disputes, and introducing multi-forum dispute resolution.

2

Regulators refining the classification of different types of
securities companies, and encouraging greater specialization

Following on from the 2019 Regulation on the Administrationof Equities of Securities Companies, regulators took further
steps in the new Securities Law to complete the categorizationof the different types of securities companies, with theaim of encouraging the specialized development of
securities companies and therefore the market as a whole.
This is the first time that the CSRC has classified securities
companies according to business risk and capitalrequirements.

In May 2020, the CSRC solicited public opinion on thedraft amended Regulation on Classified Regulation of
Securities Companies, where the classification systememphasized/recognized the business capacities in nicheareas and the revenue of securities companies. The
purpose was to encourage greater specialization bydifferent securities companies, especially small andmedium-sized companies, who could develop nicheareas of business.

The 2019 Regulation classified securities companies into
“professional” and “comprehensive” securities companies,
depending on which business they are in. The shareholders
of professional securities companies need to satisfy all
basic statutory conditions, while the major and controllingshareholders of comprehensive securities companies
are required to have a higher level of governance andrisk compensation capability than those of professional
securities companies. In line with such classification,
the amended Securities Law listed “securities lending/borrowing”
and “market-making” as “base securities business types”,
alongside other base securities business types such as“brokerage” and “underwriting”.

Leading and larger securities companies were also given
regulatory support. In particular, under the Provisions
on the Calculation Basis for Risk Control Indicators of
Securities Companies, companies with Class A, Rank AA
ratings or above for three consecutive years had theirrisk capital reserve adjustment ratio lowered (from 0.7
to 0.5). In April 2020, under the pilot “consolidated
regulation” program, securities companies taking partin the program were permitted to operate on the basisof more flexible risk control indicators, which would
take into account the consolidated data of any parent
company and subsidiaries when filing regulatory statementsof risk control indicators, as well as lower the relevant
ratios.

PRC Financial Regulation:
Annual Report (2021)
32

3

PRC Financial Regulation:
Annual Report (2021)
33

Regulators simplifying ex-ante regulation of the securities
institutions

As the CSRC has continued to refine and improve theregulations governing companies operating in the
securities market, developments in 2020 focused on thestreamlining of administration, creating more efficient
government services, and generating greater delegationof responsibilities. The amended Securities Law eliminatedmany regulatory approvals that securities institutions
previously had to obtain, requiring filing instead, andsimplified other regulatory processes. The intention is
to work towards an efficient operation of the capital
markets, improved regulatory transparency and greater
predictability for market players.
These reforms were manifested in many ways, including:· Several matters previously requiring approvals need
now only to be filed, including: the qualification of
directors and supervisors of securities companies; theestablishment, acquisition or revocation of branches of
securities companies; securities companies’ overseas
establishment, acquisition of, or investment in, securities
institutions; changes of registered capital and equity
that do not involve changes in the major shareholders
or the actual controller; and changes of important
provisions of the articles of association;· Filing procedures were made simpler, as their legal
character of filing rather than licensing was clarified,and all qualification conditions were removed. For
example, the Regulation on the Administration of Filingof Securities Service Providers Engaging in Securities
Service Business (effective August 2020) simplified filingprocedures; and· Existing regulations were made clearer, by style, structure,and categorization to aid compliance by market players.
For example, in July 2020, the CSRC consolidated all“Regulatory Q&As” addressing day-to-day regulationand M&A/restructuring review for listed companies.

4

Registration system being applied to existing securities
markets, starting with ChiNext market IPOs and bondissuances

The STAR board, launched in 2019, became the testing
ground for reform of China’s capital markets by setting
up a registration-based IPO system. The pilot was successful,leading to a similar system on the ChiNext market inJune 2020. Apart from the ChiNext market, on the firstday of the implementation of the amended Securities
Law, the National Development and Reform Commission(NDRC) and CSRC both issued new regulations providingthat enterprise bond and corporate bond issuance which
previously were subject to NDRC or CSRC approval should
move from needing prior approval of regulators to aregistration-based system.
As well carrying out reforms on the issuance side, regulators
took stronger action to enforce regulations. The regulationof ChiNext market was tightened substantially: in September,the CSRC investigated perceived abnormal trading behavior
of Tianshan Biological and other stocks; in December,
following an investigation on securities companies, theIPOs of two companies on ChiNext were cancelled; onthe last day of 2020, the CSRC reported the alleged major
financial fraud of ChiNext-listed company, Zhengzhou
Sino-Crystal Diamond.
The Supreme People’s Court, Guangdong High Court
and Shenzhen Intermediate Court all stated to safeguard
for the ChiNext market pilot registration system.
In addition, the CSRC moved to improve the delistingprocess. A total of 16 listed companies were delistedfrom A-shares in 2020, more than in any previous year.
The CSRC stated that the delisting system shall be morerigid, and the Shanghai and Shenzhen Stock Exchanges
also released draft amended delisting-related rules tosolicit public comment in late 2020.
These efforts all lay the groundwork for the introduction ofregistration-based system in China’s other securities
markets.

PRC Financial Regulation:
Annual Report (2021)
32

3

PRC Financial Regulation:
Annual Report (2021)
33

Regulators simplifying ex-ante regulation of the securities
institutions

As the CSRC has continued to refine and improve theregulations governing companies operating in the
securities market, developments in 2020 focused on thestreamlining of administration, creating more efficient
government services, and generating greater delegationof responsibilities. The amended Securities Law eliminatedmany regulatory approvals that securities institutions
previously had to obtain, requiring filing instead, andsimplified other regulatory processes. The intention is
to work towards an efficient operation of the capital
markets, improved regulatory transparency and greater
predictability for market players.
These reforms were manifested in many ways, including:· Several matters previously requiring approvals need
now only to be filed, including: the qualification of
directors and supervisors of securities companies; theestablishment, acquisition or revocation of branches of
securities companies; securities companies’ overseas
establishment, acquisition of, or investment in, securities
institutions; changes of registered capital and equity
that do not involve changes in the major shareholders
or the actual controller; and changes of important
provisions of the articles of association;· Filing procedures were made simpler, as their legal
character of filing rather than licensing was clarified,and all qualification conditions were removed. For
example, the Regulation on the Administration of Filingof Securities Service Providers Engaging in Securities
Service Business (effective August 2020) simplified filingprocedures; and· Existing regulations were made clearer, by style, structure,and categorization to aid compliance by market players.
For example, in July 2020, the CSRC consolidated all“Regulatory Q&As” addressing day-to-day regulationand M&A/restructuring review for listed companies.

4

Registration system being applied to existing securities
markets, starting with ChiNext market IPOs and bondissuances

The STAR board, launched in 2019, became the testing
ground for reform of China’s capital markets by setting
up a registration-based IPO system. The pilot was successful,leading to a similar system on the ChiNext market inJune 2020. Apart from the ChiNext market, on the firstday of the implementation of the amended Securities
Law, the National Development and Reform Commission(NDRC) and CSRC both issued new regulations providingthat enterprise bond and corporate bond issuance which
previously were subject to NDRC or CSRC approval should
move from needing prior approval of regulators to aregistration-based system.
As well carrying out reforms on the issuance side, regulators
took stronger action to enforce regulations. The regulationof ChiNext market was tightened substantially: in September,the CSRC investigated perceived abnormal trading behavior
of Tianshan Biological and other stocks; in December,
following an investigation on securities companies, theIPOs of two companies on ChiNext were cancelled; onthe last day of 2020, the CSRC reported the alleged major
financial fraud of ChiNext-listed company, Zhengzhou
Sino-Crystal Diamond.
The Supreme People’s Court, Guangdong High Court
and Shenzhen Intermediate Court all stated to safeguard
for the ChiNext market pilot registration system.
In addition, the CSRC moved to improve the delistingprocess. A total of 16 listed companies were delistedfrom A-shares in 2020, more than in any previous year.
The CSRC stated that the delisting system shall be morerigid, and the Shanghai and Shenzhen Stock Exchanges
also released draft amended delisting-related rules tosolicit public comment in late 2020.
These efforts all lay the groundwork for the introduction ofregistration-based system in China’s other securities
markets.

PRC Financial Regulation:
Annual Report (2021)
34

5

PRC Financial Regulation:
Annual Report (2021)
35

Regulators strengthened the workings of the market bystricter regulation and ex-post enforcement, andimplemented a policy of zero tolerance

For the registration-based system as well as streamlined
administration and delegation of powers to be effective,
there needs to be in place enhanced law enforcement
and supervision, more severe penalty for violations andcomprehensive civil, administrative and criminal
accountability.
The amended Securities Law significantly increased theadministrative penalties for many violations (e.g. fraudulent
issuance and disclosure-related violations) and introduced
other processes, such as ordering buybacks, advancecompensation to investors before litigation is complete
and class action-type “representative litigation”. For
example, the amount of fines levied on issuers in fraudulent
issuance cases was increased from 1%-5% to 10%-100% of
the amount of illegally raised funds; the maximum
amount of fines on sponsors issuing sponsorship lettersusing false information, misleading statements or material
omissions was increased from five times to 10 times
business revenue. The Amendment XI to the Criminal Law
significantly increased criminal penalties in respect of fourtypes of securities and futures offences, including
fraudulent issuance, fraudulent information disclosure,provision of false supporting documents by intermediaries,
and market manipulation. On top of that, the CSRC, in
its Implementation Measures for the Regulatory Measuresin the Securities and Futures Market (Consultation Draft),listed 16 common regulatory measures, other thanadministrative penalties, as effective supplements tofinancial regulatory tools.

All applicable departments were committed to vigorously
cracking down on illegal activities in the securities andfutures markets:· in 2020, the CSRC carried out targeted attacks on illegal
activities including on “black mouths” (disseminatorsof false market information), “illegal stock recommendations”,“off-market financing”, and chat groups APPs related
to the illegal activities.
· the CSRC continued to target instances of financial
fraud by listed companies.
· the CSRC, together with the Supreme People’s
Procuratorate, listed 12 typical securities offences,including market manipulation, insider trading anddissemination of false information on securities trading.
· the Supreme People’s Court issued a notice requesting
the courts nationwide to strictly punish securities andfutures crimes, adopting a policy of zero tolerance.
· in the Wuyang bond issuance case in late 2020 involving
fraud, 496 eligible investors jointly elected four investors
to bring legal action on behalf of all of them, claiming
a total amount of more than RMB810 million. The
Hangzhou Intermediate Court, in its first instancejudgment, ruled that the intermediaries such as leadunderwriters, law firms, accounting firms, and rating
agencies should be jointly and severally liable forcompensation, causing much consternation in themarket.

6Compliance management and risk control of securities
companies remaining the focus of regulation andenforcement

As the capital markets’ reforms speed up, there has
been a tightening of regulation of securities institutions.
The number of penalties issued by financial regulators
against securities companies (including branches andtrading outlets) and relevant practitioners in 2020 far
exceeded that of the previous year.
One of the main focuses of enforcement was on internal
governance and equity management. For example, forthe purpose of rectifying poor equity management andcorporate governance structure, the CSRC took over
New Times Securities, Guosheng Securities and Guosheng
Futures in July 2020. For corporate governance failures
and internal management issues, Zhongshan Securities was
suspended from carrying out some of its businesses,
including the filing of new asset management products,
conducting some new capital-intense businesses (stock-pledged

7

repo, stock lending/borrowing, etc.), and trading withrelated parties with its own funds or asset management
funds (such as bond-pledged repo transactions).
Another enforcement focus was on compliance and risk
control of securities companies’ day-to-day operations.
On July 10, the CSRC took action against GF Securities,
including suspending its sponsor qualification for six
months and suspending the acceptance of documents
related to bond underwriting business for 12 months,
for its failure to exercise due diligence in connection
with investment banking business related to Kangmei
Pharmaceutical. For failures such as major errors in theirresearch reports, Zhongtai Securities, Founder
Securities and China Securities were all punished.

The securities market continuing to open up

Opening up has long been central to reform of China’s
financial services sector. Both the securities and futures
sectors saw increased liberalization over the past year.
The opening up of the securities sector accelerated during
2020, with the restrictions on foreign ownership ofChina’s securities institutions being lifted on April 1.
Since then, approval was given to Goldman Sachs,
Morgan Stanley, Credit Suisse, Daiwa Securities and
DBS Securities to become the controlling shareholdersof their domestic joint venture securities companies; in
October, the CSRC announced to have received theapplication by Standard Chartered Securities to establish
the first wholly foreign-owned securities company; andin June, the CSRC approved JP Morgan Futures to become
the first wholly foreign-owned futures company.

Cross-border transactions were more easily facilitated,with the removal of the restrictions on qualified foreign
institutional investor (QFII) and renminbi qualified
institutional investor (RQFII) investment quotas, thesimplification of cross-border fund remittances, thecombining of the QFII and RQFII qualifications andregulations, expanding investment scope, lowering
entry qualifications, and lifting the limit on the numberof intermediaries. The first QFII securities lending andborrowing transactions were completed at the end of
2020. In October 2020, the CSRC gave its approval to the
Shanghai International Energy Exchange to conduct
international copper futures trading, as well as allowing
foreign traders to participate. In addition, the regulators
issued the Announcement on Foreign Institutional Investors’
Investment in China’s Bond Market (Consultation Draft) in
September 2020, which will connect the exchange andinterbank bond markets, allowing foreign investors toaccess exchange-traded bonds.

PRC Financial Regulation:
Annual Report (2021)
34

5

PRC Financial Regulation:
Annual Report (2021)
35

Regulators strengthened the workings of the market bystricter regulation and ex-post enforcement, andimplemented a policy of zero tolerance

For the registration-based system as well as streamlined
administration and delegation of powers to be effective,
there needs to be in place enhanced law enforcement
and supervision, more severe penalty for violations andcomprehensive civil, administrative and criminal
accountability.
The amended Securities Law significantly increased theadministrative penalties for many violations (e.g. fraudulent
issuance and disclosure-related violations) and introduced
other processes, such as ordering buybacks, advancecompensation to investors before litigation is complete
and class action-type “representative litigation”. For
example, the amount of fines levied on issuers in fraudulent
issuance cases was increased from 1%-5% to 10%-100% of
the amount of illegally raised funds; the maximum
amount of fines on sponsors issuing sponsorship lettersusing false information, misleading statements or material
omissions was increased from five times to 10 times
business revenue. The Amendment XI to the Criminal Law
significantly increased criminal penalties in respect of fourtypes of securities and futures offences, including
fraudulent issuance, fraudulent information disclosure,provision of false supporting documents by intermediaries,
and market manipulation. On top of that, the CSRC, in
its Implementation Measures for the Regulatory Measuresin the Securities and Futures Market (Consultation Draft),listed 16 common regulatory measures, other thanadministrative penalties, as effective supplements tofinancial regulatory tools.

All applicable departments were committed to vigorously
cracking down on illegal activities in the securities andfutures markets:· in 2020, the CSRC carried out targeted attacks on illegal
activities including on “black mouths” (disseminatorsof false market information), “illegal stock recommendations”,“off-market financing”, and chat groups APPs related
to the illegal activities.
· the CSRC continued to target instances of financial
fraud by listed companies.
· the CSRC, together with the Supreme People’s
Procuratorate, listed 12 typical securities offences,including market manipulation, insider trading anddissemination of false information on securities trading.
· the Supreme People’s Court issued a notice requesting
the courts nationwide to strictly punish securities andfutures crimes, adopting a policy of zero tolerance.
· in the Wuyang bond issuance case in late 2020 involving
fraud, 496 eligible investors jointly elected four investors
to bring legal action on behalf of all of them, claiming
a total amount of more than RMB810 million. The
Hangzhou Intermediate Court, in its first instancejudgment, ruled that the intermediaries such as leadunderwriters, law firms, accounting firms, and rating
agencies should be jointly and severally liable forcompensation, causing much consternation in themarket.

6Compliance management and risk control of securities
companies remaining the focus of regulation andenforcement

As the capital markets’ reforms speed up, there has
been a tightening of regulation of securities institutions.
The number of penalties issued by financial regulators
against securities companies (including branches andtrading outlets) and relevant practitioners in 2020 far
exceeded that of the previous year.
One of the main focuses of enforcement was on internal
governance and equity management. For example, forthe purpose of rectifying poor equity management andcorporate governance structure, the CSRC took over
New Times Securities, Guosheng Securities and Guosheng
Futures in July 2020. For corporate governance failures
and internal management issues, Zhongshan Securities was
suspended from carrying out some of its businesses,
including the filing of new asset management products,
conducting some new capital-intense businesses (stock-pledged

7

repo, stock lending/borrowing, etc.), and trading withrelated parties with its own funds or asset management
funds (such as bond-pledged repo transactions).
Another enforcement focus was on compliance and risk
control of securities companies’ day-to-day operations.
On July 10, the CSRC took action against GF Securities,
including suspending its sponsor qualification for six
months and suspending the acceptance of documents
related to bond underwriting business for 12 months,
for its failure to exercise due diligence in connection
with investment banking business related to Kangmei
Pharmaceutical. For failures such as major errors in theirresearch reports, Zhongtai Securities, Founder
Securities and China Securities were all punished.

The securities market continuing to open up

Opening up has long been central to reform of China’s
financial services sector. Both the securities and futures
sectors saw increased liberalization over the past year.
The opening up of the securities sector accelerated during
2020, with the restrictions on foreign ownership ofChina’s securities institutions being lifted on April 1.
Since then, approval was given to Goldman Sachs,
Morgan Stanley, Credit Suisse, Daiwa Securities and
DBS Securities to become the controlling shareholdersof their domestic joint venture securities companies; in
October, the CSRC announced to have received theapplication by Standard Chartered Securities to establish
the first wholly foreign-owned securities company; andin June, the CSRC approved JP Morgan Futures to become
the first wholly foreign-owned futures company.

Cross-border transactions were more easily facilitated,with the removal of the restrictions on qualified foreign
institutional investor (QFII) and renminbi qualified
institutional investor (RQFII) investment quotas, thesimplification of cross-border fund remittances, thecombining of the QFII and RQFII qualifications andregulations, expanding investment scope, lowering
entry qualifications, and lifting the limit on the numberof intermediaries. The first QFII securities lending andborrowing transactions were completed at the end of
2020. In October 2020, the CSRC gave its approval to the
Shanghai International Energy Exchange to conduct
international copper futures trading, as well as allowing
foreign traders to participate. In addition, the regulators
issued the Announcement on Foreign Institutional Investors’
Investment in China’s Bond Market (Consultation Draft) in
September 2020, which will connect the exchange andinterbank bond markets, allowing foreign investors toaccess exchange-traded bonds.

PRC Financial Regulation:
Annual Report (2021)
36

8

PRC Financial Regulation:
Annual Report (2021)
37

Legislation on futures accelerating, legal framework for
futures derivatives continuing to develop

Another legislative highlight in 2020 was the proposed
dedicated legislation covering the futures market. Futures
market is an integral part of the capital markets, whilst
as yet, the legal basis only extends to administrative laws
and regulations such as the Regulations on Futures Trading.
According to the Chinese legislative hierarchy mechanism,
there should be a “Futures Law” as the framework documentof futures market.
The “Futures Law” was first proposed at the NPC meetingin 2014 and was included in the 2020 legislative work
plan of the NPC Standing Committee. The draft is basicallyready and will soon start the process of being reviewed.
This will entail removing clauses dealing with securities
derivatives contracts from the amended Securities Law

and potentially moving them to the proposed Futures
Law. The Futures Law will provide an overall legislative
framework for futures and derivatives in China. The
legislation will become the top level legislation of China’s
futures market and set out the legal status of theparticipating entities, establish basic legal relationships,
civil rights and obligations and legal liabilities, clarify
the regulation of the over-the-counter market, set out
clear rules for market access, investor protection andopening-up to foreign participation, and provide asystem of rules to safeguard the opening-up of the
futures market, as well as cross-border regulation.

2021 Regulatory Outlook

1

Investment-side reforms will encourage greater long-term
investments

In 2020, regulators repeatedly emphasized investment-side
reform and the desire for entry of medium and long-term
capital into the capital markets, as well as strengthening
coordination and balance between the investment-side
and the financing-side of the capital markets, in orderto create a mature market for medium and long-term
investors.

· so far as trading is concerned, regulators may pilot
single T+0 trades and may lift limits on price fluctuation;

Throughout 2020, there have been many initial signsof these investment-side reforms, such as the lifting
the quotas for QFII and RQFII, the moderate “loosening”
of securities companies’ investment in financial bonds
issued by policy banks, index funds, and constituent
stocks, the support given by the CBIRC to wealthmanagement subsidiaries to increase their proportionof equity investments, and the ongoing relaxation of
conditions imposed on insurance funds’ investments.

· in terms of market access, the Shanghai-Hong Kong
Stock Connect, Shanghai-London Stock Connect,
Bond Connect and foreign direct investment in theinterbank bond market will continue to develop tofurther bring China’s capital markets in line withinternational standards; andAs the financing-side reforms such as launching ofregistration-based system constantly deepen, theinvestment-side reforms will develop too in parallelwith it. In this regard, we expect the following to beconsidered or introduced in 2021:· the regulators will focus on expanding the pool ofmutual fund managers, improving investment advisorybusiness rules and developing the professional capabilities
of asset management companies;· the financial derivatives market will continue todevelop and broaden, allowing for the trading of
more ETF products and more commodities andstock index futures/options, among others.

PRC Financial Regulation:
Annual Report (2021)
36

8

PRC Financial Regulation:
Annual Report (2021)
37

Legislation on futures accelerating, legal framework for
futures derivatives continuing to develop

Another legislative highlight in 2020 was the proposed
dedicated legislation covering the futures market. Futures
market is an integral part of the capital markets, whilst
as yet, the legal basis only extends to administrative laws
and regulations such as the Regulations on Futures Trading.
According to the Chinese legislative hierarchy mechanism,
there should be a “Futures Law” as the framework documentof futures market.
The “Futures Law” was first proposed at the NPC meetingin 2014 and was included in the 2020 legislative work
plan of the NPC Standing Committee. The draft is basicallyready and will soon start the process of being reviewed.
This will entail removing clauses dealing with securities
derivatives contracts from the amended Securities Law

and potentially moving them to the proposed Futures
Law. The Futures Law will provide an overall legislative
framework for futures and derivatives in China. The
legislation will become the top level legislation of China’s
futures market and set out the legal status of theparticipating entities, establish basic legal relationships,
civil rights and obligations and legal liabilities, clarify
the regulation of the over-the-counter market, set out
clear rules for market access, investor protection andopening-up to foreign participation, and provide asystem of rules to safeguard the opening-up of the
futures market, as well as cross-border regulation.

