Beijing turning screw more on WMP business

Proposed rules are expected to further curb the growth of wealth management products in China by restricting the instruments banks can buy, with WMP returns tipped to fall.
Beijing turning screw more on WMP business

China’s banking regulator is taking further steps to curb the growth of the industry’s $3.8 trillion wealth management product (WMP) business, amid what it sees as rising risks in the shadow banking sector. Banks will reportedly have more constraints on the products they can issue and partners they work with.

As a result, the average yield of these products is expected to drop below 3% from an estimated 4% currently and 5.5% as of end-2014, and fund houses’ segregated account (SA) subsidiaries will further shrink as they will be banned from investing in WMPs, say industry participants.

The China Banking Regulatory Commission (CBRC) is drafting these tighter rules governing commercial banks’ WMP business with the aim of reducing industry risk. It has not yet publicised details of such rules, their likely implementation date or what it sees as the associated risks.

According to local media, under the new rules, small and “inexperienced” banks – those with less than three-year track records in WMP business or net capital less than Rmb5 billion – will not be allowed to offer WMPs with investments in equities and so-called “non-standard credit assets” (NSCAs).

NSCAs are typically packaged loans and debt for financing local government projects, infrastructure, property projects or other industries suffering from over-capacity. Such instruments form part of China’s shadow banking sector.

Moreover, mainland commercial banks will only be allowed to invest in products issued by trust companies, but not those from asset management units of brokerage firms and segregated account (SA) subsidiaries under fund houses. 

The tightening of rules on shadow banking has been an industry trend, with regulators pointing to rising risks and declining credit quality, said a Beijing-based equity analyst on condition of anonymity. The China Securities Regulatory Commission (CSRC) made a similar move earlier this year to tighten rules on fund houses’ SA subsidiaries, he noted.

The volume of Chinese banks’ WMP business grew 56% to Rmb23.5 trillion ($3.5 billion) last year from Rmb15 trillion at the end of 2014, and Bank of China International (BOCI) predicts that it could expand by another 30% this year.

Breaking down these WMPs’ investments, 51% is in bonds and money market instruments and 23% in bank deposits, according to China Central Depository & Clearing Company. Some WMPs aim to offer higher yields, with 16% invested in NSCAs and 8% in equities.

WMPs offer average annuals yield of 3.5-4%, but those invested in riskier assets offer an annual yield of up to 6%.

Eva Yi, Beijing-based senior economist at China International Capital Corporation (CICC), expects WMPs’ average yield to drop below 3%. She also sees rising asset-liability matching risks, as the bulk (91%) of WMPs have maturities of less than a year, but must invest in longer-duration assets such as NSCAs to achieve yields of 3% or more. Indeed, 59% had duration shorter than three months as of the end of 2015, according to Goldman Sachs. 

All commercial banks’ WMPs will be banned from investing in products launched by brokers’ asset management arms or fund houses’ SA subsidiaries, which fall under the supervision of the CSRC. Beijing sees such investments as creating risks due to the multiple layers of liabilities in the domestic shadow banking industry. 

The CBRC will only allow banks to invest in products launched by trust companies, as they have stronger risk controls, said the anonymous analyst.

Trust companies must hold net capital (net assets minus risk assets) of at least 40% of their AUM, but the requirements are not as stringent for brokers’ AM units and fund houses SA subsidiaries. Since May SA units have had to hold Rmb100 million of registered net capital, but before that only Rmb20 million. Meanwhile, brokers' AM arms must have capital provision of 0.63 to 0.9% of their investments in NSCAs. 

Fund houses' SA subsidiaries have been able to compete with trust companies due to their lower fees, of 0.2% as of 2014, as against 0.55% charged by trust companies, according to the Asset Management Association of China. 

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