China regulators set new rules for asset managers as debt fears grow

[SHANGHAI] China's financial regulators have circulated a draft framework of new rules aimed at curbing risks in the country's booming asset management industry, according to several Chinese news outlets and details of the draft seen by Reuters.

The rules, formulated by the central bank in conjunction with China's securities, banking and insurance regulators, were the latest effort by the authorities to bolster their oversight of financial assets, including wealth management products (WMPs), amid concerns about growing debt in the economy.

De-leveraging and the prevention of financial risks are two major goals for China's financial regulators this year. The proposed new rules aim to unify the regulation of the asset management industry under leadership of the central bank in order to improve oversight of the sector.

The draft rules would standardise leverage ratio limits and require sellers of asset management products to put aside risk reserve funds equal to 10 per cent of product management fees, among other requirements.

Asset management products include bank WMPs, mutual funds, private investment funds, trust plans, and other asset management products issued by securities firms, fund companies, fund subsidiary companies, futures firms as well as insurance asset management companies.

Chinese investors, lured by high yields and expectations of implicit guarantees by the banks or other financial institutions, have poured trillions of yuan into lightly regulated WMPs, the biggest component of so-called "shadow banking" in China.

There was no immediate comment on the draft regulation from the People's Bank of China, the China Securities Regulatory Commission, the China Banking Regulatory Commission or the China Insurance Regulatory Commission.

WMPs are typically kept off banks' balance sheets, making it difficult for regulators to assess the stability of a banking sector reliant upon them for growth.

And just as in the global financial crisis of 2008, banks'interconnectedness amplifies the risks. Banks are increasingly buying each others' wealth management products, with interbank WMPs hitting 4 trillion Chinese yuan (US$581 billion) in June, doubling from two years ago. "The goals of the guidance are very clear - to prevent financial institutions from adding multi-layers of leverage in order to expand scale," analysts at Minsheng Securities said in a note, adding the rules would also make it harder for banks to move loan-like assets off their balance sheets using asset management products.

Under the rules it would be a violation to promise a guaranteed return for asset management products, which has been common practice for many bank WMPs and other products.

It was not clear when the rules would be finalized.

REUTERS