2021 Regulatory Outlook

1

Investment-side reforms will encourage greater long-term
investments

In 2020, regulators repeatedly emphasized investment-side
reform and the desire for entry of medium and long-term
capital into the capital markets, as well as strengthening
coordination and balance between the investment-side
and the financing-side of the capital markets, in orderto create a mature market for medium and long-term
investors.

· so far as trading is concerned, regulators may pilot
single T+0 trades and may lift limits on price fluctuation;

Throughout 2020, there have been many initial signsof these investment-side reforms, such as the lifting
the quotas for QFII and RQFII, the moderate “loosening”
of securities companies’ investment in financial bonds
issued by policy banks, index funds, and constituent
stocks, the support given by the CBIRC to wealthmanagement subsidiaries to increase their proportionof equity investments, and the ongoing relaxation of
conditions imposed on insurance funds’ investments.

· in terms of market access, the Shanghai-Hong Kong
Stock Connect, Shanghai-London Stock Connect,
Bond Connect and foreign direct investment in theinterbank bond market will continue to develop tofurther bring China’s capital markets in line withinternational standards; andAs the financing-side reforms such as launching ofregistration-based system constantly deepen, theinvestment-side reforms will develop too in parallelwith it. In this regard, we expect the following to beconsidered or introduced in 2021:· the regulators will focus on expanding the pool ofmutual fund managers, improving investment advisorybusiness rules and developing the professional capabilities
of asset management companies;· the financial derivatives market will continue todevelop and broaden, allowing for the trading of
more ETF products and more commodities andstock index futures/options, among others.

PRC Financial Regulation:
Annual Report (2021)
38

2

Fintech in the securities and futures sectors will be rolled out

Fintech is having wider applications in the securities
and futures sectors. Blockchain infrastructure forregional equity markets’ registration and custody, bigdata, cloud computing functions and program trading
are increasingly being used. Fintech is also used inregulation: for example, the Shanghai Stock Exchange’s
new generation monitoring system is based on a big
data platform, and the Shanghai Financial Court has
used sophisticated IT calculation models and the “yield
curve synchronized comparison” method to accurately
assess investors’ losses.
We expect that regulation of the application of Fintech
to become standardized in 2021. The Technology
Regulation Bureau, established by the CSRC in June
2020, will serve as an overall coordinator of regulatory
functions related to the use of technology in the
securities and futures sectors, such as coordinating thetechnology resources of regulators, guiding thetechnology development of the financial market
infrastructure of the industry, carrying out data

3

PRC Financial Regulation:
Annual Report (2021)
39

standardization governance, and taking charge of thefiling of securities IT system service providers. The twobatches of “filed securities IT system service providers”,
announced at the end of 2020, will mark the start of aroutine filing procedure and regulation for such service
providers.
Regulations may be introduced to regulate the practiceof securities companies renting third-party online
platforms to conduct securities business. Regulators
will work towards establishing a mechanism aimed atpreventing risks in Internet-based services. Third-party
online platforms will fall within the category of IT
system service providers for the purposes of unified
regulation. The regulatory approach for program
trading is also being explored, and we expect progress
to be made in 2021. Fintech-related incentive measures
are also being formulated, for example, in order tointroduce more Fintech professionals into the CSRC, theCSRC intends to relax the level of work experience
requirements of such Fintech professionals.

Securities laws enforcement will be carried out with zerotolerance, focusing on cases involving listed companies;
regulators will further emphasize the intermediaries’ duty to
act as “market gatekeepers”

We expect that, in 2021, the focus of enforcement of
securities laws will be on cases involving listedcompanies. This is one of implementation measures tosupport the registration-based system reform andother provisions of the amended Securities Law. The
CSRC will continue to pay attention to problems causedby governance failure, management and control
failures, and operational irregularities, such as illegal
capital occupation, illegal guarantees, financial fraud,and manipulation of mergers and acquisitions. The
CSRC may require listed companies to conduct
self-inspection and it will step up on-site inspections
and supervise the process of companies addressing andcorrecting internal failures. The regulators will also

continue to pay close attention to insider trading,market manipulation, illegal information disclosure,and other securities violations.
Together with the amended Securities Law, the Wuyang
bond issuance fraud case at the end of 2020 sounded awarning bell for many types of intermediaries who havea role in such activities by making them potentially
jointly and severally liable. In 2021, intermediaries will
face more comprehensive and stricter regulation, andtheir duties as “market gatekeepers” will have to be
more rigorously performed.

4Administrative settlement may play a more significant role inthe securities and futures sectors

In February 2015, with the State Council’s approval, theCSRC issued the Implementation Measures for the Pilot
Program of Administrative Settlement and the Interim
Measures for the Administration of Administrative Settlement
Payments, thus officially beginning the pilot programof “administrative settlement” in the securities andfutures sectors. In 2019, the CSRC reached and madepublic its first administrative reconciliation. The amended
Securities Law provides more clarity on the administrative
settlement at the legislative level, and the CSRC has
also set up an internal structure, including the establishment

5of an Administrative Settlement Committee. Currently,
the CSRC is pushing forward the development of supporting
regulations, and the Implementation Measures for Securities
and Futures-Related Administrative Settlement consultation
paper were published to solicit public opinion in August2020. We expect that, against the background ofstrengthened securities law enforcement, administrative
settlement is likely to be more effective, striking a balance
between efficiency and cost of law enforcement.

Judicial practice may be increasingly active in supporting theimplementation of key regulations, with better and earlier
involvement in major cases

The Wuyang bond issuance fraud case, where the various
intermediaries were held to be jointly and severally liable,
offered judicial support for the implementation of theamended Securities Law and current capital market
policies. We expect that in 2021 the judicial system willcontinue to act in this vein, becoming more involved in
major cases earlier and more decisively, and contributetypical case judgments in a number of specific areas.

We may witness the outcome of the first securities
representative litigation in 2021. The Amendment XI to
the Criminal Law also provides possibility of significant
criminal liability cases in the securities sector.

PRC Financial Regulation:
Annual Report (2021)
38

2

Fintech in the securities and futures sectors will be rolled out

Fintech is having wider applications in the securities
and futures sectors. Blockchain infrastructure forregional equity markets’ registration and custody, bigdata, cloud computing functions and program trading
are increasingly being used. Fintech is also used inregulation: for example, the Shanghai Stock Exchange’s
new generation monitoring system is based on a big
data platform, and the Shanghai Financial Court has
used sophisticated IT calculation models and the “yield
curve synchronized comparison” method to accurately
assess investors’ losses.
We expect that regulation of the application of Fintech
to become standardized in 2021. The Technology
Regulation Bureau, established by the CSRC in June
2020, will serve as an overall coordinator of regulatory
functions related to the use of technology in the
securities and futures sectors, such as coordinating thetechnology resources of regulators, guiding thetechnology development of the financial market
infrastructure of the industry, carrying out data

3

PRC Financial Regulation:
Annual Report (2021)
39

standardization governance, and taking charge of thefiling of securities IT system service providers. The twobatches of “filed securities IT system service providers”,
announced at the end of 2020, will mark the start of aroutine filing procedure and regulation for such service
providers.
Regulations may be introduced to regulate the practiceof securities companies renting third-party online
platforms to conduct securities business. Regulators
will work towards establishing a mechanism aimed atpreventing risks in Internet-based services. Third-party
online platforms will fall within the category of IT
system service providers for the purposes of unified
regulation. The regulatory approach for program
trading is also being explored, and we expect progress
to be made in 2021. Fintech-related incentive measures
are also being formulated, for example, in order tointroduce more Fintech professionals into the CSRC, theCSRC intends to relax the level of work experience
requirements of such Fintech professionals.

Securities laws enforcement will be carried out with zerotolerance, focusing on cases involving listed companies;
regulators will further emphasize the intermediaries’ duty to
act as “market gatekeepers”

We expect that, in 2021, the focus of enforcement of
securities laws will be on cases involving listedcompanies. This is one of implementation measures tosupport the registration-based system reform andother provisions of the amended Securities Law. The
CSRC will continue to pay attention to problems causedby governance failure, management and control
failures, and operational irregularities, such as illegal
capital occupation, illegal guarantees, financial fraud,and manipulation of mergers and acquisitions. The
CSRC may require listed companies to conduct
self-inspection and it will step up on-site inspections
and supervise the process of companies addressing andcorrecting internal failures. The regulators will also

continue to pay close attention to insider trading,market manipulation, illegal information disclosure,and other securities violations.
Together with the amended Securities Law, the Wuyang
bond issuance fraud case at the end of 2020 sounded awarning bell for many types of intermediaries who havea role in such activities by making them potentially
jointly and severally liable. In 2021, intermediaries will
face more comprehensive and stricter regulation, andtheir duties as “market gatekeepers” will have to be
more rigorously performed.

4Administrative settlement may play a more significant role inthe securities and futures sectors

In February 2015, with the State Council’s approval, theCSRC issued the Implementation Measures for the Pilot
Program of Administrative Settlement and the Interim
Measures for the Administration of Administrative Settlement
Payments, thus officially beginning the pilot programof “administrative settlement” in the securities andfutures sectors. In 2019, the CSRC reached and madepublic its first administrative reconciliation. The amended
Securities Law provides more clarity on the administrative
settlement at the legislative level, and the CSRC has
also set up an internal structure, including the establishment

5of an Administrative Settlement Committee. Currently,
the CSRC is pushing forward the development of supporting
regulations, and the Implementation Measures for Securities
and Futures-Related Administrative Settlement consultation
paper were published to solicit public opinion in August2020. We expect that, against the background ofstrengthened securities law enforcement, administrative
settlement is likely to be more effective, striking a balance
between efficiency and cost of law enforcement.

Judicial practice may be increasingly active in supporting theimplementation of key regulations, with better and earlier
involvement in major cases

The Wuyang bond issuance fraud case, where the various
intermediaries were held to be jointly and severally liable,
offered judicial support for the implementation of theamended Securities Law and current capital market
policies. We expect that in 2021 the judicial system willcontinue to act in this vein, becoming more involved in
major cases earlier and more decisively, and contributetypical case judgments in a number of specific areas.

We may witness the outcome of the first securities
representative litigation in 2021. The Amendment XI to
the Criminal Law also provides possibility of significant
criminal liability cases in the securities sector.

PRC Financial Regulation:
Annual Report (2021)
40

PRC Financial Regulation:
Annual Report (2021) –Asset Management

PRC Financial Regulation:
Annual Report (2021)
41

2020 Key Dates

Mid-January
The China-US Phase-One Economic and Trade
Agreement was signed, which provided, among
others, the undertakings given by China government inconnection with fund custodian business.

April 17
The CSRC published the consultation paper of the
Measures for Administration of Securities and Fund
Investment Consultancy Business.

May 8
The CBIRC issued the consultation paper, theProvisional Measures for Administration of Cash Trust of
Trust Companies.

July 31
The CSRC published the consultation paper, theMeasures for the Supervision and Administration of
Publicly-raised Securities Investment Fund Managers,
and its detailed implementation rules.

August 21
The first wholly-foreign-owned public fundmanagement company, BlackRock Fund Management
Limited Company, was approved for establishment.

August 28
The CSRC published the Measures for Supervision and
Administration of Publicly-raised Securities Investment
Fund Distribution Agencies.

March 18
New rules for insurance asset management, the Provisional
Measures for Administration of Insurance Asset Management
Products, were promulgated, and detailed implementation
rules issued on September 7.

April
The fallout from “Yuan You Bao (a financial productoffered by Bank of China (BOC) linked to crude oil
futures)”, which took place in April, resulted
ultimately in BOC being heavily fined.

June 29The Joint Announcement on the Launch of the
Cross-boundary Wealth Management Connect Pilot
Scheme in the Guangdong-Hong Kong-Macao Greater
Bay Area was made.

August 5
The first province-level Hong Kong-controlled NPL asset
management company, Hainan NWS AssetManagement Corporation Limited, was approved.

August 27
Citibank (China) Co., Ltd. became the second
wholly-foreign-owned bank to hold a public fundcustodian license.

December 25
The CBIRC published the consultation paper, theProvisional Measures for Administration of Distributionof Wealth Management Products by Commercial Bank
Wealth Management Subsidiaries.

PRC Financial Regulation:
Annual Report (2021)
40

PRC Financial Regulation:
Annual Report (2021) –Asset Management

PRC Financial Regulation:
Annual Report (2021)
41

2020 Key Dates

Mid-January
The China-US Phase-One Economic and Trade
Agreement was signed, which provided, among
others, the undertakings given by China government inconnection with fund custodian business.

April 17
The CSRC published the consultation paper of the
Measures for Administration of Securities and Fund
Investment Consultancy Business.

May 8
The CBIRC issued the consultation paper, theProvisional Measures for Administration of Cash Trust of
Trust Companies.

July 31
The CSRC published the consultation paper, theMeasures for the Supervision and Administration of
Publicly-raised Securities Investment Fund Managers,
and its detailed implementation rules.

August 21
The first wholly-foreign-owned public fundmanagement company, BlackRock Fund Management
Limited Company, was approved for establishment.

August 28
The CSRC published the Measures for Supervision and
Administration of Publicly-raised Securities Investment
Fund Distribution Agencies.

March 18
New rules for insurance asset management, the Provisional
Measures for Administration of Insurance Asset Management
Products, were promulgated, and detailed implementation
rules issued on September 7.

April
The fallout from “Yuan You Bao (a financial productoffered by Bank of China (BOC) linked to crude oil
futures)”, which took place in April, resulted
ultimately in BOC being heavily fined.

June 29The Joint Announcement on the Launch of the
Cross-boundary Wealth Management Connect Pilot
Scheme in the Guangdong-Hong Kong-Macao Greater
Bay Area was made.

August 5
The first province-level Hong Kong-controlled NPL asset
management company, Hainan NWS AssetManagement Corporation Limited, was approved.

August 27
Citibank (China) Co., Ltd. became the second
wholly-foreign-owned bank to hold a public fundcustodian license.

December 25
The CBIRC published the consultation paper, theProvisional Measures for Administration of Distributionof Wealth Management Products by Commercial Bank
Wealth Management Subsidiaries.

PRC Financial Regulation:
Annual Report (2021)
42

PRC Financial Regulation:
Annual Report (2021)
43

2020 Regulatory Observations

1

The regulatory framework for public asset managementbusiness centering the CSRC begins to take shape

A number of commercial banks set up wealth management
subsidiaries (“WMSs”) in 2019 and 2020, as required
under the Asset Management New Rules, for the purposeof splitting asset management business from their banking
businesses. These WMSs have become significant competitors
to public fund management companies (“FMCs”) andother asset managers with public fund licenses (such as
securities companies and insurance asset managementcompanies).
· In order to perfect the rules for approving public fundlicenses and governing supervision of day-to-day
operations, the CSRC published the Measures forSupervision and Administration of Publicly-raised Securities
Investment Fund Managers and supporting detailed
implementation rules (“FMC Consultation Papers”)
for public consultation in July 2020. This was the firsttime that a unified regulatory framework for public
asset management business had been initiated. The
Securities Law was amended in 2019 to make it clearthat asset management products should be classified
and regulated as securities. Adopting this regulatory
stance, the FMC Consultation Papers added therequirement that WMSs are required to be approvedby the CSRC before carrying out any public fundmanagement business (though WMSs will be subject
to dual supervision by the CSRC and the CBIRC at theinstitution-based regulation level).

· The FMC Consultation Papers relaxed the principle of“one participation/one control” (which means an entity
may only directly or indirectly own equity interests in
two FMCs, of which it may only have a controlling stakein one of them) to “one participation/one control/one
license”, allowing an entity to directly or indirectly
control one FMC and one other asset manager witha public fund license. The new principle of “oneparticipation/one control/one license” will likely leaveroom for any WMSs that have already started their
public fund management business to apply for a
retrospective license from the CSRC.
In addition to these measures, Yi Huiman, Chairman of
the CSRC, stated in May 2020 that the CSRC would continue
to welcome commercial banks’ investments in FMCs inorder to further promote the development of the publicfund market. Given that there were no bank-funded
FMCs in the past four years, the hope is that more new
FMCs will now be set up.

2

The regulation of third party services to fund management isrefined and improved

As the regulation of the asset management sector underwent
further revisions, the regulatory system for third party
services to the sector was also refined and improved
into one integrated package.
· Following the debut of the fund investment consultancy
business pilot scheme in 2019, the CSRC publishedthe Measures for Administration of Securities and Fund
Investment Consultancy Business (“Consultancy Business
Consultation Paper”) in April 2020, providing that
securities investment consultancy, fund investment
consultancy and research report businesses (together,“Consultancy Businesses”) all came under the supervisionof the CSRC. The Consultancy Business Consultation
Paper further stipulated there should be overall
supervision by the CSRC of fund investment consultancy
services (especially those having discretionary mandates,
where the service provider has discretion over the
choice of underlying funds) in terms of shareholder
qualifications, internal controls and business practices.
Additionally, the Consultancy Business Consultation
Paper explicitly mentions that Consultancy Businesses
have to operate on the “one participation/one control”
principle (see above).
· In July 2020, the CSRC officially published the Measures
for Administration of Securities Investment Funds Custodian
Business, unifying the standards applicable to bothbanking and non-banking financial institutions when
applying for public fund custodian licenses and clarifyingthat a PRC branch of a foreign-incorporated bank isalso permitted to apply for a custodian license (which
therefore allows these institutions to hold the fundassets in trust for their clients). Following that, thewholly foreign-owned (WOFE) banks of Citibank andDeutsche Bank did apply, and were granted approvals,
to secure a public fund custodian license. HSBC has
also since submitted an application.

· In August 2020, the Measures for Supervision and
Administration of Publicly-raised Securities Investment
Fund Distribution Agencies (“FDL New Rules”) was finallyintroduced after one-and-a-half-years’ public consultation.
The FDL New Rules impose more stringent requirements
on agencies in terms of their establishment, subsequentchanges to structure, and third-party fund distribution
agencies, as well as explicitly prohibiting third-party
fund distribution agencies from distributing private
equity investment funds. Additionally, the FDL New
Rules set out requirements on minimum volume ofbusiness agencies should conduct and limitations onclient maintenance fees agencies can charge. Consequently,
the FDL New Rules placed more burdensome regulatory
requirements on third-party fund distribution agencies.
· In December 2020, the CBIRC published the consultation
paper of the Provisional Measures for Administrationof Distribution of Wealth Management Products by
Commercial Bank Wealth Management Subsidiaries toregulate how wealth management products were
distributed. The consultation paper only expressly
allow banking institutions and WMSs to distributewealth management products and wealth management
products with the risk rating at Level Four or above(i.e., with relatively high levels of risk) could only besold at outlets of banks or WMSs.

PRC Financial Regulation:
Annual Report (2021)
42

PRC Financial Regulation:
Annual Report (2021)
43

2020 Regulatory Observations

1

The regulatory framework for public asset managementbusiness centering the CSRC begins to take shape

A number of commercial banks set up wealth management
subsidiaries (“WMSs”) in 2019 and 2020, as required
under the Asset Management New Rules, for the purposeof splitting asset management business from their banking
businesses. These WMSs have become significant competitors
to public fund management companies (“FMCs”) andother asset managers with public fund licenses (such as
securities companies and insurance asset managementcompanies).
· In order to perfect the rules for approving public fundlicenses and governing supervision of day-to-day
operations, the CSRC published the Measures forSupervision and Administration of Publicly-raised Securities
Investment Fund Managers and supporting detailed
implementation rules (“FMC Consultation Papers”)
for public consultation in July 2020. This was the firsttime that a unified regulatory framework for public
asset management business had been initiated. The
Securities Law was amended in 2019 to make it clearthat asset management products should be classified
and regulated as securities. Adopting this regulatory
stance, the FMC Consultation Papers added therequirement that WMSs are required to be approvedby the CSRC before carrying out any public fundmanagement business (though WMSs will be subject
to dual supervision by the CSRC and the CBIRC at theinstitution-based regulation level).

· The FMC Consultation Papers relaxed the principle of“one participation/one control” (which means an entity
may only directly or indirectly own equity interests in
two FMCs, of which it may only have a controlling stakein one of them) to “one participation/one control/one
license”, allowing an entity to directly or indirectly
control one FMC and one other asset manager witha public fund license. The new principle of “oneparticipation/one control/one license” will likely leaveroom for any WMSs that have already started their
public fund management business to apply for a
retrospective license from the CSRC.
In addition to these measures, Yi Huiman, Chairman of
the CSRC, stated in May 2020 that the CSRC would continue
to welcome commercial banks’ investments in FMCs inorder to further promote the development of the publicfund market. Given that there were no bank-funded
FMCs in the past four years, the hope is that more new
FMCs will now be set up.

2

The regulation of third party services to fund management isrefined and improved

As the regulation of the asset management sector underwent
further revisions, the regulatory system for third party
services to the sector was also refined and improved
into one integrated package.
· Following the debut of the fund investment consultancy
business pilot scheme in 2019, the CSRC publishedthe Measures for Administration of Securities and Fund
Investment Consultancy Business (“Consultancy Business
Consultation Paper”) in April 2020, providing that
securities investment consultancy, fund investment
consultancy and research report businesses (together,“Consultancy Businesses”) all came under the supervisionof the CSRC. The Consultancy Business Consultation
Paper further stipulated there should be overall
supervision by the CSRC of fund investment consultancy
services (especially those having discretionary mandates,
where the service provider has discretion over the
choice of underlying funds) in terms of shareholder
qualifications, internal controls and business practices.
Additionally, the Consultancy Business Consultation
Paper explicitly mentions that Consultancy Businesses
have to operate on the “one participation/one control”
principle (see above).
· In July 2020, the CSRC officially published the Measures
for Administration of Securities Investment Funds Custodian
Business, unifying the standards applicable to bothbanking and non-banking financial institutions when
applying for public fund custodian licenses and clarifyingthat a PRC branch of a foreign-incorporated bank isalso permitted to apply for a custodian license (which
therefore allows these institutions to hold the fundassets in trust for their clients). Following that, thewholly foreign-owned (WOFE) banks of Citibank andDeutsche Bank did apply, and were granted approvals,
to secure a public fund custodian license. HSBC has
also since submitted an application.

