CHINA is stepping up its crackdown on risky shadow banking with plans to rein in explosive growth of fund houses’ subsidiaries, a US$1.5 trillion business widely used by banks to move their loans off balance sheet to skirt regulatory oversight.

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

    The government’s long crackdown on shadow banking has taken on fresh urgency amid a growing number of company defaults as the economy cools, and as policymakers worry about the risks of too much debt-fuelled stimulus.

    “The business of fund companies’ subsidiaries has exploded in recent years because there have been almost no capital requirements, and their investment scope is very wide,” said Ivan Shi, head of research at fund research firm Z-Ben Advisors.

    “Now, if such subsidiaries want to grow bigger .. they need capital injections. Otherwise, they need to shut some businesses,” he said, adding he still needs to see the official rules to assess the full impact of the changes.

    Under the proposed rules, fund houses applying to set up subsidiaries must manage at least 20 billion yuan (US$3.06 billion) in assets excluding money-market funds, and have a minimum 600 million yuan in net assets.

    A subsidiary’s net capital also may not be lower than the company’s total risk assets, while net assets must not be lower than 20 percent of its liability, in effect slashing the leverage ratio of the business.

    The AMAC did not have an immediate comment.

    “In future, it will be very difficult for fund companies to set up subsidiaries, as the bar is very high,” said an executive at a mutual fund house in Shanghai, who declined to be identified. “The subsidiary businesses have been growing too fast, and the situation would be out of control if it implodes.” (SD-Agencies)