One of the senior-most advisors to the Chinese central bank says the release of strict new regulations governing China’s asset management sector can effectively curb risk without precipitating crisis as feared by many observers.
In an interview with China Economic Net on the topic of Beijing’s new asset management regulations, Sheng Songcheng (盛松成), counsellor to the People’s Bank of China and adjunct professor of economics and finance at the China Europe International Business School, said that risk issues in the asset management sector had emerged as a result of inadequate financing alternatives for Chinese enterprises.
“For a long-time the development of China’s direct financing has been inadequate, intensifying the real economy’s dependence upon financial intermediaries,” said Sheng.
“With respect to those enterprises who experience difficulties raising funds publicly from capital markets, or whose costs of obtaining loans from banks are comparatively high…the development of the asset management business has provided new financing channels, but also driven corporate financing costs higher.
“In order to avoid stricter regulations, the transaction structures for a considerable number of asset management products conceal multiple nested layers, lengthening the asset management operations chain, and further raising the cost of corporate financing.
“In addition to this, there has been considerable arbitrage and speculation during the course of the development of the asset management sector.”
In order to curb these issues Chinese regulators recently introduced strict new rules governing the asset management sector, specifically targeting the risk created by the perception of “implicit payments” in relation to financial instruments such as bank wealth management products.
Many observers have expressed concern about the severity of the new regulations, arguing that they could precipitate financial crisis in China by starving smaller institutions of liquidity, given their dependence upon instruments such as wealth management products to access funds.
Chinese banks reportedly conveyed these concerns to regulators at closed-door meetings, which in turn prompted the China Banking Regulatory Commission to indicate it will give further “consideration” to the new rules prior to their full roll out.
Sheng has sought to reassure the financial sector that the new regulations as implemented by CBRC won’t be so strict as to precipitate crisis.
“During the formulation and implementation of official regulatory by-laws, [we] must definitely focus on gradual transition, as well as strengthen communication with the market, in order to avoid triggering financial risk because of excessively hasty implementation of regulatory policy,” said Sheng.
“However, delaying reform isn’t a fundamental method of dispelling these concerns – the fundamental path lies in steadiness, coordinated progress of various financial market reforms, and active business model transition by market actors, in order to actively improve the investment capability of asset managers.”