Chinese banks are already suspending the sale of wealth management products (WMP’s) with guaranteed principals, following the launch of new asset management regulations that put an end to the “implicit guarantees” considered a source of acute risk in the financial system.
On 27 April China’s central financial regulators officially launched the “Guidance Opinions Concerning Standardisation of Asset Management Operations by Financial Institutions” (关于规范金融机构资产管理业务的指导意见).
The official launch of the new asset management rules is expected to cause a major shake-up of China’s financial sector, by removing the implicit guarantees undergirding financial product such as WMP’s that remain such a vital source of retail funds for China’s small and medium-sized banks.
The introduction of the regulations means that more than 22 trillion yuan in bank WMP’s will no longer be considered “risk free” financial products, with the Opinions calling for financial institutions to “strengthen education, continually increase the financial knowledge and risk awareness of investors…and break implicit guarantees.”
While the Opinions extend the transition period for implementation until the end of 2020, domestic media reports that many Chinese banks have already ended the sale of principal-guaranteed WMP’s since the start of May, while at the same time ramping up their promotion of large-denomination certificates of deposit and structured deposit products.
Securities Daily reports that this is especially the case for many small and medium-sized commercial banks in the Beijing area, with China Merchants Bank, China Everbright and Huaxia Bank all suspending the sale of principal guaranteed WMP’s in advance.
With the exception of ICBC the big state-owned banks are continuing to sell principal guaranteed WMP’s alongside many municipal lenders, but have started to place caps on sales amounts, and are also extending the maturities for these products.
While the new asset management rules forbid the provision of principal guarantees by Chinese banks for WMP’s, lenders can continue to sell these products during the transition period in order to maintain liquidity as well as market stability.
“Because the central bank gave banks a transition period of over a year, if we also include the release of the draft opinions, then the actual transition period is more than two years,” said one WMP analyst from Rong360.
“Banks must make orderly and gradual adjustments, and cannot make an immediate and complete change in their business model.”
According to the analyst the shift nonetheless means that investors will need to increase their level of financial understanding and risk awareness.
“In the past investors who bought bank WMP’s felt that they were absolutely safe, but in future this WMP mentality must change…products that make money will make money, while products that lose will lose.”
In response to the launch of the new regulations, however, Chinese banks have taken to the heavy promotion of structured deposits since the end of last year, which are considered by banks to be “principal guaranteed” products, and have emerged as a fresh favourite for local investors.
One Securities Daily journalist who visited a joint-stock commercial bank the Beijing area found that staff were heavily promoting large-denomiantion CD’s and structured deposits to customers.
“Our bank is making active adjustments to its sale of WMP’s, and principal-guaranteed WMP’s are no longer being sold,” said bank staff. “At present large-denomination CD’s and structure deposits are selling very well.”
According to bank staff structured deposits are unaffected by the new asset management regulations, and can basically provide guaranteed returns.
Rates for large-denomination CD’s are also on the rise, with the return on a 5-year 1 million yuan CD at 4.18%, or 52% above the benchmark.
Some banks are also providing CD’s starting from 300,000 yuan, with rates at least 45% above the benchmark, while those for products over 500,000 yuan are at least 48% above.
Other Chinese banks are shifting to the heavy promotion of net value WMP’s in lieu of conventional expected return WMP’s.
“Following the implementation of the new asset management regulations, both banks and investors are all heavily affected,” said one WMP manager.
“WMP’s will in future all involve net value management, and investors can try out these products.
“Additionally, bank WMP’s will have strict investment standards, and net value WMP’s won’t see major ups and downs.”