‍The People's Bank of China (PBOC) has officially issued a regulation that defines qualified investors and eliminates the tacit rule of guaranteed repayments in the asset management industry. 

Hong Hao, chief China strategist of BOCOM International Holdings, said that these new regulations are, on one hand, helping minimize financial risks, but on the other, really helping commercial banks’ in their lending businesses.

“I would say, you know, to a very large extent, the regulations actually reduce the risks in the financial system. Historically, some financial institutions, especially the smaller ones, use wealth managing products as a way to find balance because the products didn’t require a capital adequacy ratio and you don’t have to charge certain amounts of capital in a balance sheet to offset some potential risks,” he said.

The strategist explained that some smaller banks have been using these products to expand their balance sheet substantially, adding they have a much larger number of off-balance sheet items than on-balance sheet towards the end.

But as the new regulations came out, things are different. The commercial banks are no longer allowed to guarantee any profits for non-capital preservation portfolios, which exposes many of their products to higher risks.

“Now you know all these off-balance sheet items must be brought back to on-balance sheet before certain date. So, gradually, you’ll see many of these items being rolled back, capital being charged against some of these products. As a result, I would say it really helped to hedge the potential risks in the financial system,” Hong said.

He also emphasized smaller banks would be more influenced.

“To different financial institutions, the impacts are very different. To those ones who have been playing a bad book, I would say the impact would be quite minimal because they’re doing everything according to the regulations. For some smaller banks, who have been busy moving items off balance sheets and hiding liabilities, they would be in trouble,” he explained.

However, the strategist said that, on the other hand, new regulations will also create opportunities for commercial banks. That’s because more money will come back to bank deposits as financial managing products or the wealth managing products are not as popular as before.

“The capital guarantee condition has been removed in these new regulations. They would actually help bigger commercial banks to have more deposits. So the ability for these banks to lend money to companies who actually need liquidity is increasing in the future. As a result, I would say these new regulations on one hand is helping minimize financial risks, but on the other hand would really help commercial banks’ lending businesses,” he said.