Surging growth in China’s asset management market has given the shadow banking sector ample opportunity to engage in “channel financing,” prompting regulators to push for greater standardisation and scrutiny.
The People’s Bank of China’s latest “China Financial Stability Report” points to a surge the wealth management and asset management market last year, with the total volume of asset management operations by financial institutions reaching over 60 trillion yuan following the exclusion of cross-holdings.
Outstanding on-balance and off-balance sheet wealth management products reached 5.9 trillion yuan and 23.1 trillion yuan respectively by the end of 2016, while assets under management by trust companies reached 17.5 trillion yuan.
The asset management plans of publicly offered funds, private funds and securities companies reached 9.2 trillion yuan, 10.2 trillion yuan and 17.6 trillion yuan respectively, while the asset management plans of “funds and their subsidiary companies” hit 16.9 trillion yuan, and insurance asset management plans reached 1.7 trillion yuan.
According to the report “channel business” comprised approximately 42% of the overall asset management sector, far greater than the previous consensus estimate of roughly 30%.
The PBOC report highlights several other problems in relation to China’s asset management sector, including liquidity risk in relation to fund pools, the multi-layered “nesting” of products leading to risk transmission, insufficient regulation of shadow banking activity, rigid payment confining risk within the financial sector, and some non-financial sector institutions engaging in “disorderly” asset management activities.
In order to address these problems, PBOC has called of the establishment of unified standards for different product categories, the gradual removal of arbitrage opportunities, strengthening of liquidity risk management, control of leverage levels, the removal of multi-tier “nesting” and the suppression of channel business.