26 October 2016
Chinese authorities are planning stricter regulations on wealth management products in a bid to curb risks for investors. Photo: CNSA
Chinese authorities are planning stricter regulations on wealth management products in a bid to curb risks for investors. Photo: CNSA

China banks face tighter rules on wealth management products

China’s A-shares slumped in afternoon trading Wednesday, with the benchmark Shanghai index falling nearly 4 percent at one point, after a media report said that the nation’s banking regulator is discussing stricter curbs on wealth management products.

Meanwhile, signals sent from a Politburo meeting on Tuesday indicated that preventing risks in the equity market remains a top priority for authorities.

According to the media report, banks will be divided into two categories. The first category will only be allowed to engage in basic wealth management business, such as selling bonds, notes, money funds and low-risk products.

The second category will be allowed to sell more complicated products including stocks, derivatives, structured products, etc.

The institutions will be required to have a net capital of at least 5 billion yuan and three years of experience in wealth management.

This means that the likely new regulation will affect newly-established or super-small banks more than others.

Also, complex wealth management products will be only available for high-net worth individuals, who must have financial assets of at least 1 million yuan, and annual income of at least 200,000 yuan in last three years.

Most banks, in fact, have similar requirement for their existing customers.

The most controversial aspect of the new rule is that all banks will be required to set aside reserves for wealth management products for the first time. The reserve requirement ratio is set at 10 percent for stocks and structured products based on management fees.

That is however not too bad, given that some observers had feared that the reserve would be based on total value of wealth management products.

Currently, China’s wealth-management products market has grown to over 23.5 trillion yuan in size, of which over 90 percent is invested in fixed-income products like bonds and notes, and less than 10 percent in stocks and structured products.

The extra reserve for these products is estimated at below 100 billion yuan, according to the new rule.

In the past, the China Banking Regulatory Commission (CBRC) had only offered window guidance for wealth management. But now it will be the first time that some written rules will be issued.

The market should, however, see the move in the right context and not exaggerate the impact of the new requirements.

At its meeting Tuesday, the Politburo reiterated the need to prevent financial risks and funnel social capital into the real economy. The tasks have been outlined as a key agenda for policymakers.

Following the Politburo meeting, China’s top securities regulator has issued a warning against illegal activity in stock futures. And the Shenzhen Stock Exchange stressed that it will tighten supervision and crack down on speculation.

All these moves indicate that the government aims to remain vigilant about potential stock market risks in the next six to twelve months.

Investors should not expect any policy stimulus in the near term.

This article appeared in the Hong Kong Economic Journal on July 28.

Translation by Julie Zhu

[Chinese version 中文版]

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