A view of the PBC building in Beijing Photo: VCG

China's central bank on Thursday unveiled rules governing affiliate transactions of financial holding firms, in the latest effort to increase scrutiny of a vibrant part of the country's vast financial sector.

The rules are intended to regulate related-party transactions of financial holding firms, foster stable operations of those firms and prevent financial risks, the People's Bank of China (PBC), the country's central bank, said in a statement on its website. 

The new rules, approved at a PBC meeting in December, will come into force on March 1. 

Financial holding firms hold stakes in or control an array of institutions with complicated business and organizational structures. Factoring in their high volumes of financial activities and high levels of relatedness, reining in affiliate transactions plays a significant part in strengthening and improving oversight of these firms, read the PBC statement. 

Improved scrutiny of affiliate transactions is an important component of plans laid out by the 20th National Congress of the Communist Party of China to enhance the mechanism for financial stability, the statement said.

The new rules make it clear that financial holding firms have primary responsibility for management of affiliate transactions. They are expected to regulate internal transactions and operations, supervise and urge affiliated units to handle related-party transactions properly. 

The rules are envisioned to prevent the transfer of benefits, risk contagion and regulatory arbitrage, thereby improving the macro-prudential policy framework.

Also, the new rules spell out what activities are off-limits, require the establishment of limits on the amount of affiliate transactions, and mandate the creation of special audit and internal accountability mechanisms.

The move builds on efforts in recent years to put in place firewalls around big conglomerates that have ventured into financial services amid the nation's trailblazing progress in fintech acumen. Concerns about over-expansion and spillover risks across varied financial segments sped up China's regulatory toughening over financial holding firms, observers said.

A major step toward this end was a set of rules for regulating financial holding firms, which went into effect on November 1, 2020.

China's financial holding firms have developed at a fast pace in recent years, playing an active part in meeting the diversified needs of various market entities and serving economic development. But a few businesses blindly expanded into the financial sector, and risks had continuously piled up, Pan Gongsheng, a deputy PBC governor, told a media briefing in September 2020 that specifically focused on financial holding firms.
 
Thursday's new rules take regulatory efforts to the next level as the PBC vowed to strengthen regulatory collaboration with other departments as part of a wider push for financial system stability.