“There is indeed a problem of ‘regulatory arbitrage’. Bank financing subsidiaries, public funds and trust companies all have differences in many aspects [of regulation],” Xiao said at the Forum.
As an example, when new products are launched, they have different standards of disclosure for the investment strategy. The level of disclosure depends on which entity is introducing the product, and Xiao called for a unified regulation in this area.
Given the rapid opening of China’s financial industry, he added that it is increasingly urgent to supervise capital raising, investment patterns, operations of foreign and domestic firms and information disclosure across the entire asset management industry.
He said currently there is regulatory overlap and gaps that need to be addressed.
Xiao also said China’s financial system is predominantly banks and the asset management industry will continue to be dominated by the large state-run banks.
“Their customer network, ability to obtain capital, superior competitive position and level of technology investment are all obvious advantages,” he said.
In 2018, private bank clients — mainly high-net-worth individuals — accounted for roughly one-third of China’s total banking industry assets, he said. Commercial banks are another one-third and the rest is from security companies, fund subsidiaries and insurance companies.
“Even in America, where the capital market is developed, the banking system also plays a very important role in asset management. For example, JP Morgan is a comprehensive bank and a representative of integrated assets, [with funds] mainly based on active management. State Street Bank is an expert with passive equity investment [products]. Bank of America has diversified asset management products.”
Xiao was head of the CSRC from 2013 – 2016. He was replaced in 2016 after overseeing a period of wild swings in China’s domestic markets, FSA previously reported.
In 2015, he implemented a controversial “circuit breaker” mechanism to calm panic trading during a steep domestic stock market plunge. The move worsened the sell-off and the mechanism was removed after three days.