Tighter rules governing China’s asset management industry are needed because of the regulatory vacuum firms are operating in, a group of senior officials said.
The industry has been growing fast because regulators have allowed financial services firms to compete for investor assets, but a lack of common rules has also meant that new risks have emerged.
The comments came during an annual gathering of influential officials and executives on China’s Hainan Island.
Zhang Hongli, vice president of Industrial and Commercial Bank of China, the country’s largest bank, noted that the opening of asset management to banks, insurers, brokers and other groups leaves uneven playing fields. “Their standards in regulation are not 100% the same. This is causing regulatory arbitrage,” Zhang said at the Boao Forum for Asia, on a panel moderated by AsianInvestor’s Jame DiBiasio. “The question is how to coordinate regulation, and establish [universal] rules and laws.”
Under the current policy, “Different sectors have formulated different rules, and everyone is competing to maximise financial resources,” said Wang Yincheng, vice-chairman and president of People’s Insurance Company (Group) of China. “At a practical level, it is causing difficulties for the regulators.”
Wang said all types of financial players need a single set of principles to guide them, to ensure the asset-management boom does not succumb to a new set of hidden risks.
Wang Dongming, chairman at Citic Securities, said the asset-management sector now totals Rmb60 trillion ($9.7 trillion). That is far bigger than people realise, thanks to deregulation and the rise of consumer wealth. He argued the boom is going to continue for several years, and providers must innovate and diversify their offering. He cited the Shanghai-Hong Kong Stock Connect and other cross-border investment measures as important examples of how the industry will develop.
According to Citic’s Wang, the industry includes Rmb16 trillion in banks’ wealth management products, Rmb14 trillion in trust schemes, Rmb10 trillion in insurance assets managed through funds, Rmb4.5 trillion in public mutual funds, Rmb2.4 trillion in fund houses’ subsidiaries managing segregated accounts, Rmb2 trillion in private (unregulated) funds, and Rmb11.1 trillion in securities firms’ wrap accounts or other structures.
ICBC’s Zhang said his estimates for the industry were lower, but also large and growing. He declined to break out his specific estimates.
Wu Xiaoling, former vice governor at the People’s Bank of China and now vice chairwoman of financial and economic affairs committee at the National People’s Congress, noted that Chinese regulators have not coordinated. “They have not reached a mutual agreement,” she said.
She described the resulting situation as disorderly and prone to regulatory arbitrage, as firms seek to obtain licences in more loosely-supervised sectors.
She called for the industry to help regulators establish principles to clarify manager responsibilities and, in the face of losses or disputes, liabilities.
But when asked by AsianInvestor how to ensure new products avoid being viewed by investors as guaranteed by the government or free of risk, Wu didn’t have a concrete answer.
Addressing a question of whether authorities can remain aware of and prudently regulate the typhoon of financial innovation taking place (such as getting people to invest assets via mobile phones), she said innovation should serve the real economy and not be all about structured products that enrich financial companies.
In the Chinese context, ‘regulatory arbitrage’ most frequently refers to the involvement of asset management in the shadow banking system, which has evolved to channel bank-held assets (usually real estate) off the balance sheet and into trust investments or into special purpose vehicles swapped between financial institutions.
As a result, banks have many regulatory touchpoints with regard to asset management, and are affected by (or affect) rules for trust companies and securities firms, said Xie Ping, deputy general manager at China Investment Corporation, speaking on another panel at Boao. This is in addition to participating directly in asset management. These activities are designed to avoid capital charges or extra reserve ratios, Xie said.
Until recently, public fund management companies were the main vehicle for asset management, regulated by the China Securities Regulatory Commission (CSRC). Insurance companies were then allowed to manage insurance money, both internal and third party, under the auspices of the China Insurance Regulatory Commission (CIRC). Securities firms until recently could manage collective investment schemes (wrapper products), under the CSRC, while banks channelled depositors’ money into real-estate backed trust schemes, supervised by the China Banking Regulatory Commission (CBRC).
Now all of these institutions have laxer regulations permitting them to all provide more asset-management type services. Even “asset management companies” established 15 years ago to dispose of banks’ non-performing loans have since repositioned themselves as universal financial service companies, acquiring or launching businesses in funds, insurance and brokerage products, said Lai Xiaomin, chairman of China Huarong Asset Management.