China to tighten regulations on asset management industry
China is preparing to tighten regulations governing the asset management industry, which will put an end to the practice of guaranteed minimum rates of return on certain investments.
The plans also cover standard leverage ratios, risk reserve funds and investment restrictions on asset management products.
The rules aim to create unified regulations, reduce arbitrage and facilitate the development of the asset management sector, China’s central bank, the People’s Bank of China (PBoC) says in a statement.
The PBoC and four regulators – China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission and State Administration of Foreign Exchange – have come together to issue the draft rules governing China’s asset management industry. The plans are open to public consultation until December 16 this year, with a planned implementation date of June 30, 2019.
One of the most important changes is to put an end to the promising of a guaranteed rate of return, which has been a common practice in China’s wealth and asset management sector, particularly in relation to the management of trusts.
Most real estate trust products, government financing trust products and products offered under the co-operation between banks and trust companies guarantee a breakeven investment or a minimum return to investors. When the products are not performing well, the financial institutions pay the guaranteed principal and return to the investors from their balance sheets. But this practice distorts risk pricing, adding to instability in the financial system, according to the regulators.
The new rules will affect about half of the RMB100 tn ($15.2 tn) of assets under management in China’s asset management industry.