· In August 2020, the Measures for Supervision and
Administration of Publicly-raised Securities Investment
Fund Distribution Agencies (“FDL New Rules”) was finallyintroduced after one-and-a-half-years’ public consultation.
The FDL New Rules impose more stringent requirements
on agencies in terms of their establishment, subsequentchanges to structure, and third-party fund distribution
agencies, as well as explicitly prohibiting third-party
fund distribution agencies from distributing private
equity investment funds. Additionally, the FDL New
Rules set out requirements on minimum volume ofbusiness agencies should conduct and limitations onclient maintenance fees agencies can charge. Consequently,
the FDL New Rules placed more burdensome regulatory
requirements on third-party fund distribution agencies.
· In December 2020, the CBIRC published the consultation
paper of the Provisional Measures for Administrationof Distribution of Wealth Management Products by
Commercial Bank Wealth Management Subsidiaries toregulate how wealth management products were
distributed. The consultation paper only expressly
allow banking institutions and WMSs to distributewealth management products and wealth management
products with the risk rating at Level Four or above(i.e., with relatively high levels of risk) could only besold at outlets of banks or WMSs.

PRC Financial Regulation:
Annual Report (2021)
44

3

PRC Financial Regulation:
Annual Report (2021)
45

Asset management sector continues to open up, and there
are more opportunities for cross-border asset management

The asset management sector has continued to open
up and welcomed several new market players. In 2020,BlackRock, Neuberger Berman and Fidelity – all big
names – applied for licenses from the CSRC to set up
FMCs. In August 2020, BlackRock Fund Management
Limited Company received the CSRC approval to
become the first wholly foreign-owned FMC. The CBIRC
then approved the application by BlackRock, China
Construction Bank Corporation and Temasek (throughits subsidiary Fullerton) to set up a wealth managementcompany (“WMC”), which was the second foreign-controlled
WMC being approved, following the approval of thejoint venture WMC of Amundi Asset Management andBank of China in 2019.
There were also a number of important developments
in 2020 with reference to cross-border asset
management.
· A new cross-border asset management channel - theCross-Boundary Wealth Management Connect (“WM
Connect”) - as well as its pilot implementation in the
Greater Bay Area, was announced to be launched.
Pending the implementation rules, it remains unclear
how the different regulatory regimes in mainland China
and Hong Kong will be coordinated, for example whenit comes to know your client (KYC), anti-money laundering(AML), suitability check, and exchange of tax related
information for financial accounts.

· Although the ETF Connect, which allows international
investors to trade exchange-traded funds (“ETFs”) listedon the Shanghai and Shenzhen exchanges, and mainland
Chinese investors to trade ETFs listed on the Hong
Kong stock exchange, is still in its early stages ofdevelopment, the first batch of Hong Kong-mainlandcross-listed ETFs have been approved in October 2020.
The two capital markets will be connected by way of
ETF feeder funds’ (listed on one market) investments
in ETF master funds (listed on another market). Regulators
will examine how this works in practice and how thisaffects the future operation of ETF Connect.
· Regulators increased the quota for Qualified Domestic
Institutional Investor (“QDII”) by allowing WMSs toapply for QDII qualification. The State Administrationof Foreign Exchange (“SAFE”) also indicated it would
expand the foreign exchange quota and the range of
cities undertaking Qualified Domestic Investment
Partnership (“QDLP”)/Qualified Domestic Investment
Entity (“QDIE”) pilot schemes. These will all provide
onshore investors with more opportunities to participate
in the global asset management market.

4

Asset Management New Rules continue to be implemented andtransitional period extended

Following the issuance of implementation rules of theAsset Management New Rules (issued by multiple financial
regulators in 2018) governing banks, securities firms,
futures and fund houses in 2019, in 2020, implementation
rules governing asset management businesses conductedby the insurance and financial asset investment companies(”AIC”) were also issued (an AIC is a non-banking institutional
approved by the CBIRC, mainly engaging in the businessof converting the debts owed to banks into equities andprovision of other corresponding supportive businesses), in
addition to the consultation paper of the rules governing
asset management in the trust sector. As such, implementation
rules of the Asset Management New Rules have been
issued to regulate all the relevant types of institutions
across the sector.
The result is that, while all of these types of institutions
retain their core characteristics, the whole sector isinnovating. The intention is to have one set of regulations
applying to asset management generally.
· The new regulatory framework for asset management
carried out by insurance companies involves a “one+ three” supervision model, i.e. in addition to therequirements under Asset Management New Rules,
the CBIRC also introduced specific rules governing
individual category of investment by the asset
management schemes (including debt investment,
equity investment, and portfolio products).

· The consultation paper of the Provisional Measures
for Administration of Cash Trust of Trust Companies
allows flexibility when it comes to how much a trust
company can invest in “non-standard” products
acknowledging the difference between the trust sector
and other asset management sectors.
· The new rules that specifically apply to AICs set higher
requirements for who can be qualified investors for
asset management schemes launched by AICs.
Because of the impact of COVID-19 and the effects on
the macro economy, which has in turn heightened levelsof risk generally, the PBOC has extended the transition
period for the Asset Management New Rules to come intofull effect. It is worth noting that the PBOC has said thatany financial institution that has failed to fully comply
with the new regulations when the extended transition
period has ended will need to discuss special treatment
with regulators on a case-by-case basis. The approach is
one in which regulators strike a balance between
encouraging a healthy development of the market
while ensuring stability of the financial system, in order
to avoid having to extend the transition period again.

PRC Financial Regulation:
Annual Report (2021)
44

3

PRC Financial Regulation:
Annual Report (2021)
45

Asset management sector continues to open up, and there
are more opportunities for cross-border asset management

The asset management sector has continued to open
up and welcomed several new market players. In 2020,BlackRock, Neuberger Berman and Fidelity – all big
names – applied for licenses from the CSRC to set up
FMCs. In August 2020, BlackRock Fund Management
Limited Company received the CSRC approval to
become the first wholly foreign-owned FMC. The CBIRC
then approved the application by BlackRock, China
Construction Bank Corporation and Temasek (throughits subsidiary Fullerton) to set up a wealth managementcompany (“WMC”), which was the second foreign-controlled
WMC being approved, following the approval of thejoint venture WMC of Amundi Asset Management andBank of China in 2019.
There were also a number of important developments
in 2020 with reference to cross-border asset
management.
· A new cross-border asset management channel - theCross-Boundary Wealth Management Connect (“WM
Connect”) - as well as its pilot implementation in the
Greater Bay Area, was announced to be launched.
Pending the implementation rules, it remains unclear
how the different regulatory regimes in mainland China
and Hong Kong will be coordinated, for example whenit comes to know your client (KYC), anti-money laundering(AML), suitability check, and exchange of tax related
information for financial accounts.

· Although the ETF Connect, which allows international
investors to trade exchange-traded funds (“ETFs”) listedon the Shanghai and Shenzhen exchanges, and mainland
Chinese investors to trade ETFs listed on the Hong
Kong stock exchange, is still in its early stages ofdevelopment, the first batch of Hong Kong-mainlandcross-listed ETFs have been approved in October 2020.
The two capital markets will be connected by way of
ETF feeder funds’ (listed on one market) investments
in ETF master funds (listed on another market). Regulators
will examine how this works in practice and how thisaffects the future operation of ETF Connect.
· Regulators increased the quota for Qualified Domestic
Institutional Investor (“QDII”) by allowing WMSs toapply for QDII qualification. The State Administrationof Foreign Exchange (“SAFE”) also indicated it would
expand the foreign exchange quota and the range of
cities undertaking Qualified Domestic Investment
Partnership (“QDLP”)/Qualified Domestic Investment
Entity (“QDIE”) pilot schemes. These will all provide
onshore investors with more opportunities to participate
in the global asset management market.

4

Asset Management New Rules continue to be implemented andtransitional period extended

Following the issuance of implementation rules of theAsset Management New Rules (issued by multiple financial
regulators in 2018) governing banks, securities firms,
futures and fund houses in 2019, in 2020, implementation
rules governing asset management businesses conductedby the insurance and financial asset investment companies(”AIC”) were also issued (an AIC is a non-banking institutional
approved by the CBIRC, mainly engaging in the businessof converting the debts owed to banks into equities andprovision of other corresponding supportive businesses), in
addition to the consultation paper of the rules governing
asset management in the trust sector. As such, implementation
rules of the Asset Management New Rules have been
issued to regulate all the relevant types of institutions
across the sector.
The result is that, while all of these types of institutions
retain their core characteristics, the whole sector isinnovating. The intention is to have one set of regulations
applying to asset management generally.
· The new regulatory framework for asset management
carried out by insurance companies involves a “one+ three” supervision model, i.e. in addition to therequirements under Asset Management New Rules,
the CBIRC also introduced specific rules governing
individual category of investment by the asset
management schemes (including debt investment,
equity investment, and portfolio products).

· The consultation paper of the Provisional Measures
for Administration of Cash Trust of Trust Companies
allows flexibility when it comes to how much a trust
company can invest in “non-standard” products
acknowledging the difference between the trust sector
and other asset management sectors.
· The new rules that specifically apply to AICs set higher
requirements for who can be qualified investors for
asset management schemes launched by AICs.
Because of the impact of COVID-19 and the effects on
the macro economy, which has in turn heightened levelsof risk generally, the PBOC has extended the transition
period for the Asset Management New Rules to come intofull effect. It is worth noting that the PBOC has said thatany financial institution that has failed to fully comply
with the new regulations when the extended transition
period has ended will need to discuss special treatment
with regulators on a case-by-case basis. The approach is
one in which regulators strike a balance between
encouraging a healthy development of the market
while ensuring stability of the financial system, in order
to avoid having to extend the transition period again.

PRC Financial Regulation:
Annual Report (2021)
46

5

PRC Financial Regulation:
Annual Report (2021)
47

More cases of default and more investor disputes, and theprinciple of caveat venditor (“seller beware”) and caveat
emptor (“buyer beware”) is being enforced

Due to increase of default cases, 2020 has seen moreinvestor disputes in the asset management sector. This has
led to greater engagement of regulators and courts,
whose opinions have been listened to with great interestby the market as a whole.
So far as regulators are concerned, the Trust Institution
Supervision Department of the CBIRC declared in July that
asset management companies were breaking the law ifthey guaranteed investment return to investors, and thatany statements to this effect or clauses in contracts would
be deemed void and not protected by law. Both the CBIRC
and the CSRC introduced new rules/consultation papers
to impose higher standards on sellers when promoting or
selling their products. The PBOC stressed that the premiseof breaking the return guarantee to investors is that there
should not be any fraudulent or misleading behavior bysellers, otherwise, there is no basis for the seller to claim“buyer beware” and the seller should take the loss bythemselves and even get punished.
So far as courts are concerned, the courts have made somesignificant pronouncements, In cases where there wasliquidity difficulty, some trust companies declared theywould only make a partial repayment to investors, which,in turn, prompted investors to file a claim for full indemnity
on the basis that the sellers/trust companies of those trust
schemes had not fulfilled their duties. However, the courts
did not uphold such a claim for indemnity. In December,the Higher People’s Court of Hunan Province held that any
clause agreed by trust companies guaranteeing investment
return to investors should be null and void.

The “Yuan You Bao” event in April (in which investors
invested in a product linked to the price of oil which had
been sold to them by the Bank of China (BOC)) raised awide discussion in the market, especially for cross-borderbusiness of financial institutions. Whether BOC fulfilled its
obligation to check whether investors were eligible toinvest was one of the issues under discussion. As reported,
the proposal of an out-of-court settlement, as proposed by
BOC, was not accepted by all investors. The higher courts
in many provinces have appointed the single jurisdiction
to rule on multiple disputes that arose in those provinces.
In late November, several commercial banks suspended
their precious metal trading businesses following thewindow guidance of the regulators, which was indirectly
caused by this event. Eventually, in early December, BOC
was fined by the CBIRC for this event and the regulator
found that BOC had not carried out investor eligibility tests
as it should have done, including but not limited to that
few investors did not meet the age criteria.
The event demonstrated that both regulators and courts
moved strongly to protect the interests of financial
consumers. It also underlined the fact that the rules
governing financial consumer right protection aredeveloping along with the enforced investor education,
improved internal controls and a constantly changing
market environment.

6

Nationwide and regional asset management companies growin number, and new ways of disposals of non-performing
assets are explored

There has been a marked increase in activity in connection
with the sale and purchase of non-performing assets
owned by Chinese enterprises following the spread of
COVID-19 and the global economic slowdown. At thesame time, Chinese regulators are actively introducing
new players to this market. In January 2020, The China-US
Phase-one Economic and Trade Agreement allowed US
financial service providers to acquire non-performing
loans directly from Chinese banks, beginning with
provincial licenses. In March, the CBIRC approved thetransformation of Jiantou CITICS Asset Management
Co., Ltd. into a nationwide asset management company,
which thereafter became known as China Galaxy AssetManagement Co. This company became the fifth nationwide
asset management company to be licensed to acquire
non-performing assets, thereby injecting fresh impetus
into the market. In August, the first provincial non-performing
asset investment company was established in Hainan
province (controlled by Hong Kong shareholders). A
pilot scheme involving cross-border transfer of
non-performing assets was extended. Following theexamples of existing pilot schemes in Shenzhen andGuangdong, regulators in Hainan, Beijing, Shanghai
and Sichuan have all issued rules to start pilot schemes
for cross-border transfers of non-performing assets intheir provinces.
In June 2020, the regulator issued a consultation paper,
the Notice for Launching Pilot Scheme for Transferring
Non-performing Loans, and the Implementation Plan for
Pilot Scheme of Transferring Non-performing Loans in
Commercial Banks. These were intended to explore thepossibility of transferring non-performing assets with asingle institutional debtor, and transferring bulk
non-performing assets with natural person debtors. The
Chairman of the CBIRC, Guo Shuqing, said in aninterview that it was intended to allow insurance asset
management companies and AICs as new market players
to explore new ways of acquiring non-performing assets
by cooperating with banks. Such moves would helpbanks to dispose of non-performing assets and improvetheir asset quality.

PRC Financial Regulation:
Annual Report (2021)
46

5

PRC Financial Regulation:
Annual Report (2021)
47

More cases of default and more investor disputes, and theprinciple of caveat venditor (“seller beware”) and caveat
emptor (“buyer beware”) is being enforced

Due to increase of default cases, 2020 has seen moreinvestor disputes in the asset management sector. This has
led to greater engagement of regulators and courts,
whose opinions have been listened to with great interestby the market as a whole.
So far as regulators are concerned, the Trust Institution
Supervision Department of the CBIRC declared in July that
asset management companies were breaking the law ifthey guaranteed investment return to investors, and thatany statements to this effect or clauses in contracts would
be deemed void and not protected by law. Both the CBIRC
and the CSRC introduced new rules/consultation papers
to impose higher standards on sellers when promoting or
selling their products. The PBOC stressed that the premiseof breaking the return guarantee to investors is that there
should not be any fraudulent or misleading behavior bysellers, otherwise, there is no basis for the seller to claim“buyer beware” and the seller should take the loss bythemselves and even get punished.
So far as courts are concerned, the courts have made somesignificant pronouncements, In cases where there wasliquidity difficulty, some trust companies declared theywould only make a partial repayment to investors, which,in turn, prompted investors to file a claim for full indemnity
on the basis that the sellers/trust companies of those trust
schemes had not fulfilled their duties. However, the courts
did not uphold such a claim for indemnity. In December,the Higher People’s Court of Hunan Province held that any
clause agreed by trust companies guaranteeing investment
return to investors should be null and void.

The “Yuan You Bao” event in April (in which investors
invested in a product linked to the price of oil which had
been sold to them by the Bank of China (BOC)) raised awide discussion in the market, especially for cross-borderbusiness of financial institutions. Whether BOC fulfilled its
obligation to check whether investors were eligible toinvest was one of the issues under discussion. As reported,
the proposal of an out-of-court settlement, as proposed by
BOC, was not accepted by all investors. The higher courts
in many provinces have appointed the single jurisdiction
to rule on multiple disputes that arose in those provinces.
In late November, several commercial banks suspended
their precious metal trading businesses following thewindow guidance of the regulators, which was indirectly
caused by this event. Eventually, in early December, BOC
was fined by the CBIRC for this event and the regulator
found that BOC had not carried out investor eligibility tests
as it should have done, including but not limited to that
few investors did not meet the age criteria.
The event demonstrated that both regulators and courts
moved strongly to protect the interests of financial
consumers. It also underlined the fact that the rules
governing financial consumer right protection aredeveloping along with the enforced investor education,
improved internal controls and a constantly changing
market environment.

6

Nationwide and regional asset management companies growin number, and new ways of disposals of non-performing
assets are explored

There has been a marked increase in activity in connection
with the sale and purchase of non-performing assets
owned by Chinese enterprises following the spread of
COVID-19 and the global economic slowdown. At thesame time, Chinese regulators are actively introducing
new players to this market. In January 2020, The China-US
Phase-one Economic and Trade Agreement allowed US
financial service providers to acquire non-performing
loans directly from Chinese banks, beginning with
provincial licenses. In March, the CBIRC approved thetransformation of Jiantou CITICS Asset Management
Co., Ltd. into a nationwide asset management company,
which thereafter became known as China Galaxy AssetManagement Co. This company became the fifth nationwide
asset management company to be licensed to acquire
non-performing assets, thereby injecting fresh impetus
into the market. In August, the first provincial non-performing
asset investment company was established in Hainan
province (controlled by Hong Kong shareholders). A
pilot scheme involving cross-border transfer of
non-performing assets was extended. Following theexamples of existing pilot schemes in Shenzhen andGuangdong, regulators in Hainan, Beijing, Shanghai
and Sichuan have all issued rules to start pilot schemes
for cross-border transfers of non-performing assets intheir provinces.
In June 2020, the regulator issued a consultation paper,
the Notice for Launching Pilot Scheme for Transferring
Non-performing Loans, and the Implementation Plan for
Pilot Scheme of Transferring Non-performing Loans in
Commercial Banks. These were intended to explore thepossibility of transferring non-performing assets with asingle institutional debtor, and transferring bulk
non-performing assets with natural person debtors. The
Chairman of the CBIRC, Guo Shuqing, said in aninterview that it was intended to allow insurance asset
management companies and AICs as new market players
to explore new ways of acquiring non-performing assets
by cooperating with banks. Such moves would helpbanks to dispose of non-performing assets and improvetheir asset quality.

PRC Financial Regulation:
Annual Report (2021)
48

7

PRC Financial Regulation:
Annual Report (2021)
49

Financial innovation and use of technology
are encouraged and valued

As well as tightening financial regulation, the PRC regulators
are at the same time encouraging more innovation,
both in products and infrastructure. Whether the new
products/infrastructure will work well (e.g. balancing
interests and risk, and realizing the expectation ofregulators) are to be tested by the market and investors.
In April 2020, the issuance of the Notice of the Work
Related to Promoting the Pilot Program of Real Estate
Investment Trusts (REITs) in the Infrastructure Field
initiated a pilot scheme covering REITs. This was followedby the promulgation of a succession of rules governing
REITs’ regulation. The first batch of REIT products are
expected to be officially released soon.
In May, the CBIRC issued the Notice of Launching AssetManagement Business by Financial Asset Investment
Company to provide specific rules on the set-up andmanagement of debt-to-equity swap schemes by AICs
via asset management business. This adds a new investment
channel for funds in the market.
In June, the National Association of Financial Market
Institutional Investors declared that the sector planned
to introduce asset-backed commercial paper (ABCP)
that would fall within the existing regulatory framework ofasset-backed notes (ABNs). For an ABCP product, it
would allow rollover issuance and different maturity
dates between the note and the underlying asset (i.e.
the maturity date of the note could be before that of its
underlying asset, and investors of the note may exit bytransferring trust units to new investors).
In July, the CSRC issued the Guidelines for the Side Pocket
Mechanism of Publicly Offered Securities Investment
Funds (for Trial Implementation) which sought to bringin the practice used in developed markets. (A side
pocket is a mechanism often used by a fund to keep
illiquid, hard-to-value, and often highly risky assets
separate from the fund's other investments.) This was afurther step by regulators to protect investor rights.

Regulators have also sought to encourage greater useof technology and to help bring about standardized
electronic processes that can benefit the asset management
sector, in part generated by COVID-19-related lockdowns.
In March 2020, the CSRC issued the consultation paper,
the Management Rules on Leasing Third Party Internet
Platforms to Conduct Securities Business Activities by
Securities Companies, which explicitly stipulated there
must be a barrier between securities business and technology
services and required third party service providers tofile with the CSRC. Such rules would apply by reference
to fund management companies, securities investment
consultancy institutions, mutual fund distribution institutions,and investment consultants.
In July, the consultation paper of the Management Rules
on Investment Consultancy Services for Securities Investment
Funds was issued. The paper laid down that investment
consultancy institutions that provided robo-advisory services,
relying on AI and other data management functions,should report to the CSRC with details of their technology
plans, matrix of models and their investment rationale.
In October, the Asset Management Association of China
issued the consultation paper for the Management Rulesof Electronic Contract Business for Private Investment
Funds (for Trial Implementation), which looked at how
private investment funds should manage electronicallyagreed contracts and lay down the contract execution
procedure.
In December, the consultation paper of the Interim Measures
on Distribution and Management of Wealth Management
Products of Commercial Bank Wealth Management
Subsidiaries was issued, which stipulated that any institutions
which sell wealth management products to non-institutional
investors via electronic channels should record all steps
taken in that process, including marketing promotion,
product risk disclosure, the information provided tobuyers, buyers’ confirmation and feedback, and ensurethat back-track checking and evidencing are possible.

8

Regulators maintain tough enforcement against violators,
identifying common breaches, isolated violations andindustry-specific issues

Through 2020, regulators and self-regulatory institutions
continued to crack down on those in the asset management
and wealth management business acting in breach oflaws and regulations. The statistics are not complete,but, so far as is known, at least 31 commercial banks, 12
trust companies, 18 securities companies and subsidiaries, 1fund management company subsidiary, 1 insurance
asset management company, 18 independent fund
distribution institutions, and 107 private fund managers
had sanctions imposed on them or required to change
their behavior by regulatory bodies within their sector.
Analysis shows there were some common types of breaches
across the sector, as well as industry-specific violations.

Regulators had concentrated on a few issues, in particular,
including: whether institutions had set up compliant
internal controls; whether they had identified key risks
for their business; whether they were adhering to investor
eligibility criteria when selling investment products;
and whether they were disclosing the required information
to regulators. Analysis of sanctions imposed by regulators
reveals a number of other areas where institutions werefalling foul of regulations, including: the levels of borrowing
by commercial banks to support wealth managementbusinesses; the levels of proprietary business being
conducted by commercial bank wealth management
arms; trust businesses offering guaranteed returns; andfailures of compliance in asset management institutions
regulated by the CSRC.

