A worker counts Chinese currency renminbi at a bank in Linyi, East China's Shandong province. [Photo/Xinhua] Ministry asks financial institutions to focus on core business, cut hierarchies China has asked State-owned financial institutions to remain focused on their main business and eliminate unnecessary operational hierarchies, while stepping up efforts to prevent risks from the inappropriate transactions of affiliates and false capital injection, the Ministry of Finance said on Wednesday. State-owned financial institutions that are engaged in overseas investment and have subsidiaries abroad should focus on their main business, follow the necessary prudential and compliance requirements, and strictly implement the due diligence and feasibility requirements, the ministry said in a notice. The notice is an indication that the central government is tightening scrutiny of State-owned capital investment, as financial risks and fluctuations are increasing due to the slower economic growth since the COVID-19 pandemic and the rise in new cases in some major Western countries, experts said. State-owned financial institutions should withdraw from business areas that are not at the core of their development strategies or have not yielded any financial returns for a long time, the notice said. In general, for providing the same kind of financial service, they can keep only one subsidiary, and there should be no more than three hierarchies in the operational structure, said the notice. The new rules also forbid false and circulatory capital injection among different subsidiaries within the same group, or using share pledges for financing, the Ministry of Finance said. "Except for financial investment, subsidiaries at all levels are not allowed to hold equities of the parent company, and the subsidiaries at all levels shall not hold each other's shares." Zhou Maohua, an analyst with China Everbright Bank, said the new rules will help streamline the main businesses of State-owned financial companies and improve the regulatory efficiency. "Financial resources will be invested in areas that can support the growth of the real economy and limit unnecessary competition between financial service providers in the same field." Recent data from the banking sector, which dominates China's financial system, showed a moderate deterioration in asset quality, profitability and capitalization during the third quarter. Financial regulators have also started signaling a resumption of de-risking measures such as tighter supervision of the domestic systemically important banks. Besides, the People's Bank of China, the central bank, is ensuring sufficient supply of liquidity to ease the temporary volatility from the recent corporate bond defaults. It has not eased the monetary policy significantly as the economic recovery is becoming increasingly broad-based. It will also lead to balanced liquidity in the financial system, said Nicholas Zhu, a senior credit officer with Moody's Investors Service, a global credit ratings agency. The new regulations also indicate the cautious stance of the government on overseas investments by SOEs, experts said. But some experts feel that the increasingly attractive offshore funding costs will spur an increase in offshore financing next year, as the Chinese economy continues to recover and credit easing measures in the onshore market will be less forthcoming compared to the first half of this year. Commenting on the bond default cases, Ivan Chung, an associate managing director of Moody's, said: "We believe the Chinese government's willingness to support SOEs will remain, but its tolerance for isolated defaults will increase as long as they do not trigger systemic risks or undermine economic and social stability."