Banks in China may have to offer so-called asset management plans instead of controversial wealth management products, after the mainland banking regulator announced plans for a new pilot programme late last week.

This means the principal and return guarantees that wealth management products (WMPs) had provided to investors will be removed, as asset management plans (AMPs) do not have such agreements.

Under AMPs, banks simply provide investors with a possible range of investment returns and net asset values – they operate like open-ended mutual funds, which do not have principals or return guarantees.

“If banks are forced to switch WMPs into AMPs over time, investors will become more aware of the risks they actually take on,” notes says Tracy Tian, a Shanghai-based strategist at Bank of America-Merrill Lynch. As a result, they will probably become more cautious when buying financial products, she adds.

China Citic Bank confirmed it became one of the first banks to win approval from the China Banking Regulatory Commission (CBRC) on September 30 to start an AMP business. 

AMPs also offer much more transparency. At the moment, they can only invest in DDFIs, which are traded on inter-bank markets. The China Central Depository and Clearing will act as a custodian. “The regulators and public can track the underlying of the products,” says Tian.

Ye Linfeng, analyst at Chengdu-based consultancy CN Benefit, says: “Banks will be back to [their] role of managing wealth for clients. Banks have to maximise returns for investors under the controllable risk [and] investors have to bear the risk of the investment products.”

The pilot programme – incorporating 11 banks* – will allow banks to launch and sell AMPs. These will initially only be permitted to invest in direct debt financing instruments (DDFIs), but over time may be allowed to buy stocks.

If the programme proves successful, they will represent the first steps towards unwinding the country’s WMP businesses, which some argue pose systematic risk to the mainland’s financial system.

“If the trial programme goes smoothly, we expect the regulator will ask banks to replace wealth management products with asset management plans,” says Tian.  

The CBRC is expected to release detailed rules by year-end. Each bank will receive an initial quota of between Rmb500 million and Rmb1 billion ($81.7 million to $163.4 million), and will start fundraising between October 18 and 22, according to China’s 21st Century Business Herald.

Some say this switch will also harm the product-packing businesses of trust companies, securities firms and fund houses, as it will eliminate the banks’ need to use other financial intermediaries to structure off-balance-sheet products to satisfy regulatory requirements, Tian argues.

At the moment, banks partner with other financial institutions, mostly trust companies and securities firms, to bundle banks’ assets into WMPs, effectively allowing banks to satisfy loan-to-deposit ratio requirements.

WMPs are viewed as opaque and somewhat controversial – WMP issuers often pay their investors through new product sales, which led China Securities Regulatory Commission chairman Xiao Gang to describe them as Ponzi schemes. As of June 30, the WMP industry stood at Rmb9.08 trillion, according to the CBRC.

* The firms in question are: Bank of Communications, China Bohai Bank, China Construction Bank, China Merchants Bank, China Minsheng Banking, China Everbright Bank, China Citic Bank , Industrial Bank, Industrial and Commercial Bank of China, Ping An Bank and Shanghai Pudong Development Bank.