PRC Financial Regulation:
Annual Report (2021)
48

7

PRC Financial Regulation:
Annual Report (2021)
49

Financial innovation and use of technology
are encouraged and valued

As well as tightening financial regulation, the PRC regulators
are at the same time encouraging more innovation,
both in products and infrastructure. Whether the new
products/infrastructure will work well (e.g. balancing
interests and risk, and realizing the expectation ofregulators) are to be tested by the market and investors.
In April 2020, the issuance of the Notice of the Work
Related to Promoting the Pilot Program of Real Estate
Investment Trusts (REITs) in the Infrastructure Field
initiated a pilot scheme covering REITs. This was followedby the promulgation of a succession of rules governing
REITs’ regulation. The first batch of REIT products are
expected to be officially released soon.
In May, the CBIRC issued the Notice of Launching AssetManagement Business by Financial Asset Investment
Company to provide specific rules on the set-up andmanagement of debt-to-equity swap schemes by AICs
via asset management business. This adds a new investment
channel for funds in the market.
In June, the National Association of Financial Market
Institutional Investors declared that the sector planned
to introduce asset-backed commercial paper (ABCP)
that would fall within the existing regulatory framework ofasset-backed notes (ABNs). For an ABCP product, it
would allow rollover issuance and different maturity
dates between the note and the underlying asset (i.e.
the maturity date of the note could be before that of its
underlying asset, and investors of the note may exit bytransferring trust units to new investors).
In July, the CSRC issued the Guidelines for the Side Pocket
Mechanism of Publicly Offered Securities Investment
Funds (for Trial Implementation) which sought to bringin the practice used in developed markets. (A side
pocket is a mechanism often used by a fund to keep
illiquid, hard-to-value, and often highly risky assets
separate from the fund's other investments.) This was afurther step by regulators to protect investor rights.

Regulators have also sought to encourage greater useof technology and to help bring about standardized
electronic processes that can benefit the asset management
sector, in part generated by COVID-19-related lockdowns.
In March 2020, the CSRC issued the consultation paper,
the Management Rules on Leasing Third Party Internet
Platforms to Conduct Securities Business Activities by
Securities Companies, which explicitly stipulated there
must be a barrier between securities business and technology
services and required third party service providers tofile with the CSRC. Such rules would apply by reference
to fund management companies, securities investment
consultancy institutions, mutual fund distribution institutions,and investment consultants.
In July, the consultation paper of the Management Rules
on Investment Consultancy Services for Securities Investment
Funds was issued. The paper laid down that investment
consultancy institutions that provided robo-advisory services,
relying on AI and other data management functions,should report to the CSRC with details of their technology
plans, matrix of models and their investment rationale.
In October, the Asset Management Association of China
issued the consultation paper for the Management Rulesof Electronic Contract Business for Private Investment
Funds (for Trial Implementation), which looked at how
private investment funds should manage electronicallyagreed contracts and lay down the contract execution
procedure.
In December, the consultation paper of the Interim Measures
on Distribution and Management of Wealth Management
Products of Commercial Bank Wealth Management
Subsidiaries was issued, which stipulated that any institutions
which sell wealth management products to non-institutional
investors via electronic channels should record all steps
taken in that process, including marketing promotion,
product risk disclosure, the information provided tobuyers, buyers’ confirmation and feedback, and ensurethat back-track checking and evidencing are possible.

8

Regulators maintain tough enforcement against violators,
identifying common breaches, isolated violations andindustry-specific issues

Through 2020, regulators and self-regulatory institutions
continued to crack down on those in the asset management
and wealth management business acting in breach oflaws and regulations. The statistics are not complete,but, so far as is known, at least 31 commercial banks, 12
trust companies, 18 securities companies and subsidiaries, 1fund management company subsidiary, 1 insurance
asset management company, 18 independent fund
distribution institutions, and 107 private fund managers
had sanctions imposed on them or required to change
their behavior by regulatory bodies within their sector.
Analysis shows there were some common types of breaches
across the sector, as well as industry-specific violations.

Regulators had concentrated on a few issues, in particular,
including: whether institutions had set up compliant
internal controls; whether they had identified key risks
for their business; whether they were adhering to investor
eligibility criteria when selling investment products;
and whether they were disclosing the required information
to regulators. Analysis of sanctions imposed by regulators
reveals a number of other areas where institutions werefalling foul of regulations, including: the levels of borrowing
by commercial banks to support wealth managementbusinesses; the levels of proprietary business being
conducted by commercial bank wealth management
arms; trust businesses offering guaranteed returns; andfailures of compliance in asset management institutions
regulated by the CSRC.

PRC Financial Regulation:
Annual Report (2021)
50

PRC Financial Regulation:
Annual Report (2021)
51

2021 Regulatory Outlook

1

Asset management will benefit from more coordinatedoverall supervision, and function-based regulation willcontinue to be implemented

As the Assets Management New Rules are gradually
being implemented and financial reforms continue toembed in the system, the likely consequence for theasset management sector is that regulations will transition
from institution-based regulation to function-based
regulation. The publication of the FMC Consultation
Papers indicate the overall trend to unify regulations
applicable to asset management business offering
public products, in particular relating to internal controls,
investment operations of funds, compliance management,
staffing, and corporate governance. It is worth notingthat the CBIRC published the consultation draft of theProvisional Measures for Administration of Distribution of
Wealth Management Products by Commercial Bank
Wealth Management Subsidiaries, which indicates that
CBIRC will continue to improve its regulatory system ofWMS (in respect of the corporate policies to be establishedwithin WMS). However, we still expect that, as regards
regulations covering publicly offered asset management
products, the financial regulatory regime is being shaped
towards function-based regulation supported by ancillary
institution-based regulation, such that the CSRC will bein charge of license approvals and product registrations,
including inspections and enforcement, while the CBIRC
will be entrusted by the CSRC to carry out day-to-day
regulation of WMS. As regards regulations of privately
offered asset management products, we expect the overall
regulatory regimes established by the Assets Management
New Rules will be adopted in different sub-sectors in thelong run and, during such process, the PBOC will play aleading role to stabilize the financial market.

2

Regulations will cover fund third-party service providers, andthe market infrastructure in the asset management sector
will be built and improved

Once the asset management sector regulations become
well bedded-in, we expect that regulators’ focus willturn to service providers used by asset managers, suchas custodians, distributors, fund administrators (“FAs”),
transfer agents (“TAs”) and IT service providers. These
service providers will be directly regulated by financial
regulators or indirectly managed via asset managers(i.e. by regulators imposing mandatory obligations on
asset managers to monitor and manage their service
providers), so as to ensure that asset managers focus on
their main business and risk control and to promote thespecialization of fund service providers.
As the fund sector continues to open up, we expect
there to be more wholly foreign-owned fund managementcompanies. To better align local fund managementcompanies with international practices, fund management

3companies may be allowed to outsource certain middle
and back offices (with conditions/restrictions), there
will be more systematic regulations concerning FAs andTAs accessing the market, and independent custodians(which are not banks or securities firms) may be allowed. In
the private funds area, we expect the registration of
FAs/TAs will be expedited and foreign players will enter
these fields.
In addition, we expect the regulators to strengthen therequirements of registration of asset management
products, with the aim both of assigning clear responsibilities
to each party in each transaction and making sure there
are whole-process risk controls, and of establishing amarket infrastructure for the future unit transfers ofasset management products (e.g. trust unit transfersand private fund unit transfers).

Law enforcement of the trust sector will be stepped up, andthere will be further action to stamp out “mandatory
repayments”

Trust businesses have come under particular scrutiny,
involving intensive screening and monitoring, withregulators clamping down on risky practices. A few trust
companies have been taken over by regulators. In its
China Financial Stability Report (2020), the PBOC spelt
out that, in its view, a number of trust companies had
become “high risk” institutions, the risk exposure in thetrust sector was speeding up, and there was a likelihoodof risk spillover.
We expect the risks of trust sector will continue to be
exposed in 2021, and there may be more takeovers oftrust companies by regulators and even the potential
for trust companies going bankrupt. We also expect acertain amount of trust schemes, will be forced to ceasemandatory repayments in 2021. To ensure a steadytransition and avoid systematic financial risk, regulators
will balance the interest of “clearing channel businessand prohibiting cash pool” with the potential impact of
cracking down on high-risk institutions. We also expect
there to be more court judgments and judicial views on“mandatory repayment” and custodian’s responsibility
following on the lines of that handed down by the Higher
People’s Court of Hunan Province, which decreed thatmandatory repayments were void. Trust companies will
be compelled to change their business practices, tomove away from the practice of channel business andthe use of trust schemes for financing purposes.
Regulators may provide certain levels of assistance andsupport as the process unfolds.

PRC Financial Regulation:
Annual Report (2021)
50

PRC Financial Regulation:
Annual Report (2021)
51

2021 Regulatory Outlook

1

Asset management will benefit from more coordinatedoverall supervision, and function-based regulation willcontinue to be implemented

As the Assets Management New Rules are gradually
being implemented and financial reforms continue toembed in the system, the likely consequence for theasset management sector is that regulations will transition
from institution-based regulation to function-based
regulation. The publication of the FMC Consultation
Papers indicate the overall trend to unify regulations
applicable to asset management business offering
public products, in particular relating to internal controls,
investment operations of funds, compliance management,
staffing, and corporate governance. It is worth notingthat the CBIRC published the consultation draft of theProvisional Measures for Administration of Distribution of
Wealth Management Products by Commercial Bank
Wealth Management Subsidiaries, which indicates that
CBIRC will continue to improve its regulatory system ofWMS (in respect of the corporate policies to be establishedwithin WMS). However, we still expect that, as regards
regulations covering publicly offered asset management
products, the financial regulatory regime is being shaped
towards function-based regulation supported by ancillary
institution-based regulation, such that the CSRC will bein charge of license approvals and product registrations,
including inspections and enforcement, while the CBIRC
will be entrusted by the CSRC to carry out day-to-day
regulation of WMS. As regards regulations of privately
offered asset management products, we expect the overall
regulatory regimes established by the Assets Management
New Rules will be adopted in different sub-sectors in thelong run and, during such process, the PBOC will play aleading role to stabilize the financial market.

2

Regulations will cover fund third-party service providers, andthe market infrastructure in the asset management sector
will be built and improved

Once the asset management sector regulations become
well bedded-in, we expect that regulators’ focus willturn to service providers used by asset managers, suchas custodians, distributors, fund administrators (“FAs”),
transfer agents (“TAs”) and IT service providers. These
service providers will be directly regulated by financial
regulators or indirectly managed via asset managers(i.e. by regulators imposing mandatory obligations on
asset managers to monitor and manage their service
providers), so as to ensure that asset managers focus on
their main business and risk control and to promote thespecialization of fund service providers.
As the fund sector continues to open up, we expect
there to be more wholly foreign-owned fund managementcompanies. To better align local fund managementcompanies with international practices, fund management

3companies may be allowed to outsource certain middle
and back offices (with conditions/restrictions), there
will be more systematic regulations concerning FAs andTAs accessing the market, and independent custodians(which are not banks or securities firms) may be allowed. In
the private funds area, we expect the registration of
FAs/TAs will be expedited and foreign players will enter
these fields.
In addition, we expect the regulators to strengthen therequirements of registration of asset management
products, with the aim both of assigning clear responsibilities
to each party in each transaction and making sure there
are whole-process risk controls, and of establishing amarket infrastructure for the future unit transfers ofasset management products (e.g. trust unit transfersand private fund unit transfers).

Law enforcement of the trust sector will be stepped up, andthere will be further action to stamp out “mandatory
repayments”

Trust businesses have come under particular scrutiny,
involving intensive screening and monitoring, withregulators clamping down on risky practices. A few trust
companies have been taken over by regulators. In its
China Financial Stability Report (2020), the PBOC spelt
out that, in its view, a number of trust companies had
become “high risk” institutions, the risk exposure in thetrust sector was speeding up, and there was a likelihoodof risk spillover.
We expect the risks of trust sector will continue to be
exposed in 2021, and there may be more takeovers oftrust companies by regulators and even the potential
for trust companies going bankrupt. We also expect acertain amount of trust schemes, will be forced to ceasemandatory repayments in 2021. To ensure a steadytransition and avoid systematic financial risk, regulators
will balance the interest of “clearing channel businessand prohibiting cash pool” with the potential impact of
cracking down on high-risk institutions. We also expect
there to be more court judgments and judicial views on“mandatory repayment” and custodian’s responsibility
following on the lines of that handed down by the Higher
People’s Court of Hunan Province, which decreed thatmandatory repayments were void. Trust companies will
be compelled to change their business practices, tomove away from the practice of channel business andthe use of trust schemes for financing purposes.
Regulators may provide certain levels of assistance andsupport as the process unfolds.

PRC Financial Regulation:
Annual Report (2021)
52

4Further cross-border transactions of asset management
products will be allowed and opening-up will continue

Under the PRC laws, in addition to exchanged-tradedasset management products (such as ABSs and ETFs),
QFIIs are currently allowed to invest in CSRC-regulated
asset management schemes and private securities
investment funds. In 2021, we expect that the asset
management market will continue to open up, withgreater scope for cross-border transactions, adding to
the existing cross-border trading of bonds and stocks.
The ETF Connect and WM Connect regimes in the
Greater Bay Area will progress and may potentially be5fully implemented in 2021. We hope that implementing
rules addressing the fundamental differences of custodianand settlement requirements between onshore andoffshore markets will be rolled out in 2021, which is aprerequisite for the securing of cross-border transactionsof asset management products. Finally, we expect more
foreign players to take advantage of the opening up of
the asset management market, including foreign-invested
asset managers, custodians, distributor, and TAs/FAs.

Regulatory framework for the wealth management sector will
be gradually established

Following the promulgation of rules regulating asset
management, fund investment advisory businesses andfund distribution, we can say that the basic regulatory
framework of the wealth management sector has been
put in place.
We expect that unlicensed independent wealth managementcompanies (which used to be non-financial institution
type one-stop shops for people’s wealth management
needs) will gradually exit the market, and there will becloser cooperation among regulated entities (such ascommercial banks, securities companies, trust companies,
fund management companies and independent fund
distributors) to better serve the needs of high net worth
individuals. In order to provide a one-stop shop experiencefor customers, regulated entities will have increasingneeds to share client information.
Companies in the wealth management sector will findthey face the challenge of developing their businesses,
which depends on gaining extensive knowledge aboutclients, while meeting increasingly tighter regulations
covering consumer protection and data protection.
Separately, it cannot be ruled out that regulations onfamily and charitable trusts may be substantiallydeveloped in 2021.

PRC Financial Regulation:
Annual Report (2021)
53

PRC Financial Regulation:
Annual Report (2021) –FinTech

PRC Financial Regulation:
Annual Report (2021)
54

2020 Key Dates

February 13
The People’s Bank of China (PBOC) issued the
Personal Financial Information Protection Technical
Specification.

July 2
The Data Security Law (Draft) was issued for public
consultation.

August 14
The CSRC issued the Administrative Provisions on the
Securities Companies’ Renting of Third-party Internet
Platforms for Securities Business Activities (Interim
Measures) (Consultation draft).

September 15
The PBOC issued the Implementation Measures for theProtection of Financial Consumers' Rights and Interests.

November 2
The Interim Administrative Measures for Internet Small
Loan Business (Consultation draft) was issued for public
consultation.

December 7
The CBIRC issued the Regulations on the Supervision ofInternet Insurance Business.

April 21
The PBOC started pilot projects to implement theCentral Bank digital currency in four cities, including
Shenzhen.

July 12The CBIRC issued the Interim Measures for the
Administration of Internet Loans of Commercial Banks.

September 7
The State Council approved the establishment of the
National FinTech Risk Monitoring Center in Beijing.

October 13
The Personal Information Protection Law (Draft) was
submitted to the 13th NPCSC for initial review.

November 6
The CBIRC stated fintech activities should be
regarded as, and supervised as, financial activities.

December 8
the CBIRC stated that all P2P internet loan institutions
with actual operations had been closed down by
mid-November.

PRC Financial Regulation:
Annual Report (2021)
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PRC Financial Regulation:
Annual Report (2021) –FinTech

PRC Financial Regulation:
Annual Report (2021)
54

2020 Key Dates

February 13
The People’s Bank of China (PBOC) issued the
Personal Financial Information Protection Technical
Specification.

July 2
The Data Security Law (Draft) was issued for public
consultation.

August 14
The CSRC issued the Administrative Provisions on the
Securities Companies’ Renting of Third-party Internet
Platforms for Securities Business Activities (Interim
Measures) (Consultation draft).

September 15
The PBOC issued the Implementation Measures for theProtection of Financial Consumers' Rights and Interests.

November 2
The Interim Administrative Measures for Internet Small
Loan Business (Consultation draft) was issued for public
consultation.

December 7
The CBIRC issued the Regulations on the Supervision ofInternet Insurance Business.

April 21
The PBOC started pilot projects to implement theCentral Bank digital currency in four cities, including
Shenzhen.

July 12The CBIRC issued the Interim Measures for the
Administration of Internet Loans of Commercial Banks.

September 7
The State Council approved the establishment of the
National FinTech Risk Monitoring Center in Beijing.

October 13
The Personal Information Protection Law (Draft) was
submitted to the 13th NPCSC for initial review.

November 6
The CBIRC stated fintech activities should be
regarded as, and supervised as, financial activities.

December 8
the CBIRC stated that all P2P internet loan institutions
with actual operations had been closed down by
mid-November.

PRC Financial Regulation:
Annual Report (2021)
55

PRC Financial Regulation:
Annual Report (2021)
56

2020 Regulatory Observations

1

Regulations expanded to cover all internet-based financial
activities, and framed to prevent regulatory arbitrage

Regulations governing businesses in the fintech sector
underwent a significant shift in 2020. In broad terms,
there was a switch from “institution-based regulation”
and “behavior-based regulation” to “function-based
regulation”. The regulations were broadened to cover
not just finance and technology but business operations
and activities associated with fintech, such as market
entry stipulations, licensing requirements, rules or operation,and risk management requirements.
In September 2020, the CBIRC singled out two internet
platforms, Xianghubao (相互宝) and Shuidihuzhu (水滴互助), which it said had engaged in commercial insurance
and therefore should abide by strict market entry andlicensing requirements required by insurance companies.
On December 7, 2020, the CBIRC issued the Regulations on
the Supervision of Internet Insurance Business (effective fromFebruary 1, 2021), which stipulated that "Internet insurance
business shall be carried out by insurance institutions
established according to the law, and other institutions
and individuals shall not carry out Internet insurance
business".

Then, in November 2020, the CBIRC identified that a
number of loan products offered via a collaboration
between banks and fintech companies were in effectbank loans but were not being governed by rules setting
rules for standard rates for such loan products. The CBIRC
separately issued the Interim Administrative Measures forInternet Micro-Loan Business (Consultation draft), which
imposes regulations on online micro-loan businesses
and brings them into line with regulations governingbank loans. These include such matters as the analysisof borrowers’ credit risk and the use of technology anddata management, such as cloud computing and themobile internet, when transacting loans. These newrules also set out regulatory requirements for the internet
micro-loan business in terms of the business territory
restrictions, loan quotas, joint loan business restrictions,reserve funds, capital requirements, and leverage andliquidity ratios to fill in the coverage gaps of the existing
rules and to eliminate any scope for regulatory arbitrage(i.e., allowing institutions to opt for more favorable regulations).

2

Regulations implemented to prevent risks associated withfinancial institutions’ cooperation with third parties

Another major area of attention for regulations was toaddress the growth of collaboration between financial
institutions and fintech companies. Holding the financial
institutions as being primarily responsible for instigatingsuch cooperation, regulators introduced regulations
that prohibited financial institutions from outsourcing
information technology (IT) management and imposedon them much stricter risk control obligations. The Banking
and Insurance Institutions Information Technology
Outsourcing Risk Regulation Measures (Draft) emphasizedthat banks should integrate the management of IT
outsourcing into their internal risk management
procedures for the better control of outsourcing-relatedrisks. Securities companies, too, came under the regulators’
spotlight. The Administrative Provisions on the Securities
Companies’ Renting of Third-party Internet Platforms for
Securities Business Activities (Trial) (Consultation draft)laid out the responsibilities of securities companies
when conducting securities business via third-party
internet platforms.

Particular attention was paid to banks’ cooperation
with third parties in granting online loans. The Interim
Measures for the Administration of Internet Loans ofCommercial Banks required banks to establish their own
risk control and decision-making models. The Notice on
Regulating the Cooperative Business between Banks and
FinTech Companies and Internet Insurance Businessissued by the Beijing office of CBIRC provided that banks
should not operate beyond their own business scope orcircumvent regulatory restrictions when cooperating withother parties. This notice also explicitly stated thatcertain key steps during the online loan business suchas the assessment before approving any loan, the review
of loan applications, and post-loan inspections, as wellas risk control management, should not be outsourced
to business partners, and that credit funds should bestrictly prevented from flowing into prohibited areas suchas internet lending platforms and real estate markets.

PRC Financial Regulation:
Annual Report (2021)
55

PRC Financial Regulation:
Annual Report (2021)
56

2020 Regulatory Observations

1

Regulations expanded to cover all internet-based financial
activities, and framed to prevent regulatory arbitrage

Regulations governing businesses in the fintech sector
underwent a significant shift in 2020. In broad terms,
there was a switch from “institution-based regulation”
and “behavior-based regulation” to “function-based
regulation”. The regulations were broadened to cover
not just finance and technology but business operations
and activities associated with fintech, such as market
entry stipulations, licensing requirements, rules or operation,and risk management requirements.
In September 2020, the CBIRC singled out two internet
platforms, Xianghubao (相互宝) and Shuidihuzhu (水滴互助), which it said had engaged in commercial insurance
and therefore should abide by strict market entry andlicensing requirements required by insurance companies.
On December 7, 2020, the CBIRC issued the Regulations on
the Supervision of Internet Insurance Business (effective fromFebruary 1, 2021), which stipulated that "Internet insurance
business shall be carried out by insurance institutions
established according to the law, and other institutions
and individuals shall not carry out Internet insurance
business".

