The first draft of the guidelines, jointly published by the financial regulators in November, widens the scope of scrutiny over the growing asset and wealth management industry. The aim is to reduce the chances of systematic risk.
China’s asset and wealth managers are expected to fully adopt the rules by the end of 2020.
The guidelines require financial institutions to set aside a provisional reserve and eliminate their holdings in non-standardised investment products, which are mainly the bonds issued through shadow banking channels.
However, the regulator has lifted the prohibition on investing in these non-standardised bonds and will allow funds to park a small amount of money in them. But there are conditions, for example, matching the average duration of the fund and the non-standarised bond.
“Despite the announced adjustments, the authorities have not deviated from their original purpose to manage risk and to warn domestic financial institutions to remain vigilant,” says Xia chief research officer of NYSE-listed Noah.
He believes the regulators are giving out “sweeteners” to allow the market to adopt the rules more effectively under the complex environment. Regulators now understand that the problem of shadow banking is more severe than previously thought, he added. If they had maintained tight control, “financial institutions as a whole might be battered hard”.
Noah, he added, does not distribute products with risky features, such as non-standardised bonds or funds with a multi-layering product structure, which is something like a fund of funds but with a longer chain of sub-investments.
WM shakeout coming?
Xia believes tighter regulations will spark large-scale consolidation in the industry.
“Wealth managers with unsatisfactory compliance will find it difficult to attract investors to their business and have less channels to finance their operation.”
The small firms with poor risk management controls are unlikely to survive after 2020, when the new regulations are come into effect, he added.
In the short term, increased regulatory scrutiny may lead to negative market sentiment among his firm’s high net worth clients.
“The sentiment of the whole market is slightly down. The domestic wealthy may be more cautious in deciding what to invest in this stage. Their confidence in the domestic financial markets may also be hit.”
