China to Regulate Wealth Management Products

China to Regulate Wealth Management Products

The Chinese government will push to implement rules regulating the sale of wealth management products in the country.

There is a general worry among local authorities that individuals purchasing these wealth management (or asset management) products believe these carry the backing of the Chinese government.

Via these rules, China wants to make it clear that it does not vouch for these products, ones that offer people an ROI of close to 8 percent.

In a statement several weeks back, the People’s Bank of China said, “Banks . . . lack effective recognition and control of the risks from off balance sheet business… If wealth management business expands too quickly, macroeconomic risks accumulate, and it doesn’t match the requirement to deleverage.”

And this makes perfect sense considering that, per Bloomberg’s Nisha Gopalan, “asset-management products, mostly held off-balance sheet, totaled about 60 trillion yuan ($8.7 trillion) as of June 30, equal to more than three-quarters of China's 2016 gross domestic product.”

Furthermore, writes Gopalan, “wealth-management products, a shorter-duration subset sold mostly by banks, jumped 30 percent to more than 26 trillion yuan last year.”

Off-balance sheet financing resurrests as PBOC tightens loans

With this in mind, China plans on regulating products sold by banks, brokerage and insurance firms, and other financial institutions involved in the asset management product market.

As explained by Malaysia’s The Star Online, “under the draft rules, financial institutions would be banned from investing the proceeds of asset-management products in non-standard credit assets, mostly loans, or in beneficiary rights linked to such assets.”

Additionally, “financial institutions would be required to set aside 10% of fees from managing clients’ assets as reserves for potential risks,” says the Malaysian daily’s article.

According to He Xuanlai, an analyst with Commerzbank AG in Singapore, “China’s asset management business will face the most stringent rules ever,” forcing “shadow banking assets to be brought back onto the balance sheet and improve transparency of banking assets.”

Xia Le, an economist with Banco Bilbao Vizcaya Argentaria SA in Hong Kong agrees.

“Regulators are trying to defuse a bomb,” says Le, adding that “shadow banking is an important source of financing to small and private companies and property developers, and the tightening measures will weigh on economic growth in the short term.”

Wealth Management Product Rules

Will New Wealth Management Product Rules Work?

However, the situation is not that simple according to Christopher Balding, Associate Professor of Business and Economics at the HSBC Business School in Shenzen.

As Balding writes in an opinion piece for the Bangkok Post,  “Talk to most any investor in China and they clearly expect that financial products are “guaranteed”. The same goes for local governments, banks and wealth-management firms: No one fears significant losses, and everyone expects the government will save them when things go south.”

Balding adds, “China's government is now engaged in a game of chicken. Impose losses on investors, and it risks triggering a run on the bank; continue bailing out investors, and it risks creating a problem that will swallow the economy whole. So what to do?”

In the past, the Chinese government has rescued wealth management products, which, to an extent, confirms the notion that these products are guaranteed by the local authorities.

According to a February 25th article in Forbes,  “The well-known case of China Credit Equals Gold #1 Trust Product illustrates this: At first, the product appeared doomed, as the Industrial and Commercial Bank of China (ICBC) marketed it and then refused to bail it out. The product was later bailed out by an unnamed third party. Even more commonly, asset management product sellers are so fearful of product failure, that they sell additional products to make up for potential lost income based on actual performance.”

Finally, Bloomberg’s Gopalan believes the regulations will fall short of resolving this issue.

“For one thing,” she writes, “the disclaimer on guarantees will apply only to future asset management products. If anything, that will only strengthen the impression that existing investments do carry some form of guarantee.”

Do you have any thoughts on this move by the Chinese government? We would love to hear from you!

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