China’s central bank and the regulatory bodies overseeing banking, securities, insurance sectors and foreign exchange jointly drafted some new rules on 17 November, 2017. The authorities introduced stricter guidelines for asset management practices in attempt to tighten control over the growing pool of capital in the domestic financial industry.
However, foreign firms operating in China, such as Fidelity and UBS AM, which have launched domestic funds through investment management wholly foreign-owned enterprises (WFOEs), are unlikely to be affected, Chen said.
“The new rules would not be a big shock to Sino-foreign JVs and managers with WFOEs because these managers have been offering ‘visible’ products in China. Their overseas operation and track record prove their capability to be transparent,” Chen said.
Also in the draft guidelines, officials prohibit the practice of using asset management products as collateral for debt financing, in order to reduce shadow banking risk. The measure addresses China’s climbing leverage ratio and the sales of “multi-hierarchy products”, which invest in products that invest in other asset management products to evade the regulatory net.
Chen compared the multi-layered products to the complex financial instruments that drove the debt crisis in the US in 2007 and said China’s authorities are aware of the potential threats to the economy. “From the eyes of the top leadership, it is urgent to get risk under control before the situation quickly heads south. The rules serve as concrete evidence of China’s determination to rein in financial risk,” he said.
He added that the guidelines could impact returns in general. “As the rules will slightly constrain some investment opportunities, overall investment returns are likely to decline,” he said. “Foreign investors should take conservative and protective measures until the uncertainty settles down at the end of 2018.”
Preparing for foreigners
Chen said the new guidelines combined with the recent decision for a phased removal of limits on foreign ownership of domestic financial institutions will allow foreign firms to expand in China.
Authorities have drawn up a new timetable for opening up the financial sector and China needs to “clean up its own backyard” by wiping away all bad practices before widening entrance for foreign capital, Chen added. He believes the asset management guidelines will help the domestic industry catch up to international capital market standards.
The central bank did not specify a date for the completion of the draft guidelines. However, Chen anticipates the new policy guidelines are likely to be published and implemented from the beginning of 2018.
