China’s financial authorities will step up regulation of the country’s asset management sector and wealth management products as part of ongoing efforts to contain systemic financial risk.
The China Banking and Insurance Regulatory Commission (CBIRC) released draft regulations on Friday concerning the wealth management products (WMP’s) of banks, stipulating that products be based upon net value in future.
The new draft rules mandate stronger liquidity management and stress tests in order to combat risk, as well as prohibit the use of WMP funds to invest in other bank WMP’s, or the provision of “channel services” that enable financial institutions to engage in “regulatory arbitrage.”
They also reduce the minimum amount of client subscription to any single public WMP to 10,000 yuan from 50,000 yuan.
CBIRC said that lenders must prevent shadow banking risk in relation to the management of fund pools, and that it is also drafting rules for the subsidiaries of bank established to engage in wealth management operations.
The draft rules serve as a supplement to sweeping, long-anticipated asset management regulations launched in April, whose chief goal was to remove the “implicit guarantees” underlying WMP’s and associated moral hazard.
Observers pointed to a shift towards net value WMP’s following the launch of the new asset regulations several months ago.
While WMP’s in China have traditionally been closed-end funds whose yields are based upon expected returns, net value WMP’s are more akin to open-end funds that investors can redeem at any time, and whose returns are based upon regularly announced net asset values.
WMP’s are considered to be a key component of China’s shadow banking sector that enable commercial lenders to better access retail funds, as well as sidestep regulations governing fund usage.
CBIRC data indicates that as of the end of June the outstanding amount of non-guaranteed WMP’s was 21 trillion yuan (approx. USD$3.09 trillion), of which around 70% was invested in standard assets including bonds, deposits and money market instruments.
Around 15% of WMP funds were invested in non-standard debt assets that are considered by regulators to be more risk-fraught.