An increasing number of Chinese banks are planning to launch specialised asset management subsidiaries after the unveiling of new regulations that have shaken up the sector.
On 27 April Beijing 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), in move that shook up the Chinese banking and financial sector by removing the “implicit guarantees” undergirding key investment vehicles such as wealth management products (WMP’s).
According to official data China’s asset management sector reached 126 trillion yuan as of the end of 2017, with the balance of outstanding WMP’s rising to 29.54 trillion yuan, accounting for 23.44% of the total.
The launch of the Guidance Opinions has already prompted many Chinese bank to suspend the sale of guaranteed principal WMP’s, formerly a critical source of funds for smaller lenders that lack the depository base of their larger peers.
They’re also having another major impact on the Chinese financial sector, by prompting many banks to establish their own asset management subsidiaries.
The establishment of asset management subsidiaries by banks is nothing new in China, with China Everbright Bank, Shanghai Pudong Development Bank and China CITIC Bank setting up wealth management subsidiaries back in 2015.
Since the start of the year the number of Chinese banks now preparing to establish asset management subsidiaries has risen to five in total, including Industrial Bank Co., China Minsheng Bank, China Merchants Bank and the Bank of Beijing.
Dong Ximiao (董希淼), senior researcher at the Chongyang Institute for Financial Studies at Renmin University, said to Securities Daily that the establishment of asset management subsidiaries will be of benefit to breaking the implicit guarantees or “rigid payments” that regulators are concerned have been a source of moral hazard.
The Guidelines themselves stipulate that financial institutions whose main business does not include asset management operations should establish independent legal person asset management subsidiaries in order to engage in asset management operations, and strengthen separation of legal person risk.
According to Dong this is the first time that Chinese regulators have clearly required that financial institutions such as commercial banks establish asset management subsidiaries to engage in such operations, and will enable asset management operations to become more specialised and integrated.
The specialised development of asset management subsidiaries will also benefit the asset management operations of banks as a whole.
Dong said that the establishment of asset management subsidiaries by Chinese banks will be of major significance in three key areas:
i) It will be of benefit to achieving true risk separation.
Because asset management operations are a form of off-balance sheet business, risk can often be concealed. The establishment of asset management companies will create an effective risk segregation system, and a firewall between asset management operations and the bank’s other main businesses.
ii) It will help to raise the professionalism of asset management operations.
Asset management subsidiaries will be independent legal person entities possessing independent decision-making capabilities. Their ability to allocate human and financial resources independently will be of benefit to introducing market-based mechanisms, and achieving professional operation.
iii) It will be of benefiting to deepening financial system reform.
Following the establishment of asset management subsidiaries, strategic investors may be introduced at opportune times in order to implement mixed-ownership reforms, and enable state-owned and private capital to complement each other, advancing optimisation of corporate administrative structures and frameworks.
Dong points out however, that given process of establishing new asset management subsidiaries will pose major challenges for banks.
“The main thing is people, talent and materials preparations,” said Dong. “They will need a cohort of professional staff, because at present the asset management departments of some banks consists of just several dozen people who are managing 10 billion yuan to 100 billion yuan in assets.
“In terms of volume, this is insufficient, and in terms of quality, there is a lack of highly specialised personnel.
“Following the establishment of an asset management subsidiary, it and the bank will comprise two separate legal person entities, and how asset management subsidiaries position themselves and engage in competition or cooperation with the internal business departments of banks requires further exploration.”