Asset Management Cleanup Drills in On Wealth Management Products

Regulators are drafting detailed rules for banks’ wealth management businesses, a closely watched supplement to new asset management rules issued last month.

The China Banking and Insurance Regulatory Commission (CBIRC) is formulating supervision measures for wealth management products (WMP) under the framework of new asset management rules, said Li Wenhong, director of the CBIRC’s banking innovation supervision department.

The WMP rules will be stricter than the asset management rules, Li said at a financial forum in Beijing on Monday, though he didn’t specify when the new rules will be released.

Banks’ wealth management business has exploded over the past decade to become the biggest segment of China’s asset management market. The country’s banks manage around 30 trillion yuan ($4.7 trillion) of wealth management products, which have drawn regulatory concerns for fueling banks’ off-balance-sheet lending activities.

Following the coordinated regulation on financial institutions’ asset management businesses in April, the detailed wealth management rules are expected to further limit credit risk from investments in nonstandard credit assets as well as addressing the widespread maturity mismatch problem, said Yulia Wan, a banking analyst with Moody’s Investors Service.

Banks could previously roll over products with a duration of several months to fund investments with durations of several years. The new asset management rules aim to prohibit this maturity mismatch by barring financial institutions from pricing products in a way that doesn’t correlate with returns on assets. The rules also stipulate that closed-end asset management products should have a maturity longer than 90 days.

The impact of the new rules is already showing. A recent report from online financial services platform Rong360.com shows that the average maturity of WMPs was 189 days in April, 38 days longer than a year earlier and up from 184 days in March.

The new rules outline regulations covering asset management products issued by banks, trust companies, insurance companies, securities firms, funds and futures brokerages. They seek to unify standards for leverage ratios, risk reserve funds, investment restrictions and other requirements for all kinds of asset management products, which are overseen by different government bodies.

The new asset management rules aim to improve financial system stability by better regulating the asset management industry to increase transparency, reduce investment in nonstandardized assets and change the assumption that such investments are implicitly guaranteed by the government, said Katie Chen, director of financial institutions at Fitch Ratings.

Regulators have also pushed backed the date for compliance to the end of 2020 from mid-2019 in the draft regulations. The delay indicates that the government is “taking a pragmatic approach to limit potential disruptions to system liquidity and financial stability,” Wan said.

Contact reporter Liu Xiao (liuxiao@caixin.com)