Chinese Banks Say New Asset Management Rules Imperil Financial Stability

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A slew of Chinese banks have raised concerns about the central bank’s introduction of tighter regulations governing the asset management sector, on the grounds that it could deprive smaller lenders of retail funds, as well as heighten financial risk by triggering a rash of redemptions.

Several sources told Reuters that senior executives from ten joint-stock Chinese banks raised their objections with the People’s Bank of China at a closed-door meeting in Shanghai last week, claiming that the new rules could “trigger systemic financial risks.”

On 17 November the People’s Bank of China issued the draft version of the “Guidance Opinions Concerning Standardisation of Asset Management Operations by Financial Institutions (Draft for Solicitation of Opinions)” (关于规范金融机构资产管理业务的指导意见) in conjunction with several other central government authorities.

PBOC hopes that the new rules will curb risk in the asset management sector by removing the “implicit guarantees” that many financial products are perceived to enjoy, as well as containing the issuance of wealth management products that comprise a sizeable chunk of the shadow banking sector.

According to the Reuters report Chinese bank executives have expressed concern that the removal of implicit guarantees for WMP’s could trigger liquidity risks, as well as heighten market volatility.

Should the current draft of the opinions be implemented, sources claim that banks could be compelled to sell off liquid assets such as bonds and stocks in advance at a discount, as well as demand that borrower make early repayments.

“No matter which solution we choose, it will hit financial markets,” sources said.

Bankers have also expressed concern that the new regulations will cripple the current business model widely employed by China’s small and medium-sized banks, which involves raising funds by selling WMP’s that are perceived to enjoy implicit guarantees, before generating profits by investing the proceeds in stocks, bonds and non-standard debt assets.

Smaller banks rely upon WMP’s to raise retail funds, as they are unable to compete against the big state-owned banks when it comes to attracting deposits from the Chinese public.

Joint-stock bank executives revealed at the PBOC meeting that they have used much of the 28.38 trillion yuan in bank WMP’s to sidestep official constraints on lending as well as capital requirements.

Issaku Harada and Yusho Cho of the Nikkei Review previously wrote that stymieing the use of WMP’s would have a highly deleterious impact upon China’s small and medium-sized banks, as well as impact Chinese lenders in general.

“If they go into force, the regulations on WMPs could crimp weaker regional banks and small and midsize lenders’ ability to raise funds,” they wrote. “Such institutions have dangled the promise of high returns to attract capital.

“If deprived of this draw, they probably will have to offer higher interest rates on deposits. This could put upward pressure on deposit rates at big banks too, straining lenders’ profit margins.”

While the Opinions are scheduled to come into force in July 2019, providing enough time for financial institutions to make adjustments for their effects, Harada and Cho say they may never be enforced due to the size of their potential impacts.

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