China’s top financial authorities have just issued new rules for cash-management wealth management products (WMP’s), which will have a far-reaching impact on a market worth well over 7 trillion yuan (approx. USD$1.09 trillion).
On 11 June the China Banking and Insurance Regulatory Commission (CBIRC) and the People’s Bank of China (PBOC) jointly issued the “Notice Concerning Several Matters in Relation to the Standardization of Cash Management Category Wealth Management Products” (关于规范现金管理类理财产品管理有关事项的通知).
“Cash management category WMP’s” (现金管理类理财产品) are investment products in China that are only permitted to invest in money market instruments, and like money market funds can be issued openly to members of the public. The products can be subscribed and redeemed by investors on a daily basis.
The market for cash WMP’s has seen rapid growth in recent years, particularly since the launch of sweeping new asset management regulations in 2018 that removed the implicit guarantees on bank WMP’s.
The outstanding balance of cash WMP’s expanded from 4.16 trillion yuan at the end of 2019 to 7.34 trillion yuan as of the end of the first quarter of 2021, with Dong Ximiao (董希淼), chief researcher with China Merchant Finance, pointing out that cash WMP’s have come to largely replace principal-guaranteed WMP’s.
This rapid growth has caused concern amongst Chinese financial regulators however, given that large-scale redemptions en masse are liable to trigger liquidity risk with strong spill-over effects.
Dong said that release of the Notice is for the purpose of better aligning the standards and requirements for regulation of cash WMP’s with those of money market funds, as the two investment products are highly similar in practice.
Dong also points out that authorities have also made requirements in relation to liquidity risk created by the en masse redemption of cash WMP’s.
With regard to investment scope, the Notice stipulates that cash WMP’s are permitted to invest in cash, bank deposits, bond repos, central bank notes and interbank certificates of deposit with a term of one year or less, as well as other money market instruments such as asset backed securities that have a remaining term of 397 day or less, and are issued on the interbank market or exchanges.
Cash WMP’s are not permitted to make investments in stocks, convertible bonds, floating rate bonds that employ the rate for fixed term deposits as their benchmarks, or bonds or asset-backed securities with credit ratings of less than AA+.
Dong Ximiao said that the biggest area of impact for the Notice will be in narrowing the investment scope for cash WMP’s, making them consistent with those for money market funds. The Notice prohibits cash WMP’s from investing in lower grade debt such as second-tier capital bonds and perpetual bonds – especially those issued by small and medium-sized banks.
With regard to regulation of concentration levels, the Notice outlines restrictions on the percentage of investment of a given cash WMP in the financial instruments of a single institution, as well as investment of all cash WMP’s in the deposits, interbank CD’s or bonds of a single bank.
The Notice heightens regulation of liquid and leverage with the following requirements.
- Sets a floor on the percentage of high liquidity-asset holdings.
- Sets a ceiling on the percentage of restricted-liquidity asset holdings.
- Requires that the leverage of cash WMP’s not exceed 120%.
- Restricts the average remaining maturity of investment portfolios to 120 days or less.
- Where a single investor holds over 50% of the quota for a given cash WMP, require that full disclosure of such is made in sales documents, and that such cash WMP be prohibited from public sale to retail investors, in order to avoid unfair treatment of retail investors.
- Where the top ten investors hold over 20% or 50% of a given cash WMP, the relevant maturity and liquidity requirements for such cash WMP’s are increased.
- Outlines stronger management of the liquidity, transaction counter party and operational risk for interbank financing.
Dong Ximiao expects the Notice to have the effect of reducing the yields on cash WMP’s. Whereas in the past cash WMP’s provided yields that were 50 to 80 basis points above comparable money market funds, these yields will eventually align in the wake of the launch of the Notice, particularly after the end of the transitional period that is stipulated to conclude at the end of 2022.
During the transitional period, regulators will require that banks and WMP companies make efforts to amend outstanding WMP’s that fail to satisfy the requirements of the Notice, and that all new cash WMP’s conform to provisions.
Dong Ximiao said that the while the scale of the cash WMP market could contract in the short-term, in the long-term they will remain a key component of the WMP’s offered by banks, due to the structure of WMP demand and investor risk preferences.