China hopes for stability through stricter FHC rules: report

The rules will also hopefully insulate firms' finances from other risks.

China's stricter rules on financial holding companies (FHCs) are aimed at keeping these firms’ credit quality to ensure the continued stability of the country's financial sector, a Moody's Investors Service report said.

In addition, the regulation hopes to insulate the financial business arms of FHCs’ corporate owners from risks related to non-financial dealings, said Moody’s Gary Lau.

Entities, including non-financial firms, must set up FHCs if they control financial institutions whose total assets exceed a certain amount, or if regulators deem it necessary. The owners and the FHCs must meet China's requirements for corporate governance, risk management, capital adequacy and leverage management. 

To avoid excessive leverage, owners must also focus on their nonfinancial core businesses and not make aggressive investments in financial institutions.

Several Moody's-rated corporations have significant investments in financial firms, the report said, which help diversify business portfolios and create synergies with their core businesses. However, owning these financial institutions also requires large capital and strong risk-management expertise and practices.

Moody's expects that FHCs owned by rated state-owned enterprises will receive strong support from their parent companies and government owners, which will help the FHCs and their underlying financial institutions meet the regulatory requirements and their capital needs.