Then, in November 2020, the CBIRC identified that a
number of loan products offered via a collaboration
between banks and fintech companies were in effectbank loans but were not being governed by rules setting
rules for standard rates for such loan products. The CBIRC
separately issued the Interim Administrative Measures forInternet Micro-Loan Business (Consultation draft), which
imposes regulations on online micro-loan businesses
and brings them into line with regulations governingbank loans. These include such matters as the analysisof borrowers’ credit risk and the use of technology anddata management, such as cloud computing and themobile internet, when transacting loans. These newrules also set out regulatory requirements for the internet
micro-loan business in terms of the business territory
restrictions, loan quotas, joint loan business restrictions,reserve funds, capital requirements, and leverage andliquidity ratios to fill in the coverage gaps of the existing
rules and to eliminate any scope for regulatory arbitrage(i.e., allowing institutions to opt for more favorable regulations).

2

Regulations implemented to prevent risks associated withfinancial institutions’ cooperation with third parties

Another major area of attention for regulations was toaddress the growth of collaboration between financial
institutions and fintech companies. Holding the financial
institutions as being primarily responsible for instigatingsuch cooperation, regulators introduced regulations
that prohibited financial institutions from outsourcing
information technology (IT) management and imposedon them much stricter risk control obligations. The Banking
and Insurance Institutions Information Technology
Outsourcing Risk Regulation Measures (Draft) emphasizedthat banks should integrate the management of IT
outsourcing into their internal risk management
procedures for the better control of outsourcing-relatedrisks. Securities companies, too, came under the regulators’
spotlight. The Administrative Provisions on the Securities
Companies’ Renting of Third-party Internet Platforms for
Securities Business Activities (Trial) (Consultation draft)laid out the responsibilities of securities companies
when conducting securities business via third-party
internet platforms.

Particular attention was paid to banks’ cooperation
with third parties in granting online loans. The Interim
Measures for the Administration of Internet Loans ofCommercial Banks required banks to establish their own
risk control and decision-making models. The Notice on
Regulating the Cooperative Business between Banks and
FinTech Companies and Internet Insurance Businessissued by the Beijing office of CBIRC provided that banks
should not operate beyond their own business scope orcircumvent regulatory restrictions when cooperating withother parties. This notice also explicitly stated thatcertain key steps during the online loan business suchas the assessment before approving any loan, the review
of loan applications, and post-loan inspections, as wellas risk control management, should not be outsourced
to business partners, and that credit funds should bestrictly prevented from flowing into prohibited areas suchas internet lending platforms and real estate markets.

PRC Financial Regulation:
Annual Report (2021)
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3

PRC Financial Regulation:
Annual Report (2021)
58

Legal framework for data protection established, andregulators following up with strict enforcement

In 2020, China introduced a number of important legislativeand regulatory changes to cover data protection, providing
consumers with greater protection and imposing greaterobligations on institutions storing and managing personal
data. In May 2020, the Civil Code was promulgated, settingout the fundamental principles of data protection andcovering personal information, and the obligations andresponsibilities of entities/persons handling personal
information. The Code highlighted the legal challenges
arising from the impact of new technologies on personal
data protection. Afterwards, drafts of the Data Security
Law and the Personal Information Protection Law were
published, which, when passed into law, will further clarify
and strengthen the requirements of data governanceand personal information protection. In the meantime,
the new standard GB/T 35273-2020 Information Security
Technology - Personal Information Security Specification
was officially released and came into effect on October
1, 2020, replacing the previous standard.
The requirements of financial institutions to protect
personal information they hold about their customers
were tightened and made more stringent. In Februaryand September 2020, respectively, the PBOC issued the
Personal Financial Information Protection Technical Specificationand the revised Implementation Measures for the Protectionof Financial Consumers' Rights and Interests. The latter
was a revision of a previous version issued in 2016, andthe changes include the addition of a "Legal Liability"
chapter, which provides for potential liabilities on boththe institution and responsible individuals. The Interim
Measures for the Administration of Internet Loans ofCommercial Banks and the Regulations on the Supervisionof Internet Insurance Business promulgated in 2020 alsoemphasized the protection of personal information. In
addition, the regulators pointed out that some fintech
companies collected and used customers’ information
beyond the scope of what they needed the information
for, and failed to properly manage and protect suchinformation. They urged fintech companies to pay more
attention to consumers’ information security.

To make sure the new regulations were effective,
enforcement was stepped up, with a particular focus onapps. In July, the Ministry of Industry and Information
Technology (“MIIT”) launched a "special rectification
action of apps’ infringement on users' rights and interests"
in order to address and eliminate illegal collection anduse of users' personal information, user harassment anddeception, and inadequate controls of application anddistribution platforms, among other issues. Ninety-fourapps were removed from app stores, following theirfailure to correct non-compliant activities. There weremore investigations and an increase in punishments
meted out to those committing crimes. The Ministry of
Public Security gave examples of 10 typical cases involving
infringement of personal information. In the nationwide"Clean Internet 2020" program, perpetrators of crimes
such as reselling personal information and illegally collecting
private information, were punished. The Financial Mobile
Application Software Security Management Specification,issued by the PBOC in September 2019, was implemented
in 2020. This requires all financial apps to address andcorrect any inconsistencies with regulations and to filethe apps with the National Internet Finance Associationof China (“NIFA”). On May 19, 2020, the NIFA announced
the first batch of 73 financial mobile apps that had to be
filed with NIFA, and said that publication of filings offinancial mobile apps would be made on a regular basis
in the future.

4

P2P internet loan platforms converted into small loan
institutions, and regulations of Internet small loanbusinesses tightened

The process of cleaning up P2P internet loan platforms,
which had begun in 2016, was largely completed by
2020. From then on, online loans have been, and will be,routinely regulated. By mid-November, there were noP2P internet loan companies still active. The CBIRC
stated that it would focus on resolving risks associatedwith accrued P2P loans, with the aim of bringing abouta higher repayment rate. At the same time, local governments
were given the task of converting P2P platforms into
small loan companies, and regulated accordingly. To
this end, a pilot program was set up, in accordance with
the Guiding Opinions on the Pilot Projects of TransformingInternet Loan Information Intermediaries into Small Loan
Companies issued in November 2019. In May 2020, two
P2P internet loan institutions in Xiamen received approval
to be converted into small loan companies. The result isthat loan facilitating businesses and small loan companies(including internet small loans companies) will need tooperate to higher regulatory standards, as will online
lending businesses operated by banks cooperatingwith third-party institutions.

On November 2, 2020, the CBIRC and the PBOC issued
the Interim Administrative Measures for Internet Small Loan
Business (Consultation Draft), imposing more stringent
requirements on the operation and regulation of internet
small loan companies. These included changing theapproval and regulating authority from local financial
bureaus to the CBIRC, increasing registered capitalrequirements, setting minimum capital ratio requirements,
and prohibiting cross-province operations.
On promulgation of these new regulations, small loanbusinesses became integrated into the CBIRC’s unified
regulation system and subject to the same strict regulations
applying to banks.

PRC Financial Regulation:
Annual Report (2021)
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3

PRC Financial Regulation:
Annual Report (2021)
58

Legal framework for data protection established, andregulators following up with strict enforcement

In 2020, China introduced a number of important legislativeand regulatory changes to cover data protection, providing
consumers with greater protection and imposing greaterobligations on institutions storing and managing personal
data. In May 2020, the Civil Code was promulgated, settingout the fundamental principles of data protection andcovering personal information, and the obligations andresponsibilities of entities/persons handling personal
information. The Code highlighted the legal challenges
arising from the impact of new technologies on personal
data protection. Afterwards, drafts of the Data Security
Law and the Personal Information Protection Law were
published, which, when passed into law, will further clarify
and strengthen the requirements of data governanceand personal information protection. In the meantime,
the new standard GB/T 35273-2020 Information Security
Technology - Personal Information Security Specification
was officially released and came into effect on October
1, 2020, replacing the previous standard.
The requirements of financial institutions to protect
personal information they hold about their customers
were tightened and made more stringent. In Februaryand September 2020, respectively, the PBOC issued the
Personal Financial Information Protection Technical Specificationand the revised Implementation Measures for the Protectionof Financial Consumers' Rights and Interests. The latter
was a revision of a previous version issued in 2016, andthe changes include the addition of a "Legal Liability"
chapter, which provides for potential liabilities on boththe institution and responsible individuals. The Interim
Measures for the Administration of Internet Loans ofCommercial Banks and the Regulations on the Supervisionof Internet Insurance Business promulgated in 2020 alsoemphasized the protection of personal information. In
addition, the regulators pointed out that some fintech
companies collected and used customers’ information
beyond the scope of what they needed the information
for, and failed to properly manage and protect suchinformation. They urged fintech companies to pay more
attention to consumers’ information security.

To make sure the new regulations were effective,
enforcement was stepped up, with a particular focus onapps. In July, the Ministry of Industry and Information
Technology (“MIIT”) launched a "special rectification
action of apps’ infringement on users' rights and interests"
in order to address and eliminate illegal collection anduse of users' personal information, user harassment anddeception, and inadequate controls of application anddistribution platforms, among other issues. Ninety-fourapps were removed from app stores, following theirfailure to correct non-compliant activities. There weremore investigations and an increase in punishments
meted out to those committing crimes. The Ministry of
Public Security gave examples of 10 typical cases involving
infringement of personal information. In the nationwide"Clean Internet 2020" program, perpetrators of crimes
such as reselling personal information and illegally collecting
private information, were punished. The Financial Mobile
Application Software Security Management Specification,issued by the PBOC in September 2019, was implemented
in 2020. This requires all financial apps to address andcorrect any inconsistencies with regulations and to filethe apps with the National Internet Finance Associationof China (“NIFA”). On May 19, 2020, the NIFA announced
the first batch of 73 financial mobile apps that had to be
filed with NIFA, and said that publication of filings offinancial mobile apps would be made on a regular basis
in the future.

4

P2P internet loan platforms converted into small loan
institutions, and regulations of Internet small loanbusinesses tightened

The process of cleaning up P2P internet loan platforms,
which had begun in 2016, was largely completed by
2020. From then on, online loans have been, and will be,routinely regulated. By mid-November, there were noP2P internet loan companies still active. The CBIRC
stated that it would focus on resolving risks associatedwith accrued P2P loans, with the aim of bringing abouta higher repayment rate. At the same time, local governments
were given the task of converting P2P platforms into
small loan companies, and regulated accordingly. To
this end, a pilot program was set up, in accordance with
the Guiding Opinions on the Pilot Projects of TransformingInternet Loan Information Intermediaries into Small Loan
Companies issued in November 2019. In May 2020, two
P2P internet loan institutions in Xiamen received approval
to be converted into small loan companies. The result isthat loan facilitating businesses and small loan companies(including internet small loans companies) will need tooperate to higher regulatory standards, as will online
lending businesses operated by banks cooperatingwith third-party institutions.

On November 2, 2020, the CBIRC and the PBOC issued
the Interim Administrative Measures for Internet Small Loan
Business (Consultation Draft), imposing more stringent
requirements on the operation and regulation of internet
small loan companies. These included changing theapproval and regulating authority from local financial
bureaus to the CBIRC, increasing registered capitalrequirements, setting minimum capital ratio requirements,
and prohibiting cross-province operations.
On promulgation of these new regulations, small loanbusinesses became integrated into the CBIRC’s unified
regulation system and subject to the same strict regulations
applying to banks.

PRC Financial Regulation:
Annual Report (2021)
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5

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Regulation of payments tightened and enforcement leading
to sector consolidation; launch of Central Bank digitalcurrency marking start of new era for payments

In 2020, the regulation of the payments business was
further enhanced. In June and October 2020, respectively,
the PBOC issued the Notice of the PBOC on Strengthening
the Management of Payment Receiving Terminals andRelated Business (Draft) and the Notice of the PBOC on
Regulating the Agent Collection Business. The former
regulates payment receiving terminal devices, the payment
receiving business and other related business from four
aspects: the management of payment receiving terminals,
the management of contracting merchants, the monitoringof payment receiving businesses, and inspection andsupervision. The latter set out the management obligationsof collection agents in various collection situations inorder to mitigate risks that might result from related
payments business.
A number of payment institutions were fined for breachingregulations. These included Helibao (合利宝), Rongbao
Payment (融宝支付), Yisheng Payment (易生支付),Yinyingtong Payment (银盈通支付), Kailiantong Payment(开联通支付), Chuanhua Payment (传化支付), Bianlitong(便利通) and Shangyinxin Payment (商银信支付). On
October 10, 2020, the Business Management Departmentof the PBOC issued a notice indicating that six payment
institutions had received warnings and had been fined
RMB178 million (in total), and that eight individuals withresponsibility for these businesses had been fined RMB2.4
million (in total). A number of payment institutions wereshut down. There has been an overall consolidation of
the payments sector, resulting in a reduced number ofofficially licensed payments operators.

The promotion and implementation of the Central Bank
digital currency (see 8, below) is posing a challenge topoint-of-sale (POS) payment receiving businesses andfor third-party payment institutions. However, there
remains scope for these payment institutions to incorporate
digital currency transactions into their businesses. To
date, Lakara and Union Pay have both signed strategiccooperation agreements with the PBOC Digital Currency
Research Institute.

6

Fintech technology developing, and industry standards andtechnical specifications upgraded

In the past year, blockchain technology has increasingly
been used in supporting the main banking business, inwhat is a significant step-up in the delivery of banking
services. In July 2020, the China Construction Bank andthe Bank of Communications, two of the five major Chinesebanks, both launched their respective blockchain platforms.
The “blockchain international syndicated asset transfer
platform”, which the China Construction Bank developed
internally, led to the simultaneous launch of the publicblockchain cloud and a new generation private blockchain
cloud and was used to support its first asset transfer businessvalued at US$70 million. The Bank of Communications
successfully launched the international trade “one-stop”
financial blockchain platform in Xiamen, which was used
for domestic foreign exchange transfers and payments
for sea freight. This was the first time in China thatblockchain technology has been used for payment in a
non-trade business (i.e. sea freight business) in a one-stop
platform. Elsewhere, Tencent Financial Technology,
JDDigits and Mashang Consumer Finance (all part of the
Ant Group) each made progress in the development
and application of blockchain technology.

There has also been modification of industry standards
and technical specifications as they apply to fintech activities.
The GB/T38671-2020 Information Security Technology Technical Requirements for Remote Face Recognition
System was officially issued by the State Administration
for Market Regulation and the National Standardization
Management Committee on April 28, 2020, and tookeffect on November 1. Drafting of the national standards
was officially started with a meeting to discuss theInformation Security Technology - Blockchain Information
Service Security Specification. This specification will help
to guide blockchain information service providers forsecurity purposes.

PRC Financial Regulation:
Annual Report (2021)
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5

PRC Financial Regulation:
Annual Report (2021)
60

Regulation of payments tightened and enforcement leading
to sector consolidation; launch of Central Bank digitalcurrency marking start of new era for payments

In 2020, the regulation of the payments business was
further enhanced. In June and October 2020, respectively,
the PBOC issued the Notice of the PBOC on Strengthening
the Management of Payment Receiving Terminals andRelated Business (Draft) and the Notice of the PBOC on
Regulating the Agent Collection Business. The former
regulates payment receiving terminal devices, the payment
receiving business and other related business from four
aspects: the management of payment receiving terminals,
the management of contracting merchants, the monitoringof payment receiving businesses, and inspection andsupervision. The latter set out the management obligationsof collection agents in various collection situations inorder to mitigate risks that might result from related
payments business.
A number of payment institutions were fined for breachingregulations. These included Helibao (合利宝), Rongbao
Payment (融宝支付), Yisheng Payment (易生支付),Yinyingtong Payment (银盈通支付), Kailiantong Payment(开联通支付), Chuanhua Payment (传化支付), Bianlitong(便利通) and Shangyinxin Payment (商银信支付). On
October 10, 2020, the Business Management Departmentof the PBOC issued a notice indicating that six payment
institutions had received warnings and had been fined
RMB178 million (in total), and that eight individuals withresponsibility for these businesses had been fined RMB2.4
million (in total). A number of payment institutions wereshut down. There has been an overall consolidation of
the payments sector, resulting in a reduced number ofofficially licensed payments operators.

The promotion and implementation of the Central Bank
digital currency (see 8, below) is posing a challenge topoint-of-sale (POS) payment receiving businesses andfor third-party payment institutions. However, there
remains scope for these payment institutions to incorporate
digital currency transactions into their businesses. To
date, Lakara and Union Pay have both signed strategiccooperation agreements with the PBOC Digital Currency
Research Institute.

6

Fintech technology developing, and industry standards andtechnical specifications upgraded

In the past year, blockchain technology has increasingly
been used in supporting the main banking business, inwhat is a significant step-up in the delivery of banking
services. In July 2020, the China Construction Bank andthe Bank of Communications, two of the five major Chinesebanks, both launched their respective blockchain platforms.
The “blockchain international syndicated asset transfer
platform”, which the China Construction Bank developed
internally, led to the simultaneous launch of the publicblockchain cloud and a new generation private blockchain
cloud and was used to support its first asset transfer businessvalued at US$70 million. The Bank of Communications
successfully launched the international trade “one-stop”
financial blockchain platform in Xiamen, which was used
for domestic foreign exchange transfers and payments
for sea freight. This was the first time in China thatblockchain technology has been used for payment in a
non-trade business (i.e. sea freight business) in a one-stop
platform. Elsewhere, Tencent Financial Technology,
JDDigits and Mashang Consumer Finance (all part of the
Ant Group) each made progress in the development
and application of blockchain technology.

There has also been modification of industry standards
and technical specifications as they apply to fintech activities.
The GB/T38671-2020 Information Security Technology Technical Requirements for Remote Face Recognition
System was officially issued by the State Administration
for Market Regulation and the National Standardization
Management Committee on April 28, 2020, and tookeffect on November 1. Drafting of the national standards
was officially started with a meeting to discuss theInformation Security Technology - Blockchain Information
Service Security Specification. This specification will help
to guide blockchain information service providers forsecurity purposes.

PRC Financial Regulation:
Annual Report (2021)
61

7

Regulatory sandboxes continuing to expand

There has been a concerted effort to promote the use oftechnology in the fintech sector. The regulators haveannounced at least 49 innovative pilot projects in Beijing,
Shanghai, Shenzhen, Chongqing, and Hangzhou, among
others. Of these applications, at least 20 of them wereclassified as financial service applications, 35 of them
involved utilization of big data, more than 30% of them
involved blockchain and distributed accounting technology,
and a large number of them involved artificial intelligence(AI), 5G, and cloud computing technologies. The regulators
have shown a certain degree of tolerance to the risks
associated with technology innovation, which also reflected
the determination of the regulators to actively explore
flexible regulation.

8

PRC Financial Regulation:
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62

Key among the projects has been the promotion of“regulatory sandboxes”, frameworks set up by regulators
to allow fintech start-ups and other innovators to conduct
live experiments in a controlled environment underregulatory supervision. So far, only licensed financial
institutions are eligible to operate within a regulatory
sandbox; fintech companies can only benefit from thepilot as a partner of a financial institution. It is expectedthat this restriction will be relaxed in the next stage ofthe pilot project, allowing non-licensed institutions whichmeet qualification requirements and have outstanding
technical products to apply to enter the regulatory
sandbox independently, and thereafter be matchedwith licensed financial institutions.

The Central Bank digital currency poised to launch, andrelated proprietary rights to be protected

All eyes are on the timetable for the official launch of
the Central Bank digital currency, which is currently
being piloted internally. According to the reported
timetable of the regulators, the Central Bank digitalcurrency will replace cash nationwide in the next two to
three years. The digital currency will not only hugelychange the infrastructure supporting payments, butwill also help China to promote the internationalization of
the RMB as an alternative to the current US dollar-dominatedinternational payments structure and the global SWIFT
currency settlement system.
There have been a number of policies and regulations
paving the way for the formal issuance of the digitalcurrency, including clarifying the legal status of the digitalcurrency and other new rights and interests. The Civil
Code provides guidance on the protection of data andvirtual property, but has not, as yet, provided substantial

implementing rules. On July 22, 2020, the Supreme
People's Court and NDRC jointly issued the Opinions on
Providing Judicial Services and Guarantees for Accelerating
the Improvement of the Socialist Market Economic System in
the New Era, which stated that new rights and interests
such as those relating to digital currency, virtual internet
property and data rights should be protected. On October23, 2020, the PBOC published the Law of the PRC on the
People's Bank of China (revised draft for comments), which
stipulated that the RMB currency can be in both physicaland digital form. It also provided that in order to prevent
virtual currency-related risk, no entity or individual shallmake or issue tokens and digital tokens to replace thecirculation of RMB in the market.

2021 Regulatory Outlook

1“Function-based regulation” will be strengthened. License
requirements for operating financial business will continue

With the increasing integration of the financial andtechnology sectors in recent years, we expect regulators
will look to strengthen the regulation of functions, rather
than institutions, via "function-based regulation", which
focuses on the substance of financial functions andassociated risks, and implement “see-through” supervision
over each operation step and module within the entire
fintech ecosystem. There are two aims here: to avoid
regulatory arbitrage and the circumvention of regulation.
In 2020, regulators proposed to fully incorporate all
financial activities into the regulation framework, and2issued supporting rules and consultation drafts to thisend. In 2021, we expect that the regulators will continue toapply this principle, imposing well-defined regulations
and clarifying the boundaries of responsibility among
the different participants in the sector by identifying
the substance of business activities. The regulators willcontinue to crack down on unlicensed business activities
conducted in the name of providing tech services. The
supporting rules for the Interim Measures for the Supervision
and Administration of Financial Holding Companies andthe Interim Administrative Measures for Internet Small
Loan Business are expected to be issued.

Financial institutions will ramp up digital transformation, andmore regulations will be issued to regulate joint businessbetween financial institutions and third parties

In 2020, a number of policies and guidelines were released atboth the national and local levels to encourage andsupport the development of fintech and promote thedigital transformation of traditional financial institutions.
The Fintech Development Plan (2019-2021) specifically
proposed that financial institutions should accelerate
their digital transformation. The CBIRC and the SAC
both issued articles to encourage the asset insurancecompanies and securities companies, respectively, touse big data, cloud computing, blockchain, AI and otherscientific and technological means to promote thedigitization of their businesses.
The process of digital transformation has been accelerated
with the emergence of the COVID-19 and the need for
lockdowns to prevent human contact. The arrival of thedigital currency will also become a key driver of thedigitalization of the financial services sector. More andmore financial institutions are investing in fintech andusing technology to upgrade their processes andsystems, either on their own or through cooperation
with third parties. While regulators support the digital
revolution, they also recognize the need to regulate
business activities associated with fintech, in particular
to accurately identify risks arising from the digitaltransformation of financial institutions and to regulate
them. We expect this approach to continue to be uppermost
in regulators’ minds. The risks arising from the cooperation
between financial institutions and third-party technology
companies will be the focus of supervision. For example,
the formal drafts of the Administrative Provisions on the
Securities Companies’ Renting Third-party Internet
Platforms for Securities Business Activities (Trial) (Consultation
draft) and the Banking and Insurance Institutions Information
Technology Outsourcing Risk Regulation Measures(Consultation draft) are expected to be published in 2021.

