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Will China’s new WMP units compete with PFMs?

The new wealth management subsidiaries that banks in China are now allowed to set up could rival fund managers to some extent, according to Cerulli Associates.

Private fund managers (PFMs) in China will be closely watching how the new landscape for wealth management products (WMPs) develops, after the mainland’s banking watchdog finalised rules earlier this month to allow onshore banks to set up subsidiaries to run their WMP business.

As substitutes for bank deposits, WMPs invest in products issued by trust companies, securities firms and subsidiaries of fund houses, and funnel the proceeds into loans for corporations. As at the end of 2017, the size of the WMP market was around $11.5trn, according to an Oliver Wyman report.

Yet unlike the WMPs run by banks, the new WMPs to be managed by bank subsidiaries will have no minimum investment, explained Miao Hui, Singapore-based senior analyst at Cerulli. In addition, the new stand-alone units can directly invest in stocks, plus can be distributed through channels other than banks. Further, in-person signatures are not required for first-time processes.

“This makes WMPs launched by subsidiaries very similar to mutual fund products, and their investment scope is even wider to include non-standard assets,” Miao said.

Compete or collaborate?

Both bank- and subsidiary-run WMPs are under the “private category”, in which a maximum of 200 investors are only allowed in one product. PFMs, which also includes those foreign managers with a private fund management licence in China, are also subject to such regulations.

“The public WMPs may rival private fund managers,” Miao said.

Bank-backed fund managers will be the first to face such competition, as banks are likely to give preference to their fully-owned subsidiaries, according to a Cerulli report.

However, Miao said “collaboration will be more than competition between banks and PFMs in the near future”.

She explained that under the new guidelines for WMP subsidiaries, PFMs are allowed to provide advisory services to WMPs, while WMPs that are only available to qualified investors can invest directly into private funds.

The Cerulli report added that most banks lack the strong investment research teams of fund firms. As a result, they may maintain, or even increase, their collaboration with fund managers during the transition period, building up their investment capabilities along the way.

The new guidelines only cover banks registered in China and it is not clear whether foreign banks are allowed to set up such subsidiaries, Miao noted.

“But foreign players, including banks, are allowed to be shareholders of Chinese banks’ WMP subsidiaries, though with minor interests,” she added.

At the moment, 16 banks have announced plans to set up WMP subsidiaries, with the Industrial and Commercial Bank of China (ICBC) injecting the most capital (RMB16bn) to its subsidiary, according to Cerulli.

Other banks that have registered at least RMB10bn in capital to subsidiaries are the Agricultural Bank of China, China Construction Bank, Bank of China, and Shanghai Pudong Development Bank.

Part of the Bonhill Group.