Policymakers cautious about giving go-ahead due to product proliferation
The final countdown for the debut of China’s tightened asset management regulation has begun, with a possible launch by the weekend, which would restrict banks from investing in high-risk and short-term funding vehicles and further ease financial vulnerability, sources said.
But signals have shown that Chinese policymakers are cautious about giving the final go-ahead, due to the proliferation of asset management products that included around 29.54 trillion yuan ($4.68 trillion) of bank-issued wealth management products by 2017. In addition, any indiscreet move without strengthening financial institutions’ liquidity and capital buffers could inadvertently raise stability risks, said experts.
“After some banks’ lobbying and the possible revision of the proposed regulation, the new rules could be released as early as this week, before the May Day holiday starting on April 29,” an anonymous source close to the central bank told China Daily.
“But I think with the regulation taking effect, many basic matters and details need to be further clarified in terms of guidelines, including reassessing the scale of standard credit assets and their appropriate value assessment methods,” he said.
The nation’s 250-trillion-yuan banking system, securities brokers, fund companies, trust companies and insurers, were keen on cross-holding off-balance-sheet investment vehicles that have been difficult for regulators and investors to monitor since the global financial crisis, facilitating the credit boom and elevating leverage.
The upcoming regulation is aimed at limiting the leverage level and complexity of risky investment vehicles, valued at almost 75 trillion yuan by last year, according to the International Monetary Fund, and gradually restricting banks’ ability to implicitly guarantee fixed-yield returns that are usually higher than standard deposit products.
Following tighter regulatory constraints, China’s money market rates have risen sharply this year, leading to wider corporate bond spreads which indicate a higher risk premium, particularly for weaker borrowers.
Ming Ming, an analyst with CITIC Securities, said that the contraction of banks’ funding channels and interconnected business with other financial institutions may moderate credit growth while raising corporate financing costs.
“Smaller banks with limited branch networks and a weaker ability to attract deposits will face greater pressure.
“But deleveraging and risk control will remain key tasks in the coming months for financial regulators,” he said.
To ease banks’ rising liquidity pressure, the central bank decided to cut the amount of cash that financial institutions must hold on reserve starting from April 25 by 1 percentage point, freeing 1.3 trillion yuan in total.
The central bank also intends to push forward interest rate reform, including further liberalizing deposit rates, which would allow banks to retain some wealth management funds that would have otherwise flowed into other financial products.
On March 28, the new regulatory guidelines were approved by the country’s top policymakers. The unified standards and the clear classification of various asset products were released in the form of a draft guideline in November by the central bank.
Some market watchers speculated that the recent fluctuations in the global financial market and Sino-US trade tension would delay the debut of the guidelines, but some local media quoted anonymous senior officials as saying the launch is still “right on schedule”, possibly by the beginning of May.
Yi Gang, the central bank governor, said on April 22 that “China has demonstrated its firm determination on further reform and opening-up”, although rising financial vulnerability, increasing trade and geopolitical tensions, and historically high global debt could threaten global growth prospects.
