China to give adequate account of impact before finalizing new asset management rules: regulator

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‍China will take adequate account of the possible impact on banks and markets before finalizing its new asset management rules, said a senior banking regulator on Saturday.

China’s financial regulators proposed sweeping rules last month to curb risks in the country’s 15-trillion-US-dollar of asset-management products, the latest step by Beijing to fend off systemic risks from the country's rampantly growing shadow banking sector.

"The new regulations will take adequate account of the impact on banks and markets before being finalized," said Liu Zhiqing, deputy director general of the China Banking Regulatory Commission’s prudential regulation bureau.

"We are seeking comments now, hoping all parties will make suggestions and come up with good solutions that will be implemented smoothly."

The draft rules were released for public consultation and firms will be given a grace period until June 30, 2019 to comply.

Financial institutions should offer yields based on the net asset value of the products they issue, to reflect the risks and return of the underlying assets, instead of offering a guaranteed principal repayment or rate of return, China's central bank the People’s Bank of China (PBOC) said in a joint statement with the banking, insurance, securities and foreign exchange regulators.

The new rules aim to close loopholes that allow regulatory arbitrage, reduce leverage levels to curb asset price bubbles and rein in shadow banking activity.

The new rules will set leverage limits for asset management products. They will cap the total assets to net assets ratio at 140 percent for open mutual funds and 200 percent for private funds. Investors will be prohibited from pledging their shares in asset management products as collateral to obtain financing, a practice that would increase leverage.

Financial institutions will also be forbidden from creating a "capital pool" to manage funds raised through asset management products. The practice allows banks to roll over the products constantly. The investment losses will be implicitly covered by the new product issuance.

"Clearly this is a critical turning point of the financial regulations," said Zhou Hao, a Singapore-based analyst at Commerzbank. "Over the past few years, while the financial risks were rising, the overall regulations were actually behind the curve."

"The new requirements will push asset management business to go back to its essence and prevent risks to transfer cross-sector and cross-markets," said Dong Ximiao, a senior researcher at Chongyang Institute for Financial Studies at Renmin University of China.

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Source(s): Reuters