China proposes rules to curb asset-management product risks
(Bloomberg) China’s financial regulators proposed sweeping rules to curb risks in the country’s $15 trillion (€12.7 trillion) of asset-management products as leaders move to tighten supervision, including breaking an implicit guarantee that’s driven investment into such vehicles.
Financial institutions should offer yields based on the net asset value of the products they issue, to reflect the risks and return of the underlying assets, instead of offering a guaranteed principal repayment or rate of return, the People’s Bank of China (PBOC) said in a joint statement with other financial regulators on Friday.
Firms that fail to comply with that rule will be punished with measures such as additional reserve requirements, they said.
President Xi Jinping and his top economic deputies have vowed to make controlling financial risks their foremost priority, a pledge renewed at the Communist Party’s twice-a-decade leadership congress last month. Since April, regulators have stepped up efforts to curb the threat that excessive leverage in the financial system poses to economic growth.
"At the very minimum, this step reconfirms the clear signals sent at the 19th Party Congress that financial deleveraging in the form of more regulations is a policy priority and will intensify," Yao Wei, chief China economist at Societe Generale said.
The draft rules were released for public consultation and firms will be given a grace period until June 30, 2019 to comply. Firms will be required to set aside risk provisions equivalent to 10% of the management fees, the regulators said.
The new rules will be applied to the CNY29 trillion (€3.7 trillion) of wealth-management products issued by banks, CNY17.5 trillion of trust products, as well as asset-management plans sold by insurers, fund managers and brokerages, according to the PBOC.
The rules cover all kinds of asset-management products under the administration of different regulators, a sign of improved coordination after the establishment of a national financial stability and development committee, said Li Wei, a senior economist at Standard Chartered Bank in Shanghai.
"The key message is to fend off risks by breaking guaranteed payment with clear requirements and definition," he said.
The value of asset-management products has surged in recent years as households and companies sought higher returns than bank deposits can offer. On the other side, banks have created off-balance sheet vehicles to provide such offerings, then channeled funds to riskier borrowers who pay higher interest rates.
Most recently, financial institutions have invested in each other’s products, leading to a potential chain reaction in the event of a default.