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New Wealth Management Rule Broadens Stock Access

Chinese banks manage nearly 30 trillion yuan of wealth management funds raised from public investors. Photo: VCG
Chinese banks manage nearly 30 trillion yuan of wealth management funds raised from public investors. Photo: VCG

* WMPs sold publicly to retail investors will be allowed to invest in equity-related mutual funds, an indirect way to buy stocks

* More flexibility will be allowed for privately raised WMPs in terms of risk management and capital requirements

A long-anticipated industry rule broadens the ability of bank wealth management funds to invest in stocks while granting some leeway on capital requirements for certain investment vehicles.

The rule affecting China’s 30 trillion yuan ($4.5 trillion) wealth management industry was published Friday by the China Banking and Insurance Regulatory Commission (CBIRC) following two months of public consultation.

The new rule supplements a previously issued framework regulation covering the entire asset management industry. The supplemental regulation spells out investment scope, capital and leverage requirements, and management details for commercial banks’ wealth management departments, which manage investment plans for retail investors.

The news may potentially benefit China’s stock markets, which are stuck in a bear market over lingering fears about the trade war with the U.S. and a broader slowdown in economic growth.

A CBIRC official said the regulator may further relax investment restrictions and grant direct stock market access to WMPs sold publicly by banks’ wealth management subsidiaries in future regulations.

China’s bank wealth management market started to take off in 2002 and underwent explosive growth between 2009 and 2015, thanks to ample market liquidity after the economic stimulus policy in 2009. By the end of 2017, wealth management products (WMPs) managed by banks totaled 29.54 trillion yuan.

But the freewheeling market drew regulators’ concerns as it became a major element of the shadow banking system, which largely fell outside oversight. A crackdown on financial leverage and shadow banking slowed the growth of WMPs last year to 1.69%, compared with annual growth of as much as 50% over the past several years.

The new rule makes clear that WMPs sold publicly to retail investors will be allowed to invest in equity-related mutual funds, giving the products an indirect way to buy stocks.

Previously, only WMPs issued privately to selected clients such as high-net-worth individuals were permitted to invest in the stock market through certain intermediaries such as brokerages and trust companies.

Earlier this month, a rule change by the China Securities Depository and Clearing Corp. (CSDC) for commercial banks’ securities investment accounts fueled speculation that regulators would broaden stock market access to WMPs.

The new rule also requires banks to install a 24-hour “cooling-off” period for privately sold WMPs, which often bear greater risks, so that investors can change their decisions without any loss during the period.

The CBIRC official said such arrangement is consistent with international practices designed to better protect investors’ interests.

Separate requirements were set for publicly and privately raised WMPs to meet different investors’ demands and risk tolerance. Privately sold WMPs can involve no more than 200 investors.

More flexibility will be allowed for privately raised WMPs in terms of risk management and capital requirements. For instance, banks are required to hold cash equivalent to at least 5% of the net value of publicly sold WMPs, but privately issued products are exempt from such a requirement.

CBIRC data showed that by the end of August, the outstanding value of banks’ non-guaranteed WMPs totaled 22.32 trillion yuan. About 70% of the funds are invested in low-risk assets such as bond, deposit and money market products.

Contact reporter Han Wei (weihan@caixin.com)


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