China’s securities regulator intends to ban securities firms and fund managers from providing “channeling” services to banks that help them to sidestep investment controls.
The China Securities Regulatory Commission (CSRC) released draft versions of the “Securities Futures Operating Organisation Privately Offered Asset Management Business Administrative Measures” (证券期货经营机构私募资产管理业务管理办法) and the “Securities Futures Operating Organisation Privately Offered Asset Management Plan Operation Administrative Regulations” on 20 July, covering activity in China’s 26 trillion yuan privately offered asset management sector.
The draft rules outline a ban on securities firms and fund managers from engaging in the type of “channeling business” which permits clients such as banks to direct funds towards areas of the economy deemed by regulators to be off limits to conventional lending.
Securities firms, fund managers and futures companies are key players in China’s asset management product (AMP) sector.
According to data from CSRC securities firms account for the largest share of China’s 25.9 trillion yuan privately offered AMP market, managing around 14.9 trillion yuan in total as of June 2018.
Fund managers and their affiliates account for around 10.8 trillion yuan, while futures firms approximately 160 billion yuan.
The dominance of the privately offered asset management sector by securities firms and fund managers has given them ample opportunity to engage in channeling business which permits “regulatory arbitrage” on the part of Chinese banks.
Channeling business usually involves a bank using a non-bank financial institution such as a securities firm or fund manager, as an intermediary for “channeling” funds to borrowers who are barred from conventional lending by regulators.
Such borrowers include local government financing vehicles, who are considered to be a primary source of China’s risky debt, as well as real estate developers.
Bank are capable of exerting heavy pressure upon asset managers, typically requesting that an AMP be established before providing direct instructions as to where the funds will be channeled.
The arrangement gives regulators the surface impression that non-bank financial institutions are responsible for the management of AMP funds, when it’s actually banks who are calling the shots as well as bearing associated risk.