China's financial regulators have unveiled landmark nationwide rules governing local asset management companies (AMCs), closing a critical regulatory gap that persisted for over a decade. The National Financial Regulatory Administration (NFRA) recently released the Provisional Supervision Measures for Local Asset Management Companies, establishing clear supervisory responsibilities while imposing five operational prohibitions and stringent geographical restrictions.

These measures address systemic vulnerabilities in China's dual-track AMC framework comprising national financial AMCs and local counterparts. After years of rapid expansion, the sector now confronts intensifying polarization between leading institutions and struggling players as the industry transitions toward quality-driven development.

Dong Ximiao, chief researcher at Zhaolian, emphasized this represents the first comprehensive regulatory framework at the national level. "These rules will standardize operations and facilitate coordinated risk mitigation between local and national AMCs," he noted, adding they'll help contain financial risks among regional lenders while supporting high-quality economic growth.

The regulations crystallize responsibilities between central and provincial authorities. Provincial financial regulators now bear primary oversight duties for local AMCs within their jurisdictions, including authority over establishment and dissolution. NFRA retains rule-making powers and supervisory guidance over provincial agencies, though lower-level authorities may conduct inspections under delegated powers.

A pivotal change restricts cross-regional operations. Local AMCs must now primarily operate within their home provinces, with exceptions only for personal non-performing asset portfolios and select non-financial distressed acquisitions. This expands previous draft limitations beyond financial bad-debt purchases to cover all seven core AMC functions, reinforcing their role as regional financial stabilizers.

Five explicit red lines now demarcate prohibited practices: 1) No principal guarantees or implicit repurchase agreements with asset transferors 2) Ban on helping financial institutions disguise non-performing assets 3) Prohibition against fictitious acquisitions or disguised financing schemes 4) Restrictions on channeling services for local government financing vehicles 5) Forbidden collusion in debt evasion or improper benefit transfers.

Chen Chao, columnist at the Financial Law Inquiry Research Institute, observed that while cross-provincial secondary market operations remain undefined, the consistent policy direction aims to curb regulatory arbitrage and risk spillovers through regional loopholes.

Since the 2014 pilot program launched China's first local AMCs, the sector has grown to 59 regulated entities by late 2024—77.97% state-owned—forming a critical component in regional financial safety nets. Yet mounting challenges emerge as national AMCs expand downward into local markets while economic headwinds compress profit margins and complicate asset disposals.

A United Ratings industry report reveals stark divergence: top-tier local AMCs control over 40% of sector assets, while lagging institutions face marginalization. Some grapple with real estate exposure or accumulated legacy burdens, causing liquidity crunches and costly transitions. Dong cautioned against two pitfalls: reverting to policy-driven non-performing asset transfers that enable debt evasion, or conducting artificial asset swaps that artificially beautify financial statements.

Policy recommendations for sustainable development include easing market entry to diversify ownership structures, enforcing market-based pricing mechanisms to reduce moral hazard, and establishing fiscal frameworks for writing off regional bad-debt losses to incentivize local governments.