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November 20, 2017

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PBOC to tighten rules on asset management business

CHINA’S central bank has issued sweeping guidelines to tighten rules on asset management business, the latest step by Beijing to fend off systemic risks in the country’s rampantly growing shadow banking sector.

The guidelines unified rules covering asset management products issued by banks, trust firms, insurance asset management companies, securities firms, funds and futures companies, the People’s Bank of China said in a joint statement with the banking, insurance, securities and foreign exchange regulators on Friday.

At the end of 2016, the collective outstanding volume of their asset management business was 102 trillion yuan (US$15.38 trillion), including 29 trillion yuan of bank wealth management products and 17.5 trillion yuan in trust products, according to the PBOC.

The new rules aim to close loopholes that allow regulatory arbitrage, reduce leverage levels to curb asset price bubbles and rein in shadow banking activity.

The new rules will set leverage limits for asset management products. They will cap the total assets to net assets ratio at 140 percent for open mutual funds and 200 percent for private funds. Investors will be prohibited from pledging their shares in asset management products as collateral to obtain financing, a practice that would increase leverage.

The PBOC also said financial institutions must break the practice of providing investors with implicit guarantees against investment losses.

Financial institutions will also be forbidden from creating a “capital pool” to manage funds raised through asset management products. The practice allows banks to roll over the products constantly. The investment losses will be implicitly covered by the new product issuance.

The draft guidelines are the latest and most comprehensive set of rules proposed by financial regulators to fend off shadow banking risks that could spread across different asset classes.

“Clearly this is a critical turning point of the financial regulations,” said Zhou Hao, a Singapore-based analyst at Commerzbank. “Over the past few years, while the financial risks were rising, the overall regulations were actually behind the curve.”

PBOC Governor Zhou Xiaochuan has warned that China’s financial system is becoming increasingly vulnerable due to high leverage and accumulating “hidden, complex, sudden, contagious and hazardous” latent risks.

Financial institutions will not be allowed to use asset management products to invest in commercial banks‚ credit assets or provide “channel service” for other institutions to bypass regulations, the statement said.


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