China steps up rules on wealth management

Pedro Gonçalves
China steps up rules on wealth management

China’s regulator has issued new draft rules for the country’s $3trn wealth management business that sets stricter requirements on banks to raise and invest funds from their clients.

The China Banking and Insurance Regulatory Commission (CBIRC) proposed regulation on commercial banks’ wealth management products (WMPs) stipulates that these WMPs should be managed based on their net value.

Banks must manage open and close funds in separate ways. The new rules will lower the minimum amount of client subscription to any single public WMPs to 10,000 yuan (about £1.122) from 50,000 yuan in line with the central bank’s asset management rules

Banks must also standardise the management of their fund pools to prevent shadow banking risk, according to an online statement issued by the regulator.

According to the draft proposal, institutions handling securities and futures should adopt a diversified investment portfolio, and are subject to the ‘double 20%’ ratio restriction.

That is, a collective asset management plan is not allowed to park most of the funds in one wealth management product (WMP). The funds invested in one WMP shall not exceed 20% of the net asset value of the plan.

Meanwhile, all asset management plans managed by one financial institution are not allowed to invest more than 20% of the assets in one WMP.

Also, non-standard investment in bank WMP’s is not allowed to exceed 35% of the net assets of the WMPs or 4% of total bank assets. (continues…)

The rules also aim to push banks to standardize their wealth management businesses and to invest WMP funds into the capital markets in a compliant way.

The banking regulator also aims to force banks to break the practice of providing investors with implicit guarantees against investment losses.

The guidelines are aimed at shrinking the China’s sprawling shadow-banking system. However, the industry feared a tougher stance, as reported by International Investment.

“While maintaining the overall direction of earlier policy proposals, the new changes mostly represent a more flexible way to manage these products and hence a more dovish policy stance,” Goldman Sachs said in a note.

The rules, designed to “remove uncertainties and stabilise market expectations”, would establish a centralised supervisory system for banks’ wealth management business, prohibit implicit guarantees against losses and increase safeguards for investors, according to the CBIRC.

If approved, the draft list will be effective as of January 1, 2021.