PRC Financial Regulation:
Annual Report (2021)
61

7

Regulatory sandboxes continuing to expand

There has been a concerted effort to promote the use oftechnology in the fintech sector. The regulators haveannounced at least 49 innovative pilot projects in Beijing,
Shanghai, Shenzhen, Chongqing, and Hangzhou, among
others. Of these applications, at least 20 of them wereclassified as financial service applications, 35 of them
involved utilization of big data, more than 30% of them
involved blockchain and distributed accounting technology,
and a large number of them involved artificial intelligence(AI), 5G, and cloud computing technologies. The regulators
have shown a certain degree of tolerance to the risks
associated with technology innovation, which also reflected
the determination of the regulators to actively explore
flexible regulation.

8

PRC Financial Regulation:
Annual Report (2021)
62

Key among the projects has been the promotion of“regulatory sandboxes”, frameworks set up by regulators
to allow fintech start-ups and other innovators to conduct
live experiments in a controlled environment underregulatory supervision. So far, only licensed financial
institutions are eligible to operate within a regulatory
sandbox; fintech companies can only benefit from thepilot as a partner of a financial institution. It is expectedthat this restriction will be relaxed in the next stage ofthe pilot project, allowing non-licensed institutions whichmeet qualification requirements and have outstanding
technical products to apply to enter the regulatory
sandbox independently, and thereafter be matchedwith licensed financial institutions.

The Central Bank digital currency poised to launch, andrelated proprietary rights to be protected

All eyes are on the timetable for the official launch of
the Central Bank digital currency, which is currently
being piloted internally. According to the reported
timetable of the regulators, the Central Bank digitalcurrency will replace cash nationwide in the next two to
three years. The digital currency will not only hugelychange the infrastructure supporting payments, butwill also help China to promote the internationalization of
the RMB as an alternative to the current US dollar-dominatedinternational payments structure and the global SWIFT
currency settlement system.
There have been a number of policies and regulations
paving the way for the formal issuance of the digitalcurrency, including clarifying the legal status of the digitalcurrency and other new rights and interests. The Civil
Code provides guidance on the protection of data andvirtual property, but has not, as yet, provided substantial

implementing rules. On July 22, 2020, the Supreme
People's Court and NDRC jointly issued the Opinions on
Providing Judicial Services and Guarantees for Accelerating
the Improvement of the Socialist Market Economic System in
the New Era, which stated that new rights and interests
such as those relating to digital currency, virtual internet
property and data rights should be protected. On October23, 2020, the PBOC published the Law of the PRC on the
People's Bank of China (revised draft for comments), which
stipulated that the RMB currency can be in both physicaland digital form. It also provided that in order to prevent
virtual currency-related risk, no entity or individual shallmake or issue tokens and digital tokens to replace thecirculation of RMB in the market.

2021 Regulatory Outlook

1“Function-based regulation” will be strengthened. License
requirements for operating financial business will continue

With the increasing integration of the financial andtechnology sectors in recent years, we expect regulators
will look to strengthen the regulation of functions, rather
than institutions, via "function-based regulation", which
focuses on the substance of financial functions andassociated risks, and implement “see-through” supervision
over each operation step and module within the entire
fintech ecosystem. There are two aims here: to avoid
regulatory arbitrage and the circumvention of regulation.
In 2020, regulators proposed to fully incorporate all
financial activities into the regulation framework, and2issued supporting rules and consultation drafts to thisend. In 2021, we expect that the regulators will continue toapply this principle, imposing well-defined regulations
and clarifying the boundaries of responsibility among
the different participants in the sector by identifying
the substance of business activities. The regulators willcontinue to crack down on unlicensed business activities
conducted in the name of providing tech services. The
supporting rules for the Interim Measures for the Supervision
and Administration of Financial Holding Companies andthe Interim Administrative Measures for Internet Small
Loan Business are expected to be issued.

Financial institutions will ramp up digital transformation, andmore regulations will be issued to regulate joint businessbetween financial institutions and third parties

In 2020, a number of policies and guidelines were released atboth the national and local levels to encourage andsupport the development of fintech and promote thedigital transformation of traditional financial institutions.
The Fintech Development Plan (2019-2021) specifically
proposed that financial institutions should accelerate
their digital transformation. The CBIRC and the SAC
both issued articles to encourage the asset insurancecompanies and securities companies, respectively, touse big data, cloud computing, blockchain, AI and otherscientific and technological means to promote thedigitization of their businesses.
The process of digital transformation has been accelerated
with the emergence of the COVID-19 and the need for
lockdowns to prevent human contact. The arrival of thedigital currency will also become a key driver of thedigitalization of the financial services sector. More andmore financial institutions are investing in fintech andusing technology to upgrade their processes andsystems, either on their own or through cooperation
with third parties. While regulators support the digital
revolution, they also recognize the need to regulate
business activities associated with fintech, in particular
to accurately identify risks arising from the digitaltransformation of financial institutions and to regulate
them. We expect this approach to continue to be uppermost
in regulators’ minds. The risks arising from the cooperation
between financial institutions and third-party technology
companies will be the focus of supervision. For example,
the formal drafts of the Administrative Provisions on the
Securities Companies’ Renting Third-party Internet
Platforms for Securities Business Activities (Trial) (Consultation
draft) and the Banking and Insurance Institutions Information
Technology Outsourcing Risk Regulation Measures(Consultation draft) are expected to be published in 2021.

PRC Financial Regulation:
Annual Report (2021)
63

3

Regulators will strengthen regtech, continue to expand thepilot and application of innovative fintech products, andcollaborate to improve fintech regulation

Through 2020, we saw increasing adoption of regtech,
the application of technology in the exercising of regulation.
For example, the pilot project of big data anti-insurance
fraud carried out by the CBIRC and the Ministry of Public
Security had promising initial results. Also happening
were the release of industry standards to ensure effective
and safe use of new technology. These included theInformation Security Technology - Technical Requirements
for Remote Face Recognition System and the Guidelines
for Construction of the National New Generation AI Standard
System. The scope of the pilot "regulatory sandbox" wasextended (see 7, above), and related innovative fintech
products were registered and put into practice. In addition,
the National FinTech Risk Monitoring Center was given
approval to set up in Beijing, and the local financial risk
monitoring platform are also under exploration.

4

PRC Financial Regulation:
Annual Report (2021)
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In 2021, the fintech regulatory framework will continue
to develop. We expect that the regulators will continue
to strengthen the application of regtech, actively exploring
further use of big data, AI, cloud computing, blockchain
and other technologies. The objectives will be to build
digital regulatory capacity, continue to enhance financial
risk prevention capabilities, and make sure that regulation is
professional, uniform and extends to all areas that need
to be covered by regulation.
Local regulators will be given greater powers, under theoverall coordination of the PBOC, and we expect there
to be the adoption of local financial regulations tailored tomeet local conditions. We anticipate that non-licensed
institutions will be allowed to apply independently tojoin regulatory sandboxes.

Regulation of data property rights will be a particular focus

Substantial progress was made in 2020 in the field of
data and data trading. Many localities developed local
policies relating to data. On September 29, the Beijing
Local Financial Supervision and Administration together
with Beijing Municipal Bureau of Economy and Information
Technology issued the Implementation Plan for the
Establishment of Beijing International Big Data Exchange.
The services of the Exchange include a data information
registration service, a data products trading service,data operation and management services, data assets
financial services, and data assets fintech service, and soon. Hainan announced that it would gradually expand theopening-up of its data sector, and carry out online dataprocessing and transaction processing business for thewhole Hainan Free Trade Port and internationally.
Shenzhen will study the viability of data trading markets as
proposed in the Implementation Plan (2020-2025) for
Comprehensive Pilot Reform in Shenzhen to Build the City
into a Pilot Demonstration Zone for Socialism with Chinese
Characteristics.

However, the legal framework for data property rights
and interests lags behind these positive developments.
The Data Regulations of Shenzhen Special Economic Zone
(Consultation draft) released in July 2020 proposed theconcept of a "data right" for the first time, and proposed
clarifications of such issues as ownership of private data,
public data and the data collected and generated byrelevant market players. In 2021, it is expected that
regulators will release applicable both at the overall level
and at the local level that will make clear fundamental
rights such as data ownership, rights of usage andmanagement obligations. Applicable laws and regulations
are expected to be promulgated to regulate and protect
the collection, use and trading of data, and intellectual
property ownership. We will also see regulations issued
covering international coordination of cross-borderdata flows.

5

Information security remains a top priority, and anti-trust
may become another regulatory focus

Personal information security and privacy protection
will continue to be the focus of regulation as the financial
services sector continues its digital transformation andthe data sector grows in importance. We therefore expect
to see more regulations bearing upon these sectors, aswell as the release of industry standards. It is well understoodthat fintech companies have access to, and process, large
volumes of personal and financial information, yet there
are no clear standards about these companies’ information
protection obligations. The Implementation Measures
for the Protection of Financial Consumers' Rights and Interests,
newly revised in 2020, still only apply to traditional licensed
financial institutions. Whilst the Personal Financial
Information Protection Technical Specification is applicable
to all relevant institutions involved in the processing of
personal financial information, it is only a recommended
industry standard.
In 2021, in addition to the Personal Information Protection
Law (Draft), regulations on the security and protectionof financial data for all institutions in the financial services
sector that are involved in the processing of personal
financial information are expected to be issued.

Antitrust is also likely to become another focus of fintech
regulation. The Antitrust Guidelines on Platform Economy(Consultation draft) released in November 2020 signaled
that regulators will look at potential anticompetitive
nature in the operations of internet platforms. In December,
regulators imposed penalties on three unreported merger
cases, which indicated how seriously they are taking thesituation. Existing antitrust legislation focuses on
traditional issues such as monopoly agreements, market
abuse and concentration of undertakings, which may
not cover potential antitrust issues that arise in the fintech
sector, such as the data monopoly advantage of large
technology companies, and the use of platform anddata advantages to obstruct fair competition and theentry of new institutions. The CBIRC has emphasized
the importance of regulating the antitrust behavior of
fintech companies. In the future, more antitrust regulations
focusing on specific business practices such as financial
marketing, platform referral traffic and use of financial
information are expected to be issued.

PRC Financial Regulation:
Annual Report (2021)
63

3

Regulators will strengthen regtech, continue to expand thepilot and application of innovative fintech products, andcollaborate to improve fintech regulation

Through 2020, we saw increasing adoption of regtech,
the application of technology in the exercising of regulation.
For example, the pilot project of big data anti-insurance
fraud carried out by the CBIRC and the Ministry of Public
Security had promising initial results. Also happening
were the release of industry standards to ensure effective
and safe use of new technology. These included theInformation Security Technology - Technical Requirements
for Remote Face Recognition System and the Guidelines
for Construction of the National New Generation AI Standard
System. The scope of the pilot "regulatory sandbox" wasextended (see 7, above), and related innovative fintech
products were registered and put into practice. In addition,
the National FinTech Risk Monitoring Center was given
approval to set up in Beijing, and the local financial risk
monitoring platform are also under exploration.

4

PRC Financial Regulation:
Annual Report (2021)
64

In 2021, the fintech regulatory framework will continue
to develop. We expect that the regulators will continue
to strengthen the application of regtech, actively exploring
further use of big data, AI, cloud computing, blockchain
and other technologies. The objectives will be to build
digital regulatory capacity, continue to enhance financial
risk prevention capabilities, and make sure that regulation is
professional, uniform and extends to all areas that need
to be covered by regulation.
Local regulators will be given greater powers, under theoverall coordination of the PBOC, and we expect there
to be the adoption of local financial regulations tailored tomeet local conditions. We anticipate that non-licensed
institutions will be allowed to apply independently tojoin regulatory sandboxes.

Regulation of data property rights will be a particular focus

Substantial progress was made in 2020 in the field of
data and data trading. Many localities developed local
policies relating to data. On September 29, the Beijing
Local Financial Supervision and Administration together
with Beijing Municipal Bureau of Economy and Information
Technology issued the Implementation Plan for the
Establishment of Beijing International Big Data Exchange.
The services of the Exchange include a data information
registration service, a data products trading service,data operation and management services, data assets
financial services, and data assets fintech service, and soon. Hainan announced that it would gradually expand theopening-up of its data sector, and carry out online dataprocessing and transaction processing business for thewhole Hainan Free Trade Port and internationally.
Shenzhen will study the viability of data trading markets as
proposed in the Implementation Plan (2020-2025) for
Comprehensive Pilot Reform in Shenzhen to Build the City
into a Pilot Demonstration Zone for Socialism with Chinese
Characteristics.

However, the legal framework for data property rights
and interests lags behind these positive developments.
The Data Regulations of Shenzhen Special Economic Zone
(Consultation draft) released in July 2020 proposed theconcept of a "data right" for the first time, and proposed
clarifications of such issues as ownership of private data,
public data and the data collected and generated byrelevant market players. In 2021, it is expected that
regulators will release applicable both at the overall level
and at the local level that will make clear fundamental
rights such as data ownership, rights of usage andmanagement obligations. Applicable laws and regulations
are expected to be promulgated to regulate and protect
the collection, use and trading of data, and intellectual
property ownership. We will also see regulations issued
covering international coordination of cross-borderdata flows.

5

Information security remains a top priority, and anti-trust
may become another regulatory focus

Personal information security and privacy protection
will continue to be the focus of regulation as the financial
services sector continues its digital transformation andthe data sector grows in importance. We therefore expect
to see more regulations bearing upon these sectors, aswell as the release of industry standards. It is well understoodthat fintech companies have access to, and process, large
volumes of personal and financial information, yet there
are no clear standards about these companies’ information
protection obligations. The Implementation Measures
for the Protection of Financial Consumers' Rights and Interests,
newly revised in 2020, still only apply to traditional licensed
financial institutions. Whilst the Personal Financial
Information Protection Technical Specification is applicable
to all relevant institutions involved in the processing of
personal financial information, it is only a recommended
industry standard.
In 2021, in addition to the Personal Information Protection
Law (Draft), regulations on the security and protectionof financial data for all institutions in the financial services
sector that are involved in the processing of personal
financial information are expected to be issued.

Antitrust is also likely to become another focus of fintech
regulation. The Antitrust Guidelines on Platform Economy(Consultation draft) released in November 2020 signaled
that regulators will look at potential anticompetitive
nature in the operations of internet platforms. In December,
regulators imposed penalties on three unreported merger
cases, which indicated how seriously they are taking thesituation. Existing antitrust legislation focuses on
traditional issues such as monopoly agreements, market
abuse and concentration of undertakings, which may
not cover potential antitrust issues that arise in the fintech
sector, such as the data monopoly advantage of large
technology companies, and the use of platform anddata advantages to obstruct fair competition and theentry of new institutions. The CBIRC has emphasized
the importance of regulating the antitrust behavior of
fintech companies. In the future, more antitrust regulations
focusing on specific business practices such as financial
marketing, platform referral traffic and use of financial
information are expected to be issued.

PRC Financial Regulation:
Annual Report (2021)
65

PRC Financial Regulation:
Annual Report (2021) –Insurance

PRC Financial Regulation:
Annual Report (2021)
66

2020 Key Dates

March 18
The China Banking and Insurance Regulatory
Commission (CBIRC) issued the Interim Measures for
the Administration of Insurance Asset Management
Products, establishing the regulatory framework
for insurance asset management together with thesubsequently issued implementation measures.

July 17
The CBIRC took over Tianan Property Insurance,
Huaxia Life Insurance, Tianan Life Insurance, and Yi’an
P&C Insurance.

September 14
Anbang Insurance Group Co., Ltd announced its
dissolution and liquidation.

November 5
Definitions for critical illnesses were updated, andsteps were taken to move critical illness insurance
products into the new framework.

November 23
The Provisions on the Regulation of Insurance Agents was
issued, reshaping the regulatory framework underwhich insurance agents work.

December 30
China Agricultural Reinsurance Co. Ltd. was approved
to open for business.

June 17
The CBIRC approved AIA’s conversion of its Shanghai
branch to a wholly-owned subsidiary. AIA Life
Insurance was the first wholly foreign-owned life
insurance company in China.

July 30
Provisions on the Regulation of the Solvency of
Insurance Companies was published for public
consultation.

September 19
The Guiding Opinions on Implementing the Comprehensive
Reform of Auto Insurance were officially implemented,
starting a new round of auto insurance reform.

November 13
The CBIRC removed industry restrictions on financial
equity investment by insurance funds.

December 14
The CBIRC issued the Measures for the Regulation ofInternet Insurance Business.

December 31
Consultation paper, the Implementation Rules of theRegulations on the Administration of Foreign-Funded
Insurance Companies, was published for public
consultation.

PRC Financial Regulation:
Annual Report (2021)
65

PRC Financial Regulation:
Annual Report (2021) –Insurance

PRC Financial Regulation:
Annual Report (2021)
66

2020 Key Dates

March 18
The China Banking and Insurance Regulatory
Commission (CBIRC) issued the Interim Measures for
the Administration of Insurance Asset Management
Products, establishing the regulatory framework
for insurance asset management together with thesubsequently issued implementation measures.

July 17
The CBIRC took over Tianan Property Insurance,
Huaxia Life Insurance, Tianan Life Insurance, and Yi’an
P&C Insurance.

September 14
Anbang Insurance Group Co., Ltd announced its
dissolution and liquidation.

November 5
Definitions for critical illnesses were updated, andsteps were taken to move critical illness insurance
products into the new framework.

November 23
The Provisions on the Regulation of Insurance Agents was
issued, reshaping the regulatory framework underwhich insurance agents work.

December 30
China Agricultural Reinsurance Co. Ltd. was approved
to open for business.

June 17
The CBIRC approved AIA’s conversion of its Shanghai
branch to a wholly-owned subsidiary. AIA Life
Insurance was the first wholly foreign-owned life
insurance company in China.

July 30
Provisions on the Regulation of the Solvency of
Insurance Companies was published for public
consultation.

September 19
The Guiding Opinions on Implementing the Comprehensive
Reform of Auto Insurance were officially implemented,
starting a new round of auto insurance reform.

November 13
The CBIRC removed industry restrictions on financial
equity investment by insurance funds.

December 14
The CBIRC issued the Measures for the Regulation ofInternet Insurance Business.

December 31
Consultation paper, the Implementation Rules of theRegulations on the Administration of Foreign-Funded
Insurance Companies, was published for public
consultation.

PRC Financial Regulation:
Annual Report (2021)
67

PRC Financial Regulation:
Annual Report (2021)
68

2020 Regulatory Observations2

1

The trillion RMB insurance fund market undergoing reformand opening up a new era for insurance asset management

Following repeated signals from regulators in 2019 toencourage insurance funds to enter the market, a numberof new regulations were issued and implemented in 2020,
offering more space for insurance funds in terms ofinvestment scope and investment management capabilities.
One of the most notable changes has been the removal ofindustry restrictions on financial equity investments byinsurance funds. Direct equity investment by insurance
funds, both domestically and internationally, has long
been limited to a few specific types of companies. In
November 2020, the CBIRC issued the Notice on Matters
Related to Financial Equity Investment with Insurance
Funds, which gives insurance companies more liberty infinancial investments through a "negative list + positive
guidance" regulatory mechanism.
Also relaxed was the upper limit on the portion of equity
assets permitted to be held by insurance companies intheir total assets. In July 2020, the CBIRC issued the
Notice on Optimizing the Regulation of the Allocation of
Equity Assets of Insurance Companies, which adjusted theprevious "one-size-fits-all" limit of 30% of the insurancecompany’s total assets to a differentiated regulatorymodel based on the level of solvency, with the highest
level of limit set at 45% of the insurance company’s total
assets (as measured at the end of the previous quarter).
Such series of policy adjustments have made it possiblefor insurance funds to enter the equity investment market
on a larger scale. Allowing investment into traditional
industries, support for small and medium-sized enterprises,
participation in technological innovation and dovetailingwith the wider financing needs of the real economy may
become some of the main focuses of insurance funds
in the next phase.

Other investment sectors were also opening up. In
addition to the relaxation of the conditions for issuersof tier 2 capital bonds and non-fixed term capital bonds,
the regulations relating to investment in financial derivatives,
treasury bond futures and stock index futures have also
been issued. Insurance funds may be permitted to invest
in convertible debt investment plans, which are includedin the "white list" of financial products that can be invested
in by insurance funds. It is also worth mentioning theremoval of the filing requirement for investment management
capacity of insurance institutions, which strengthens
the interim and ex-post regulation from the perspectiveof rules and regulations. This move also reflects thedetermination of regulators to “delegate power, streamline
administration and optimize government services”.
The regulatory system of insurance asset management
developed during 2020, with the Interim Measures for
the Administration of Insurance Asset Management Products
and its supporting rules (including the Detailed Implementation
Rules for Portfolio Insurance Asset Management Products,
the Detailed Implementation Rules for Debt Investment
Plans, and the Detailed Implementation Rules for Equity
Investment Plans) coming into effect. As anticipated by
the market, the new rules defined the privately-offered
nature of insurance asset management products, aligning
the requirements of the guiding opinions of regulatorson asset management.
As insurance asset management institutions developed
from catering purely to the insurance market to becoming
part of the wider world of institutional investors andeven serving high net worth individual clients, while
enjoying regulatory policy benefits, insurance asset
management institutions also faced new challenges ofleveraging their investment capabilities and improving
their risk control capabilities.

2. Data and some information referred to in this chapter are mainly obtained from the disclosed information or statistics on the CBIRC official website, and relevant
media reports from Securities Daily, Financial Times, Shanghai Securities News, China Banking, Insurance News and Caixin, etc.

