Trust companies see a windfall from China’s latest effort to crack down on risky wealth management products (WMPs), which could divert money from rivals shut out of the market by the new rules.
Draft rules circulated by the banking regulator would curb the exposure of WMPs to riskier assets such as stocks and could also hamper the sale of structured products that increase leverage in the financial system, Reuters reports.
The regulations are seen weighing heaviest on smaller banks and brokerages — whose shares have been hit — although the reaction from trusts suggests they may merely shift some risk rather than eliminating it.
“A trust license is suddenly worth a lot now,” said a source at one of China’s top three trust companies.
“All our competitors can’t do structured products, we still can.”
Trust companies are non-bank lenders that raise funds by selling high-yielding WMPs and use the proceeds to invest in everything from equities to commodities and fund loans to risky borrowers to whom banks are reluctant to lend.
Chinese authorities have taken a number of steps in recent years to try to control the growth of WMPs amid mounting concerns about the level of debt, particularly the rapid expansion of off-balance sheet lending.
As the economy has slowed to its slackest pace in 25 years, smaller banks with less access to top-tier creditworthy borrowers have increasingly dabbled in creating, packaging and repackaging exotic assets for sale to retail investors, who assume they are tacitly guaranteed by the government.
Bank WMPs hit 25 trillion to 26 trillion yuan (US$3.91 trillion) in June, according to investment bank CICC, an increase of 8 percent from the beginning of the year.
Under the draft rules from the China Banking Regulatory Commission, first reported by Reuters on Wednesday, only banks with more than 5 billion yuan (US$750 million) of net capital would be allowed to invest WMP proceeds in equities and “non-standard credit assets” such as bills or entrusted loans.
That would mean only about 10 percent of China’s 2,500 banks would be able to issue the full range of WMPs, according to analysts at China Merchants Securities Co.
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