The document, jointly drafted by the central bank and the regulatory bodies overseeing banking, securities, insurance sectors and foreign exchange, is aimed at monitoring more closely China’s booming asset management industry and controlling financial industry risk.
“A joined-up approach – with all the financial regulators signing on – is an indication of seriousness and critical to avoid the normal game of whack-a-mole with funds shifting to wherever regulations are lightest,” according to a statement from Bloomberg Intelligence.
The 10000-word guidelines (in Chinese) highlighted liquidity risks in the industry. Authorities require financial institutions to set aside 10% of the management fees they collect from managing clients’ assets for a provisional reserve. They warned the firms to remain vigilant in avoiding a mismatch between the duration of products and the maturity of assets, according to the document.
Another prohibition targets investors using asset management products as collateral for debt financing. Officials have prohibited the practice in order to reduce shadow banking risk by “not letting the asset management industry turn into a credit creation business”.
In terms of product formation, asset managers will not be allowed to promise investors a guaranteed rate of return. Additionally, asset managers will no longer be allowed to price products regardless of market conditions or in a way that does not correlate the investment returns. The guidelines suggest asset managers should employ appropriate measures to evaluate the fair value of their products.
The draft document mentions a limit for firms launching multiple products with the same underlying assets. The total invested amount in a single asset shall not exceed RMB30bn ($3.84bn), or shares accounting for more than 30% of the market capitalisation of a listed company. For the holdings of a fund product, a single stock should not be greater than 10% of the portfolio.
The new rules include the elimination of the “channeling service”, an intermediary service provided by non-bank financial institutions. The idea is to assist banks in bypassing regulatory requirements so they can funnel money into high-risk investments.
Asset managers will also be prohibited from investing in products that invest in other asset management products, with an exception for retail equity funds.
Authorities also said they would require financial institutions to separate the accounts for each product they manage. Management, examination and calculation for these accounts should be handled separately.
The regulator has opened a public consultation until 16 December 2017. After the rules become effective, a grace period will be granted until the end of second quarter in 2019.
Bloomberg Intelligence commented that the draft guidelines were necessary for China to develop a sustainable financial industry and did not represent a change in policy direction. “Stricter oversight has already dented growth in assets under management in wealth management products from 56.5% year on year at the end of 2015 to 8% in mid-2017.”