2

Advanced opening-up of the insurance sector being steadily
promoted

In 2020, regulators continued to push forward theopening-up of the insurance sector. In mid-2020, the
CBIRC approved the opening of Korean Re’s branch in
China and Hannover Re and Swiss Re to increase theircapital in their China branches, thus enabling foreign
reinsurers to increase their China investments. There
are now more foreign reinsurance companies thanChinese ones.
A number of international insurance companies increased
their equity investments. The US company Chubb increased
its stake in Huatai Insurance Group, becoming the largest
shareholder, while AIA upgraded its Shanghai branch
into a wholly foreign-owned life insurance company,
becoming the first wholly foreign-owned life insurancecompany in China. At the same time, the market has
also seen a number of international insurance companies
exiting the China market, either in whole or in part, as aresult of their own commercial objectives (e.g. businessintegration or transformation).
The Regulations on the Administration of Foreign-Funded
Insurance Companies and its implementation rules havebeen the main regulation for foreign insurance companies.
The Regulations, as amended in 2019, for the first timeallowed international insurance groups to establish
foreign insurance companies in China, as well as permittinginternational financial institutions to acquire shares inforeign insurance companies based in China. At the end of
2020, the CBIRC issued a consultation draft of theimplementation rules of the Regulations with the aim ofclarifying the scope and qualification of these two
types of institutions and further improving the alignmentof the Regulations with the Measures for the Administration of
Equities of Insurance Companies and other existing insurance
regulations.
Although, in practice, “group companies” and “financial
institutions” are still defined differently, as applied in
the domestic and foreign regulatory contexts, the issueof the final regulations may provide an opportunity forforeign licensed institutions to either increase theirinvestments or establish a stronger presence in China,
or both, as well as being able to take advantage ofcreating regional operations within China. All of this is
in line with the objective of ensuring the same treatment
for domestic and foreign investment in the insurance
sector and having compatible rules for access.
Although there have been some restraints on opening-up
over the past year, in part because of the pandemic
and in part because of delays in updating the relevant
regulations, many foreign insurance companies havesignaled their investment plans in China, and many
have already locked in partners or submitted preliminary
applications. We believe that we will see a new round ofaccelerated opening-up of the sector to foreign
involvement in the near future.

PRC Financial Regulation:
Annual Report (2021)
67

PRC Financial Regulation:
Annual Report (2021)
68

2020 Regulatory Observations2

1

The trillion RMB insurance fund market undergoing reformand opening up a new era for insurance asset management

Following repeated signals from regulators in 2019 toencourage insurance funds to enter the market, a numberof new regulations were issued and implemented in 2020,
offering more space for insurance funds in terms ofinvestment scope and investment management capabilities.
One of the most notable changes has been the removal ofindustry restrictions on financial equity investments byinsurance funds. Direct equity investment by insurance
funds, both domestically and internationally, has long
been limited to a few specific types of companies. In
November 2020, the CBIRC issued the Notice on Matters
Related to Financial Equity Investment with Insurance
Funds, which gives insurance companies more liberty infinancial investments through a "negative list + positive
guidance" regulatory mechanism.
Also relaxed was the upper limit on the portion of equity
assets permitted to be held by insurance companies intheir total assets. In July 2020, the CBIRC issued the
Notice on Optimizing the Regulation of the Allocation of
Equity Assets of Insurance Companies, which adjusted theprevious "one-size-fits-all" limit of 30% of the insurancecompany’s total assets to a differentiated regulatorymodel based on the level of solvency, with the highest
level of limit set at 45% of the insurance company’s total
assets (as measured at the end of the previous quarter).
Such series of policy adjustments have made it possiblefor insurance funds to enter the equity investment market
on a larger scale. Allowing investment into traditional
industries, support for small and medium-sized enterprises,
participation in technological innovation and dovetailingwith the wider financing needs of the real economy may
become some of the main focuses of insurance funds
in the next phase.

Other investment sectors were also opening up. In
addition to the relaxation of the conditions for issuersof tier 2 capital bonds and non-fixed term capital bonds,
the regulations relating to investment in financial derivatives,
treasury bond futures and stock index futures have also
been issued. Insurance funds may be permitted to invest
in convertible debt investment plans, which are includedin the "white list" of financial products that can be invested
in by insurance funds. It is also worth mentioning theremoval of the filing requirement for investment management
capacity of insurance institutions, which strengthens
the interim and ex-post regulation from the perspectiveof rules and regulations. This move also reflects thedetermination of regulators to “delegate power, streamline
administration and optimize government services”.
The regulatory system of insurance asset management
developed during 2020, with the Interim Measures for
the Administration of Insurance Asset Management Products
and its supporting rules (including the Detailed Implementation
Rules for Portfolio Insurance Asset Management Products,
the Detailed Implementation Rules for Debt Investment
Plans, and the Detailed Implementation Rules for Equity
Investment Plans) coming into effect. As anticipated by
the market, the new rules defined the privately-offered
nature of insurance asset management products, aligning
the requirements of the guiding opinions of regulatorson asset management.
As insurance asset management institutions developed
from catering purely to the insurance market to becoming
part of the wider world of institutional investors andeven serving high net worth individual clients, while
enjoying regulatory policy benefits, insurance asset
management institutions also faced new challenges ofleveraging their investment capabilities and improving
their risk control capabilities.

2. Data and some information referred to in this chapter are mainly obtained from the disclosed information or statistics on the CBIRC official website, and relevant
media reports from Securities Daily, Financial Times, Shanghai Securities News, China Banking, Insurance News and Caixin, etc.

2

Advanced opening-up of the insurance sector being steadily
promoted

In 2020, regulators continued to push forward theopening-up of the insurance sector. In mid-2020, the
CBIRC approved the opening of Korean Re’s branch in
China and Hannover Re and Swiss Re to increase theircapital in their China branches, thus enabling foreign
reinsurers to increase their China investments. There
are now more foreign reinsurance companies thanChinese ones.
A number of international insurance companies increased
their equity investments. The US company Chubb increased
its stake in Huatai Insurance Group, becoming the largest
shareholder, while AIA upgraded its Shanghai branch
into a wholly foreign-owned life insurance company,
becoming the first wholly foreign-owned life insurancecompany in China. At the same time, the market has
also seen a number of international insurance companies
exiting the China market, either in whole or in part, as aresult of their own commercial objectives (e.g. businessintegration or transformation).
The Regulations on the Administration of Foreign-Funded
Insurance Companies and its implementation rules havebeen the main regulation for foreign insurance companies.
The Regulations, as amended in 2019, for the first timeallowed international insurance groups to establish
foreign insurance companies in China, as well as permittinginternational financial institutions to acquire shares inforeign insurance companies based in China. At the end of
2020, the CBIRC issued a consultation draft of theimplementation rules of the Regulations with the aim ofclarifying the scope and qualification of these two
types of institutions and further improving the alignmentof the Regulations with the Measures for the Administration of
Equities of Insurance Companies and other existing insurance
regulations.
Although, in practice, “group companies” and “financial
institutions” are still defined differently, as applied in
the domestic and foreign regulatory contexts, the issueof the final regulations may provide an opportunity forforeign licensed institutions to either increase theirinvestments or establish a stronger presence in China,
or both, as well as being able to take advantage ofcreating regional operations within China. All of this is
in line with the objective of ensuring the same treatment
for domestic and foreign investment in the insurance
sector and having compatible rules for access.
Although there have been some restraints on opening-up
over the past year, in part because of the pandemic
and in part because of delays in updating the relevant
regulations, many foreign insurance companies havesignaled their investment plans in China, and many
have already locked in partners or submitted preliminary
applications. We believe that we will see a new round ofaccelerated opening-up of the sector to foreign
involvement in the near future.

PRC Financial Regulation:
Annual Report (2021)
69

3

Regulators tackling misconduct, corporate governance, andmanagement of shareholder risk

Increasingly, the CBIRC has attached great importanceto regulating corporate governance. According to theThree-Year Action Plan for Enhancing Corporate Governance inBanking and Insurance Industry (2020-2022), shareholder
misconduct and unclear equity structures (e.g., lacking
in transparency of who the shareholders are) have been
the main reasons for the “disorder” in the banking andinsurance sectors. One of the main tasks of regulators in2020 has been to put in place regulations that addressthese failings, in particular ensuring that there are curbs
placed on majority shareholders. In July and December

4

PRC Financial Regulation:
Annual Report (2021)
70

2020, the CBIRC published two lists of shareholders ofbanking and insurance institutions which had been foundto be in major violation of laws and regulations. Amongthe 47 institutions named, 12 were shareholders of
insurance companies involving a total of three insurancecompanies (including two Anbang-linked insurancecompanies). The main violations included: preparing orproviding false materials, concealing the actual controller
and affiliation, and non-compliant sourcing of investment
funds. It is expected that the regulators will continue topublish such lists regularly to create a nationwide record.

Risk resolution being further escalated as Ming Tian group
was taken over; Dajia Insurance’s engagement with potential
strategic investors meeting difficulties

Since 2017, the regulators have formulated a series ofplans with the goal of preventing and resolving
financial risk. This task was all but completed in 2020.
Following the takeover and disposal of the Anbang
group in 2018, in July 2020 the CBIRC announced thetakeover of six institutions that formed part of the Ming
Tian Group, including Tianan Property Insurance,
Huaxia Life Insurance, Tianan Life Insurance, and Yi’an
P&C Insurance, which were taken over by specialgroups established by China Pacific Property Insurance,
China Life Health Industry Investment, New China Lifeand PICC P&C, respectively. Based on the experience ofthe process taken to resolve risks of Anbang grouppreviously, private capital and foreign investment may

have the opportunity to be introduced on completionof the liquidation, debt restructuring and confirmationof the equity structure.
The reorganization of Dajia Insurance adopted, for the
first time in the insurance sector the model of "newestablishment and takeover". For various reasons, theintroduction of strategic investors was not completed
in 2020. However, we believe the introduction of new
investors for Dajia Insurance will continue, not only
because of special nature of the China Insurance
Security Fund, but also the regulators’ determination todemonstrate their desire to prevent and eliminate riskin the insurance sector.

5

Strict regulation of the insurance sector continuing

In 2020, the CBIRC continued its strict regulation of theinsurance sector, with an increase in penalties for institutions
and an increase in the number of fines for individuals.
This was under the “dual punishment system”, aimed
at both institutions and individuals. According to statistics
from reports, the CBIRC and its local branch offices imposeda total of some 1,800 penalties on more than 1,100
institutions and more than 1,500 individuals, with totalfines levied of more than RMB230 million. On all thesecounts, the numbers did not drop due to the pandemic
but were far higher than in 2019.
A new focus of compliance centered on the use of funds.
In particular, regulators looked at certain areas of activity
that needed addressing and correcting. These included:
the use of unlisted equity and real estate investments to
set up platform companies; the retention, misappropriationand transfer of insurance funds through such platform
companies; the illegitimate transfer of benefits to connectedparties; and the illegal use of funds for capital increases.

In September, the regulators carried out a special risk
inspection on the use of funds, and identified a numberof problematical issues, including uncontrolled investments
and other illegal uses of funds, for which the offenders
were fined.
Added to this, the regulators focused their attention on
insurance intermediaries, signified by the promulgationof Measures for the Administration of the Handling ofBanking and Insurance Consumer Complaints, Work
Plan for Rectifying Disorder in the Insurance IntermediaryMarket in 2020 and Notice on Effectively Strengthening theAdministration of Practitioners of Professional Insurance
Intermediaries. The scope of regulation of the insuranceintermediary market has been expanded and the seriousnessof penalties increased.

PRC Financial Regulation:
Annual Report (2021)
69

3

Regulators tackling misconduct, corporate governance, andmanagement of shareholder risk

Increasingly, the CBIRC has attached great importanceto regulating corporate governance. According to theThree-Year Action Plan for Enhancing Corporate Governance inBanking and Insurance Industry (2020-2022), shareholder
misconduct and unclear equity structures (e.g., lacking
in transparency of who the shareholders are) have been
the main reasons for the “disorder” in the banking andinsurance sectors. One of the main tasks of regulators in2020 has been to put in place regulations that addressthese failings, in particular ensuring that there are curbs
placed on majority shareholders. In July and December

4

PRC Financial Regulation:
Annual Report (2021)
70

2020, the CBIRC published two lists of shareholders ofbanking and insurance institutions which had been foundto be in major violation of laws and regulations. Amongthe 47 institutions named, 12 were shareholders of
insurance companies involving a total of three insurancecompanies (including two Anbang-linked insurancecompanies). The main violations included: preparing orproviding false materials, concealing the actual controller
and affiliation, and non-compliant sourcing of investment
funds. It is expected that the regulators will continue topublish such lists regularly to create a nationwide record.

Risk resolution being further escalated as Ming Tian group
was taken over; Dajia Insurance’s engagement with potential
strategic investors meeting difficulties

Since 2017, the regulators have formulated a series ofplans with the goal of preventing and resolving
financial risk. This task was all but completed in 2020.
Following the takeover and disposal of the Anbang
group in 2018, in July 2020 the CBIRC announced thetakeover of six institutions that formed part of the Ming
Tian Group, including Tianan Property Insurance,
Huaxia Life Insurance, Tianan Life Insurance, and Yi’an
P&C Insurance, which were taken over by specialgroups established by China Pacific Property Insurance,
China Life Health Industry Investment, New China Lifeand PICC P&C, respectively. Based on the experience ofthe process taken to resolve risks of Anbang grouppreviously, private capital and foreign investment may

have the opportunity to be introduced on completionof the liquidation, debt restructuring and confirmationof the equity structure.
The reorganization of Dajia Insurance adopted, for the
first time in the insurance sector the model of "newestablishment and takeover". For various reasons, theintroduction of strategic investors was not completed
in 2020. However, we believe the introduction of new
investors for Dajia Insurance will continue, not only
because of special nature of the China Insurance
Security Fund, but also the regulators’ determination todemonstrate their desire to prevent and eliminate riskin the insurance sector.

5

Strict regulation of the insurance sector continuing

In 2020, the CBIRC continued its strict regulation of theinsurance sector, with an increase in penalties for institutions
and an increase in the number of fines for individuals.
This was under the “dual punishment system”, aimed
at both institutions and individuals. According to statistics
from reports, the CBIRC and its local branch offices imposeda total of some 1,800 penalties on more than 1,100
institutions and more than 1,500 individuals, with totalfines levied of more than RMB230 million. On all thesecounts, the numbers did not drop due to the pandemic
but were far higher than in 2019.
A new focus of compliance centered on the use of funds.
In particular, regulators looked at certain areas of activity
that needed addressing and correcting. These included:
the use of unlisted equity and real estate investments to
set up platform companies; the retention, misappropriationand transfer of insurance funds through such platform
companies; the illegitimate transfer of benefits to connectedparties; and the illegal use of funds for capital increases.

In September, the regulators carried out a special risk
inspection on the use of funds, and identified a numberof problematical issues, including uncontrolled investments
and other illegal uses of funds, for which the offenders
were fined.
Added to this, the regulators focused their attention on
insurance intermediaries, signified by the promulgationof Measures for the Administration of the Handling ofBanking and Insurance Consumer Complaints, Work
Plan for Rectifying Disorder in the Insurance IntermediaryMarket in 2020 and Notice on Effectively Strengthening theAdministration of Practitioners of Professional Insurance
Intermediaries. The scope of regulation of the insuranceintermediary market has been expanded and the seriousnessof penalties increased.

PRC Financial Regulation:
Annual Report (2021)
71

6

PRC Financial Regulation:
Annual Report (2021)
72

Regulators addressing the need to regulateInternet-generated insurance

The outbreak of COVID-19 catalyzed the growth ofInternet/online sales of insurance products. This contributed
to the finalization towards the end of 2020 of the Measures for
the Regulation of Internet Insurance Business, which had
been in the process for two years and had involved threerounds of public consultation. The new regulations
replaced the previous outdated interim measures andalso reflect requirements on internet insurance contemplated
in several recently issued regulations. The key words forInternet insurance are "licensed institutions andlicensed personnel”, as insurance institutions may only
sell internet insurance products or provide services fromtheir own online platforms or those of other insurance
institutions, and the web pages used for enrolment mustalso be part of the insurance institutions’ own online
platform. The intention, and the desired end result, isthat any cooperation between insurance companies
and third-party online platforms on client data sharing
will end. The main responsibility for conducting online
business will now lie completely with licensed institutions.
The final regulations removed the potential for insurancecompanies and third-party online platforms to engage
in joint marketing and promotion.

However, this does not mean that internet companies
will no longer be able to participate in the insurance
market. For this to happen, they will need to obtain an
insurance agency license in order to sell products andprovide services using their own online platform, as set
out in a specific chapter in the final regulations coveringinternet companies. We can expect to see internetcompanies returning to the insurance market, who, in
addition to complying with the above regulations, will
also be required to adhere to the Provisions of the Regulationof Insurance Agents and future regulations dealing withconcurrent businesses agent qualifications.
As well as the establishment of the general regulatory
framework, attention has also been paid to the regulatory
system for online products, which is close to completion.
The Notice on Internet Life Insurance Business was recently
circulated for public consultation. When finalized, theserules will expand the scope of online life insurance products
while also raising the qualification bar for those to conduct
such business. The Notice also indicates that, in future,
there will be a specific mechanism designed for approvalor filing in respect of online products.

7

Development of regulations on insurance products being
intensified, auto insurance adjusted in favor of consumers,
and more extensive definitions of critical illness introduced

In 2020, regulators were focused on the formulation of
the regulatory regime for insurance products. Amongthe insurance products, guarantee insurance had become
increasingly used and sold by property insurers, in respectof which there had been provisional measures datingfrom 2017 but which were due to expire. In timely fashion,
CBIRC issued the Measures for the Regulation of Credit
Insurance and Guarantee Insurance in May 2020, followedby the publication of two operating guidelines dealing
with for pre-insurance and post-insurance management.
The new regulations aimed to improve insurers' risk
prevention capabilities, avoid the risk transmission that
accompanies the blind growth of the credit insurance
business, and resolve other risks to head off any moreinsurance companies collapsing. At the end of 2020,
the Regulation on Liability Insurance Business was issued,
clarifying the relationship between liability insurance
and other types of insurance to prevent regulatory arbitrage
through the mechanism of insuring financing credit
risks through liability insurance.
Regulations in the field of auto insurance, the Guiding
Opinions on Implementing the Comprehensive Reform ofAuto Insurance, issued by the CBIRC during 2020 were
widely viewed as the boldest of reforms in this sector. At
the core, the reforms aimed to reduce premiums for
consumers, increase coverage and improve services.
Specific measures included: increasing the liability limits ofcompulsory auto liability insurance and commercial
auto insurance, increasing the coverage of commercial
auto insurance, and modifying the no claims discountcoefficient in commercial auto insurance. The Insurance
Association of China subsequently amended the Terms
and Conditions of Compulsory Auto Liability Insurance forMotor Vehicles and the New Plan of Premium Rate Floating
Coefficients for Compulsory Traffic Accident Liability Insurance
for Motor Vehicles for reference and use by all auto insurancecompanies. In the highly competitive auto insurance
market, this reform would mean lower per-customer

premium income and more insurance coverage. There
will be challenges for every insurance company offering
auto insurance, as they adjust their cost-to-income ratios
while still ensuring compliance.
So far as life insurance was concerned, the city-customizedcommercial medical insurance named “Benefiting People
Insurance” launched in more than 70 cities across thecountry in the middle of the year, attracting a large numberof policyholders. In November, the CBIRC issued the Noticeon Standardizing the City-customized Commercial Medical
Insurance Business of Insurance Companies (Consultation
Draft), listing a range of violations that had transpired
and setting out the main responsibilities of companies
to offer city-customized commercial medical insurance.
In the same month, the amended Specification on the
Use of Disease Definitions for Critical Illness Insurance wasofficially issued, replacing the first version that had
been issued in 2007. The new Specification established aclassification of critical illnesses, introduced a definition of“mild” illnesses and expanded the number of diseases andscope of coverage in order that the regulations becameclosely aligned with modern medical technology andpractice. A transitional period was provided-for in the
new Specification, until January 31, 2021, after which
insurers will no longer be allowed to sell critical illness
insurance products that do not comply with the newSpecification. Since then, the CBIRC also issued a Noticeon Regulation of Short-Term Health Insurance Business,
which prohibited guaranteed extension of insurance
policies, and clearly conveyed the regulators’ attitude
that short-term insurance should not be operated on along-term basis.

PRC Financial Regulation:
Annual Report (2021)
71

6

PRC Financial Regulation:
Annual Report (2021)
72

Regulators addressing the need to regulateInternet-generated insurance

The outbreak of COVID-19 catalyzed the growth ofInternet/online sales of insurance products. This contributed
to the finalization towards the end of 2020 of the Measures for
the Regulation of Internet Insurance Business, which had
been in the process for two years and had involved threerounds of public consultation. The new regulations
replaced the previous outdated interim measures andalso reflect requirements on internet insurance contemplated
in several recently issued regulations. The key words forInternet insurance are "licensed institutions andlicensed personnel”, as insurance institutions may only
sell internet insurance products or provide services fromtheir own online platforms or those of other insurance
institutions, and the web pages used for enrolment mustalso be part of the insurance institutions’ own online
platform. The intention, and the desired end result, isthat any cooperation between insurance companies
and third-party online platforms on client data sharing
will end. The main responsibility for conducting online
business will now lie completely with licensed institutions.
The final regulations removed the potential for insurancecompanies and third-party online platforms to engage
in joint marketing and promotion.

However, this does not mean that internet companies
will no longer be able to participate in the insurance
market. For this to happen, they will need to obtain an
insurance agency license in order to sell products andprovide services using their own online platform, as set
out in a specific chapter in the final regulations coveringinternet companies. We can expect to see internetcompanies returning to the insurance market, who, in
addition to complying with the above regulations, will
also be required to adhere to the Provisions of the Regulationof Insurance Agents and future regulations dealing withconcurrent businesses agent qualifications.
As well as the establishment of the general regulatory
framework, attention has also been paid to the regulatory
system for online products, which is close to completion.
The Notice on Internet Life Insurance Business was recently
circulated for public consultation. When finalized, theserules will expand the scope of online life insurance products
while also raising the qualification bar for those to conduct
such business. The Notice also indicates that, in future,
there will be a specific mechanism designed for approvalor filing in respect of online products.

