Investors Squirm as Regulators Narrow Bank Investment Channels
(Beijing) – China’s stock and bond markets are heading down a bumpy road as uncertainties mount over how far regulators will go to limit bank investment risk.
Many banks have apparently been heeding recent regulatory directives by cutting back or at least curbing growth tied to investments in other banks, bond and stock markets through non-bank asset managers.
Apparently, an indirect result has been that the Shanghai and Shenzhen exchanges have been losing ground in recent weeks. And billions of yuan worth of proposed bond issues have been delayed or canceled since January.
Experts say some investors have been pulling out of stocks and bonds for fear that regulatory action is forcing banks to scale back securities investments made through intermediaries. They blame these sentiments for volatility in the stock and bond markets since mid-April.
Relying on asset managers to run so-called entrusted investments – which refers to when banks farm out funds to investment-class specialists -- is a practice that took off in 2015 and has been growing ever since.
Estimates of the amount of money parked in entrusted investments nationwide varies widely. Citic Securities' high-end estimate was more than 19 trillion yuan as of December.
Market watchers generally agree that entrusted investments have surged over the past few years, which in turn has worried regulators.
In recent weeks, regulators have started reining in these investment channels over concerns that the inexpensive, bank-sourced funds on which they depend have been enabling securities market speculators.
In the long run, these tighter measures are expected to strengthen the financial system, said Wang Tao, chief China economist at the investment firm UBS. But they may trigger liquidity crunches and amplify market fluctuations in the short term, he said, especially if regulators fail to coordinate the process well.
Many investors have taken a dim view of the clampdown. Experts say investors worry about the impact on interbank lending and investment, fearing it will impede the flow of funds from banks to non-bank institutions such as securities firms.
A Shenwan Hongyuan Securities report said some clauses in the new rules simply repeat those found in previous rules. And some requirements lack enforceable standards and measurements, the report said.
Moreover, the Shenwan report said, regulators have not said how much time financial institutions would be given by regulators to wind down any outstanding loans and slow investments. Nor have they said how violators might be punished.
"Right now, the regulators are only trying to get a better sense of what’s really going on by thoroughly checking the situation," the report said. "But the markets have already been shaken up quite a bit."
Nevertheless, Beijing seems determined to continue the battle and work through temporary market woes.
At a recent gathering of top financial regulators and senior Communist Party officials, President Xi Jinping set a tough tone by speaking in favor of reining in debt, cracking down on illegal capital markets activity, and getting the financial industry to do more to support the real economy.
The Beijing meeting with some members of the 25-seat Politburo was chaired by Xi on April 24, one day after the yield on 10-year government bonds hit a 20-month high and the Shanghai stock market index posted the steepest decline in four months.
Xi's speech came five weeks after the China Securities Regulatory Commission issued non-binding guidelines for firms that manage mutual funds, advising them to significantly increase their own monetary contributions to new funds backed by a single, major investor.
The CSRC guidelines means that tailor-made funds for entrusted investments are bound to shrink in the future, said a staffer at an asset management firm. "And many mutual fund companies would be squeezed in the process.”
Some of the most forceful regulatory salvos of late were fired by the China Banking Regulatory Commission (CBRC), whose Chairman Guo Shuqing took the agency's helm in February.
Banking regulator action since March has further restrained bank-to-bank loans and wealth management product purchases. These transactions helped banks boost their assets quickly and channeled huge amounts of inexpensive funds into non-bank financial institutions, which in turn used the money to buy and trade bonds.
Banks are also now required to report funds received through negotiable certificates of deposits (NCD) as interbank loans, which are capped at one-third of their total assets.
Small and mid-size banks have been primary NCD issuers. Many have used these notes to buy wealth management plans from other banks.
Government leaders want more of this money to support the real economy rather than simply circulate among financial institutions.
And since April, some of the country’s biggest banks have answered the government's call.
For example, according to anonymous sources in the banking sector, some banks have already cut back on entrusted investments through professional investment institutions. These include Industrial and Commercial Bank of China (ICBC), China Construction Bank, Citic Bank and Everbright Bank, according to the sources.
The Shenwan report said almost every bank surveyed by the firm in April had stopped making new entrusted investments.
Some big banks pulled back mainly because they were losing money, according to sources close to those lenders. A source familiar with China Construction Bank said that lender has been losing money on outsourced investments since late 2016.
But the extent of each bank's reduction is unclear. ICBC said April 26 it had not made any “large scale” withdrawals of entrusted investments.
Banks facing the most pressure to cut entrusted investments are those that rely heavily on other banks' deposits or investments, analysts said.
Interbank loans and investments were the primary sources of funds involved in entrusted investment activities, Citic Securities said in a research report. Therefore, regulations that curb interbank lending will have “an obvious effect” on restricting these activities, according to the report.
Regulators may soften their stance in the future, according to Sun Binbin, an analyst at TF Securities. But if they do not, he said, the interbank lending and entrusted investments network may undergo "great shocks."
For the time being, the Shenwan report said, investors have turned pessimistic in the face of regulators' clear intention to tighten the screws. Investors are particularly unsettled by the fact that they don’t know where the regulations might be heading.
Contact reporter Wang Yuqian (firstname.lastname@example.org)
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