Securities Regulator Takes Aim at ‘Channeling Business’
* Rules aim to tame risks in the asset management sector, which has largely fueled the country’s rampantly growing “shadow banking” activities in recent years
* Financial institutions would be barred from taking instructions or suggestions about investment decisions from their clients
(Beiing) — China’s securities regulator wants to ban securities firms and fund managers from engaging in the “channeling business” that is specifically to help clients circumvent regulations designed to protect the financial system.
The ban is part of the China Securities Regulatory Commission’s (CSRC’s) draft rules for the portion of the privately offered asset management business that it oversees — worth about 26 trillion yuan ($3.84 trillion). The draft rules (link in Chinese), published on Friday, aim to tame risks in the asset management sector, which has largely fueled the country’s rampantly growing “shadow banking” activities in recent years.
The draft rules prohibit securities firms and fund managers, two of the main players involved in the asset management business, from providing “channeling” services to clients looking to circumvent regulatory restrictions, such as those limiting which kinds of projects that banks can lend money to, the CSRC said.
“The channeling business is a business that should be gradually cleaned up,” an unnamed official at the CSRC’s bureau in Shenzhen told Caixin.
In a typical example of the channeling business, a nonbank financial institution, such as a securities firm, acts as an intermediary to help a bank lend money to borrowers prohibited from obtaining loans from banks, such as troubled local government financing vehicles and underqualified real estate developers.
Typically, the financial institution receives a request from a bank asking it to set up an asset management product (AMP), which the bank then invests in. The bank then instructs the institution what the AMP will invest in, even though on paper, it appears that the institution is managing the investment. However, the bank bears the risk of losses. As an intermediary, the financial institution takes a fee for its trouble.
Asset managers’ product management practices are often influenced by the clients, most of whom are banks, thus leading to a lack of risk control and post-investment management by the institutions that create them, according to the CSRC official.
Under the draft rules, financial institutions would be barred from taking instructions or suggestions about investment decisions from their clients, or otherwise relinquishing their responsibilities for product management, the CSRC said.
Of these privately offered AMPs, securities firms hold the largest share of the 25.9 trillion yuan business. As of June, securities firms and their subsidiaries managed around 14.9 trillion yuan of privately offered AMPs. Fund management firms and their affiliates managed around 10.8 trillion yuan, and futures firms and their subsidiaries managed about 160 billion yuan, according to data from the CSRC.
When approved, the CSRC’s draft rule for AMPs will supplement the framework guidelines for the asset management sector, which the central bank and other financial regulators, including the CSRC, issued in April. The guidelines aim to close loopholes caused by different regulatory agencies’ different requirements, and seek to rein in the chaotic expansion of shadow banking.
Qu Hui contributed to this report.
Contact Reporter Lin Jinbing (firstname.lastname@example.org)
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