Measures for Calculating the Business Turnover of Financial Business Operators for Notification of a Concentration

Issuing Body:  Ministry of Commerce, People's Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission

Issuing Date:  July 15, 2009

Effective Date:  August 15, 2009

Continuing efforts to implement China's year-old Anti-Monopoly Law (AML), five of the country's top regulatory agencies have jointly issued guidelines that clarify when financial sector businesses must give antitrust regulators advance notice of a planned merger, acquisition or other concentration. Under the AML, which took effect on August 1, 2008, and subsequently issued regulations, businesses that meet certain size thresholds must notify the Anti-Monopoly Commission prior to implementation of a concentration. The Measures for Calculating the Business Turnover of Financial Business Operators for Notification of a Concentration (the Financial Business Turnover Measures) provide guidelines for banks, securities companies and other financial businesses.

China Law Update has previously summarized both the Anti-Monopoly Law (October 2007) and various regulatory efforts to implement that landmark legislation, including the State Council's Regulations on Notification Thresholds of a Concentration of Undertakings (China Law Update, September 2008). But those regulations left open the key question of precisely how the new rules would apply to concentrations involving businesses in the financial sector.

The Regulations on Notification Thresholds of a Concentration of Undertakings provide thresholds, above which business operators must notify regulators in advance of a concentration:

(i) The aggregate worldwide turnover of all business operators involved in the concentration was more than RMB 10 billion in the previous fiscal year, with at least two of the businesses involved having a turnover within China of more than RMB 400 million in the previous fiscal year; or

(ii) The aggregate turnover within China of all business operators involved in the concentration was more than RMB 2 billion in the previous fiscal year, while at least two of those businesses had a turnover within China of more than RMB 400 million.

Those regulations also said, however, that the methods for calculating turnover in financial industries would be formulated by relevant regulatory authorities. Thus the Ministry of Commerce and four other agencies have together issued the Financial Business Turnover Measures.

Applicability

The Financial Business Turnover Measures are applicable to concentrations that involve banking financial institutions, securities firms, futures firms, fund management companies, insurance companies and other financial institutions. The term "banking financial institutions" includes commercial banks, urban and rural credit cooperatives, and China's "policy" banks (Agricultural Development Bank of China, Export-Import Bank of China and China Development Bank).

The Financial Business Turnover Measures are also applicable to financial asset management companies, trust companies, finance companies, leasing companies, automotive financing companies and currency brokerage firms.

Basic Elements Constituting Turnover

In accordance with the Financial Business Turnover Measures, for the purposes of determining notification thresholds, different types of financial businesses must incorporate different elements in their calculation of turnover.

For banking financial institutions, the elements of turnover include:

• Net interest income
• Net commission income
• Investment proceeds
• Income from changes in fair market value
• Currency exchange gains
• Other business revenues

The turnover elements for securities firms include:

• Net commission income (including brokerage, asset management, underwriting and sponsorship, and financial advisory business)
• Net interest income
• Investment proceeds
• Earnings from currency exchanges
• Other business revenue

For futures companies, the elements of turnover include:

• Net commission income
• Net interest income from bank deposits

The elements of turnover for fund management companies include:

• Management fee income
• Commission income

Insurance companies must calculate turnover based on net premiums collected (total premiums, minus outward premiums), including reinsurance premiums.

Turnover Calculation Formula

Once the core elements of turnover are calculated, in order to determine whether notification of a concentration is required, banking financial institutions, securities firms, futures companies and fund management companies use the following formula:

Turnover for Determining Threshold Notification = Cumulative Turnover Elements – (Business Taxes and Surcharges) × 10%

For insurance companies, the turnover calculation formula is:

Turnover for Determining Threshold Notification = Net Premium Income – (Business Taxes and Surcharges) × 10%

Note that by allowing companies to multiply basic turnover by 0.1, the government has effectively—and significantly—reduced the number of companies, and thus mergers and acquisitions, that will meet the threshold for requiring notification of a concentration.