7

Development of regulations on insurance products being
intensified, auto insurance adjusted in favor of consumers,
and more extensive definitions of critical illness introduced

In 2020, regulators were focused on the formulation of
the regulatory regime for insurance products. Amongthe insurance products, guarantee insurance had become
increasingly used and sold by property insurers, in respectof which there had been provisional measures datingfrom 2017 but which were due to expire. In timely fashion,
CBIRC issued the Measures for the Regulation of Credit
Insurance and Guarantee Insurance in May 2020, followedby the publication of two operating guidelines dealing
with for pre-insurance and post-insurance management.
The new regulations aimed to improve insurers' risk
prevention capabilities, avoid the risk transmission that
accompanies the blind growth of the credit insurance
business, and resolve other risks to head off any moreinsurance companies collapsing. At the end of 2020,
the Regulation on Liability Insurance Business was issued,
clarifying the relationship between liability insurance
and other types of insurance to prevent regulatory arbitrage
through the mechanism of insuring financing credit
risks through liability insurance.
Regulations in the field of auto insurance, the Guiding
Opinions on Implementing the Comprehensive Reform ofAuto Insurance, issued by the CBIRC during 2020 were
widely viewed as the boldest of reforms in this sector. At
the core, the reforms aimed to reduce premiums for
consumers, increase coverage and improve services.
Specific measures included: increasing the liability limits ofcompulsory auto liability insurance and commercial
auto insurance, increasing the coverage of commercial
auto insurance, and modifying the no claims discountcoefficient in commercial auto insurance. The Insurance
Association of China subsequently amended the Terms
and Conditions of Compulsory Auto Liability Insurance forMotor Vehicles and the New Plan of Premium Rate Floating
Coefficients for Compulsory Traffic Accident Liability Insurance
for Motor Vehicles for reference and use by all auto insurancecompanies. In the highly competitive auto insurance
market, this reform would mean lower per-customer

premium income and more insurance coverage. There
will be challenges for every insurance company offering
auto insurance, as they adjust their cost-to-income ratios
while still ensuring compliance.
So far as life insurance was concerned, the city-customizedcommercial medical insurance named “Benefiting People
Insurance” launched in more than 70 cities across thecountry in the middle of the year, attracting a large numberof policyholders. In November, the CBIRC issued the Noticeon Standardizing the City-customized Commercial Medical
Insurance Business of Insurance Companies (Consultation
Draft), listing a range of violations that had transpired
and setting out the main responsibilities of companies
to offer city-customized commercial medical insurance.
In the same month, the amended Specification on the
Use of Disease Definitions for Critical Illness Insurance wasofficially issued, replacing the first version that had
been issued in 2007. The new Specification established aclassification of critical illnesses, introduced a definition of“mild” illnesses and expanded the number of diseases andscope of coverage in order that the regulations becameclosely aligned with modern medical technology andpractice. A transitional period was provided-for in the
new Specification, until January 31, 2021, after which
insurers will no longer be allowed to sell critical illness
insurance products that do not comply with the newSpecification. Since then, the CBIRC also issued a Noticeon Regulation of Short-Term Health Insurance Business,
which prohibited guaranteed extension of insurance
policies, and clearly conveyed the regulators’ attitude
that short-term insurance should not be operated on along-term basis.

PRC Financial Regulation:
Annual Report (2021)
73

8

PRC Financial Regulation:
Annual Report (2021)
74

The much-anticipated new regulatory system for insurance
agents and intermediaries being establishedThe Provisions on the Regulation of Insurance Agents cameinto effect on January 1, 2021, replacing multiple regulations
such as the Provisions on the Regulation of Full-Time
Insurance Agencies, the Measures for the Regulation of
Insurance Sales Personnel, and the Interim Measures for
the Regulation of Concurrent-Business Insurance Agency.
For the first time, the new Regulation created a unified
regulatory system for insurance agents, bringing full-time
agencies, concurrent-business agencies and individual
insurance agents under a single regulation. In accordancewith the requirements of “delegating power, streamlining
administration and optimizing government services”,
the new Regulation removed the three-year term forinsurance agency licenses, but also raised the minimum
requirement on registered capital of regional agencies
and strengthened the entry and exit requirements of all
types of agents.

The new Regulation incorporated the previous pilot
program on "independent individual insurance agent"
into the formal regulatory framework. Subsequently,
the CBIRC issued the Notice on the Development of
Independent Individual Insurance Agents, which provided
more detailed rules on the implementation of the Regulation.
In addition, in August, the regulators issued consultation
drafts of the Implementation Measures for Administrative
Licensing and Filing of Insurance Intermediaries, and at the
beginning of 2021, issued the Provisions on the Regulationof Informationization of Insurance Intermediaries following
public consultations, incrementally complementing thesubordinate rules governing the regulation of insuranceintermediaries.

2021 Regulatory Outlook

1

The regulatory system will continue to be built and improved

The year 2020 has been an exceptional year but during
this period, regulators were able to do their work towards
building a well-functioning regulatory system – this wasindeed a great achievement. During the last year, someregulations were published for consultation but not yet
finalized and issued, in particular the Provisions on theRegulation of Solvency of Insurance Companies (Consultation
Draft) published in mid-2020, one of the most important
areas and critical for the development of the insurance
sector. The Consultation Draft elevated the principle andframework requirements in the regulatory rules of China
Risk Oriented Solvency System Phase II (C-ROSS Phase II)
to the level of departmental regulations; set out three
regulatory indicators: the core solvency adequacy ratio;
comprehensive solvency adequacy ratio and comprehensive
risk rating; and provided effective regulatory tools
available to regulators when needing to respond tocases of insufficient solvency of insurance companies.

As things stand, some of the major industry regulations
were formulated in the context of the C-ROSS Phase 1
but which are now are out of step with the latest regulations.
The introduction of new solvency regulations may involvea wave of amendments that will help to unify the regulatory
framework.
As well as these, consultation papers have been published
for other regulations such as the Administrative Measuresfor Policy Mortgage Loans of Life Insurance Companies, theImplementation Measures for Administrative Licensing andFiling of Insurance Intermediaries, the Administrative Measures
for the Real-Name System of Individual Insurance, and the
Implementation Rules of the Regulations on the Administrationof Foreign-Funded Insurance Companies; and regulations
on the pilot long-term care insurance projects, internet
life insurance business, and city-customized medical
insurance have all been circulated within the industry
for comments. In 2021, we expect more fundamental
and core regulations to be issued and implemented,
helping to establish a well-operating regulatory system.

PRC Financial Regulation:
Annual Report (2021)
73

8

PRC Financial Regulation:
Annual Report (2021)
74

The much-anticipated new regulatory system for insurance
agents and intermediaries being establishedThe Provisions on the Regulation of Insurance Agents cameinto effect on January 1, 2021, replacing multiple regulations
such as the Provisions on the Regulation of Full-Time
Insurance Agencies, the Measures for the Regulation of
Insurance Sales Personnel, and the Interim Measures for
the Regulation of Concurrent-Business Insurance Agency.
For the first time, the new Regulation created a unified
regulatory system for insurance agents, bringing full-time
agencies, concurrent-business agencies and individual
insurance agents under a single regulation. In accordancewith the requirements of “delegating power, streamlining
administration and optimizing government services”,
the new Regulation removed the three-year term forinsurance agency licenses, but also raised the minimum
requirement on registered capital of regional agencies
and strengthened the entry and exit requirements of all
types of agents.

The new Regulation incorporated the previous pilot
program on "independent individual insurance agent"
into the formal regulatory framework. Subsequently,
the CBIRC issued the Notice on the Development of
Independent Individual Insurance Agents, which provided
more detailed rules on the implementation of the Regulation.
In addition, in August, the regulators issued consultation
drafts of the Implementation Measures for Administrative
Licensing and Filing of Insurance Intermediaries, and at the
beginning of 2021, issued the Provisions on the Regulationof Informationization of Insurance Intermediaries following
public consultations, incrementally complementing thesubordinate rules governing the regulation of insuranceintermediaries.

2021 Regulatory Outlook

1

The regulatory system will continue to be built and improved

The year 2020 has been an exceptional year but during
this period, regulators were able to do their work towards
building a well-functioning regulatory system – this wasindeed a great achievement. During the last year, someregulations were published for consultation but not yet
finalized and issued, in particular the Provisions on theRegulation of Solvency of Insurance Companies (Consultation
Draft) published in mid-2020, one of the most important
areas and critical for the development of the insurance
sector. The Consultation Draft elevated the principle andframework requirements in the regulatory rules of China
Risk Oriented Solvency System Phase II (C-ROSS Phase II)
to the level of departmental regulations; set out three
regulatory indicators: the core solvency adequacy ratio;
comprehensive solvency adequacy ratio and comprehensive
risk rating; and provided effective regulatory tools
available to regulators when needing to respond tocases of insufficient solvency of insurance companies.

As things stand, some of the major industry regulations
were formulated in the context of the C-ROSS Phase 1
but which are now are out of step with the latest regulations.
The introduction of new solvency regulations may involvea wave of amendments that will help to unify the regulatory
framework.
As well as these, consultation papers have been published
for other regulations such as the Administrative Measuresfor Policy Mortgage Loans of Life Insurance Companies, theImplementation Measures for Administrative Licensing andFiling of Insurance Intermediaries, the Administrative Measures
for the Real-Name System of Individual Insurance, and the
Implementation Rules of the Regulations on the Administrationof Foreign-Funded Insurance Companies; and regulations
on the pilot long-term care insurance projects, internet
life insurance business, and city-customized medical
insurance have all been circulated within the industry
for comments. In 2021, we expect more fundamental
and core regulations to be issued and implemented,
helping to establish a well-operating regulatory system.

PRC Financial Regulation:
Annual Report (2021)
75

2

PRC Financial Regulation:
Annual Report (2021)
76

Local-level regulation may be extended; and reforms willcontinue to progress in order to “delegate power, streamline
administration and optimize government services”

Delegating responsibility for regulation at the local levelhas been in mind for a long time. As early as 2014, regulators
tried to set up local-level regulation to regulate use of
insurance funds. In early 2019, the CBIRC delegated someadministrative licensing matters to its local branch offices.
In February 2020, the CBIRC issued the Notice on Further
Strengthening and Improving the Regulation of Productsof Property Insurance Companies, which formally introduced
local-level regulation for property insurance products,
which, except for some specific products, would be filed
with, and regulated by, the relevant CBIRC branch offices.
Subsequently, the application of local-level regulation
expanded from product to institutional regulation.
In July 2020, the CBIRC issued the Reform Plan for the
Responsibilities of Regulators of Property Insurance Companies
and Reinsurance Companies, dividing 87 property insurancecompanies and 13 reinsurance companies into two
categories: companies directly regulated by the CBIRC,
and companies regulated by the local CBIRC branch
offices, with a clear division of regulatory responsibilities.
At the beginning of 2021, the CBIRC issued the Reform

Plan for the Responsibilities of Regulators of Life Insurance
Companies, taking basically the same approach as had
been adopted for property insurance and reinsurance
and applying it to life insurance, i.e., dividing 91 life
insurance companies into two categories: 39 companies
directly regulated by the CBIRC, and 52 companies regulatedby the local CBIRC branch offices.
In the future, we anticipate that local-level regulation
may be extended to other types of regulated insurance
entities.
Also, as part of the ongoing reform program, in the
beginning of 2021, regulators discontinued the practice of
directors, supervisors and senior management in thebanking and insurance sectors having to sit for a qualification
examination. As regulators have been more innovativein their approach to regulation and streamlined resources
needed for regulation, more licensing matters may beremoved or delegated to local branch offices in the
future, and it is expected that “post-entry regulation”
will play a larger role.

3

Strict regulation will continue to be the key theme

In recent years, the insurance industry has been the subject ofmore detailed regulation, which has also been morestrictly enforced. In 2020, the CBIRC issued the Administrative
Penalty Measures of the CBIRC and the Provisions on the
CBIRC Administrative Licensing Procedures to standardize
and unify the administrative licensing and penalty proceduresin the banking and insurance sectors. With such regulations
and more regulatory resources released at the local level,
we can expect to see no softening of China’s efforts tostamp out irregular practices. Regulators will continue

4

to focus on regulation of shareholdings in insurers. The
next regulatory focuses will likely be on internet insurance
business and consumer protection taking into accountthe issue of various new rules and the current government
stand to impose comprehensive regulation on internet
finance. Already in 2021, there have been two cases of
insurance companies infringing consumer rights, andwe expect there to be more examples of penalties being
imposed, as the insurance sector follows in the footstepsof the banking sector.

Positive prospects continue for insurance funds to enter thecapital markets; asset management institutions will beformally classified and rated

In December 2020, the executive meeting of the StateCouncil pointed out that it is required to improve thelong-term investment capacity of insurance funds, toencourage insurance funds to participate in the constructionof major projects such as infrastructure and new urbanization
construction, and to have insurance funds play a greaterrole in supporting the real economy. In the same month,
the State Council regular policy briefing endorsed policies
to improve the long-term investment capacity of insurance
funds and to support insurance asset managementcompanies launching long-term products. As industry
restrictions are lifted on insurance companies conducting
financial equity investment, we expect the government
will guide insurance institutions to make value investments,
long-term investments and prudent investments in 2021,
as well as granting more favorable policies for investments.

In terms of regulation of institutions, in January 2021,
the CBIRC issued the Interim Measures for the Regulatory
Rating of Insurance Asset Management Companies, which
provided a comprehensive rating system for insurance
asset management companies with five key indicators:
corporate governance and internal controls; asset management
capability; comprehensive risk management; transaction
and operation security; and information disclosure. Ratings
would be divided into four bands. For institutions ofdifferent bands, regulators will apply differentiatedregulatory measures in terms of market access, businessscope, product innovation, and on-site inspection. This
coming year will be a trial period of classified regulation,
during which time each insurance asset management
institution is expected to conduct internal investigations
and make any changes necessary to meet rating indicators,
in order to be ready to meet and comply with future
regulations, when they are fully implemented.

PRC Financial Regulation:
Annual Report (2021)
75

2

PRC Financial Regulation:
Annual Report (2021)
76

Local-level regulation may be extended; and reforms willcontinue to progress in order to “delegate power, streamline
administration and optimize government services”

Delegating responsibility for regulation at the local levelhas been in mind for a long time. As early as 2014, regulators
tried to set up local-level regulation to regulate use of
insurance funds. In early 2019, the CBIRC delegated someadministrative licensing matters to its local branch offices.
In February 2020, the CBIRC issued the Notice on Further
Strengthening and Improving the Regulation of Productsof Property Insurance Companies, which formally introduced
local-level regulation for property insurance products,
which, except for some specific products, would be filed
with, and regulated by, the relevant CBIRC branch offices.
Subsequently, the application of local-level regulation
expanded from product to institutional regulation.
In July 2020, the CBIRC issued the Reform Plan for the
Responsibilities of Regulators of Property Insurance Companies
and Reinsurance Companies, dividing 87 property insurancecompanies and 13 reinsurance companies into two
categories: companies directly regulated by the CBIRC,
and companies regulated by the local CBIRC branch
offices, with a clear division of regulatory responsibilities.
At the beginning of 2021, the CBIRC issued the Reform

Plan for the Responsibilities of Regulators of Life Insurance
Companies, taking basically the same approach as had
been adopted for property insurance and reinsurance
and applying it to life insurance, i.e., dividing 91 life
insurance companies into two categories: 39 companies
directly regulated by the CBIRC, and 52 companies regulatedby the local CBIRC branch offices.
In the future, we anticipate that local-level regulation
may be extended to other types of regulated insurance
entities.
Also, as part of the ongoing reform program, in the
beginning of 2021, regulators discontinued the practice of
directors, supervisors and senior management in thebanking and insurance sectors having to sit for a qualification
examination. As regulators have been more innovativein their approach to regulation and streamlined resources
needed for regulation, more licensing matters may beremoved or delegated to local branch offices in the
future, and it is expected that “post-entry regulation”
will play a larger role.

3

Strict regulation will continue to be the key theme

In recent years, the insurance industry has been the subject ofmore detailed regulation, which has also been morestrictly enforced. In 2020, the CBIRC issued the Administrative
Penalty Measures of the CBIRC and the Provisions on the
CBIRC Administrative Licensing Procedures to standardize
and unify the administrative licensing and penalty proceduresin the banking and insurance sectors. With such regulations
and more regulatory resources released at the local level,
we can expect to see no softening of China’s efforts tostamp out irregular practices. Regulators will continue

4

to focus on regulation of shareholdings in insurers. The
next regulatory focuses will likely be on internet insurance
business and consumer protection taking into accountthe issue of various new rules and the current government
stand to impose comprehensive regulation on internet
finance. Already in 2021, there have been two cases of
insurance companies infringing consumer rights, andwe expect there to be more examples of penalties being
imposed, as the insurance sector follows in the footstepsof the banking sector.

Positive prospects continue for insurance funds to enter thecapital markets; asset management institutions will beformally classified and rated

In December 2020, the executive meeting of the StateCouncil pointed out that it is required to improve thelong-term investment capacity of insurance funds, toencourage insurance funds to participate in the constructionof major projects such as infrastructure and new urbanization
construction, and to have insurance funds play a greaterrole in supporting the real economy. In the same month,
the State Council regular policy briefing endorsed policies
to improve the long-term investment capacity of insurance
funds and to support insurance asset managementcompanies launching long-term products. As industry
restrictions are lifted on insurance companies conducting
financial equity investment, we expect the government
will guide insurance institutions to make value investments,
long-term investments and prudent investments in 2021,
as well as granting more favorable policies for investments.

In terms of regulation of institutions, in January 2021,
the CBIRC issued the Interim Measures for the Regulatory
Rating of Insurance Asset Management Companies, which
provided a comprehensive rating system for insurance
asset management companies with five key indicators:
corporate governance and internal controls; asset management
capability; comprehensive risk management; transaction
and operation security; and information disclosure. Ratings
would be divided into four bands. For institutions ofdifferent bands, regulators will apply differentiatedregulatory measures in terms of market access, businessscope, product innovation, and on-site inspection. This
coming year will be a trial period of classified regulation,
during which time each insurance asset management
institution is expected to conduct internal investigations
and make any changes necessary to meet rating indicators,
in order to be ready to meet and comply with future
regulations, when they are fully implemented.

PRC Financial Regulation:
Annual Report (2021)
77

5

PRC Financial Regulation:
Annual Report (2021)
78

Greater Bay Area cross-border insurance be considered anddeveloped

Based on the top-level design of the development of
the Greater Bay Area, the PBOC, the CBIRC, the CSRC
and the SAFE jointly issued the Opinions on Financial
Support for the Development of the Guangdong-Hong
Kong-Macao Greater Bay Area in April 2020. The goal
was to encourage cooperation between insurance
institutions in Guangdong, Hong Kong and Macao todevelop innovative products especially, cross-border
medical and auto insurance. In November 2020, the CBIRC
issued the Notice on Promoting the Work Relating to Life
Insurance Products in the Guangdong-Hong Kong-Macao
Greater Bay Area, following which the first cross-border

medical insurance and critical illness insurance products
for permanent residents in the Greater Bay Area werelaunched. Cross-border auto insurance, based on theprinciple of "recognizing equivalent products first", islikely to take the form of single policies covering thewhole area, which should be available for Hong Kongand Macao car owners in 2021. Before that can happen,
however, a number of issues need to resolved, including
cross-border payments, tax management and differences
in industry regulation. If the pilot programs in the Greater
Bay Area work out well, future cross-border cooperation in
the insurance industry may not be far behind.

Authors

FANG Jian

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

Xiaoying Zhang

Ada Zou

Luna Yang

Counsel, Fangda Partners
xiaoying.zhang@fangdalaw.com

Counsel, Fangda Partners
ada.zou@fangdalaw.com

Counsel, Fangda Partners
luna.yang@fangdalaw.com

Lily YanSam Wang

Rong Fan

Counsel, Fangda Partners
lily.yan@fangdalaw.com

Counsel, Fangda Partners
sam.wang@fangdalaw.com

Fangda Partners
rong.fan@fangdalaw.com

Fangkun Hu

Zhao Li

Giselle Li

Fangda Partners
fangkun.hu@fangdalaw.com

Fangda Partners
zhao.li@fangdalaw.com

Fangda Partners
giselle.li@fangdalaw.com

PRC Financial Regulation:
Annual Report (2021)
77

5

PRC Financial Regulation:
Annual Report (2021)
78

Greater Bay Area cross-border insurance be considered anddeveloped

Based on the top-level design of the development of
the Greater Bay Area, the PBOC, the CBIRC, the CSRC
and the SAFE jointly issued the Opinions on Financial
Support for the Development of the Guangdong-Hong
Kong-Macao Greater Bay Area in April 2020. The goal
was to encourage cooperation between insurance
institutions in Guangdong, Hong Kong and Macao todevelop innovative products especially, cross-border
medical and auto insurance. In November 2020, the CBIRC
issued the Notice on Promoting the Work Relating to Life
Insurance Products in the Guangdong-Hong Kong-Macao
Greater Bay Area, following which the first cross-border

medical insurance and critical illness insurance products
for permanent residents in the Greater Bay Area werelaunched. Cross-border auto insurance, based on theprinciple of "recognizing equivalent products first", islikely to take the form of single policies covering thewhole area, which should be available for Hong Kongand Macao car owners in 2021. Before that can happen,
however, a number of issues need to resolved, including
cross-border payments, tax management and differences
in industry regulation. If the pilot programs in the Greater
Bay Area work out well, future cross-border cooperation in
the insurance industry may not be far behind.

Authors

FANG Jian

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

Xiaoying Zhang

Ada Zou

Luna Yang

Counsel, Fangda Partners
xiaoying.zhang@fangdalaw.com

Counsel, Fangda Partners
ada.zou@fangdalaw.com

Counsel, Fangda Partners
luna.yang@fangdalaw.com

Lily YanSam Wang

Rong Fan

Counsel, Fangda Partners
lily.yan@fangdalaw.com

Counsel, Fangda Partners
sam.wang@fangdalaw.com

Fangda Partners
rong.fan@fangdalaw.com

Fangkun Hu

Zhao Li

Giselle Li

Fangda Partners
fangkun.hu@fangdalaw.com

Fangda Partners
zhao.li@fangdalaw.com

Fangda Partners
giselle.li@fangdalaw.com

PRC Financial Regulation:
Annual Report (2021)
79

Tracy Lin

Sophia Liu

Yimei Qiao

Fangda Partners
yuan.lin@fangdalaw.com

Fangda Partners
sophia.liu@fangdalaw.com

Fangda Partners
yimei.qiao@fangdalaw.com

Marshall Shen

Kristy Tang

Rainie Zhang

Fangda Partners
marshall.shen@fangdalaw.com

Fangda Partners
kristy.tang@fangdalaw.com

Fangda Partners
rainie.zhang@fangdalaw.com

Yao Zhang

Qifei Zhang

Xiaoye Zhao

Fangda Partners
yao.zhang@fangdalaw.com

Fangda Partners
qifei.zhang@fangdalaw.com

Fangda Partners
xiaoye.zhao@fangdalaw.com

Jazzy Zhou
Fangda Partners
Jazzy.Zhou@fangdalaw.com

PRC Financial
Regulation

2021

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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