China’s crackdown on shadow banking hits foreign asset managers
China’s recent crackdown on the shadow banking industry might mean foreign managers in the country will lose investments from wealth management products. Under the new rules, banks are prohibited from investing in such products, pushing foreign asset managers to rethink their fundraising strategy.
Beijing has stipulated that private fund manager wholly foreign owned enterprises (WFOEs) are no longer considered financial institutions and thus prohibited from issuing or selling asset management products.
Foreign asset managers who have established a private fund manager WFOE may find their fundraising activities severely hampered by this development as this clarification means that WFOEs in China stand to lose investments from wealth management products.
Financial institutions operating in China are no longer allowed to use asset management products to invest in commercial banks’ credit assets or provide channel service in an attempt to bypass the new regulations. China also forbids financial institutions from conducting asset pools to manage funds raised through asset management products.
The major new asset management rules, announced in April, are aimed at tightening shadow banking activities and reducing the systemic risks in order to develop a healthier domestic capital market.
Shadow banking has become a big part of China’s economy, growing to about $12.3 trillion last year according to the recent numbers provided by the Bank for International Settlements (BIS).