China tightens rules on asset management businesses

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China’s central bank published new rules on asset management on Friday night, strengthening leverage reduction and risk control in the country’s financial market.

The long-awaiting final version of rules covers asset management products issued by banks, trust firms, insurance asset management companies, securities firms, funds and futures companies, aiming at closing loopholes that allow regulatory arbitrage, reduce leverage levels to curb asset price bubbles and rein in shadow banking activity.

The rules from People’s Bank of China (PBOC) ban financial institutions from offering investors with implicit guarantees against investment losses, and the definition of such behavior and related punishment must be clarified.

To control the leverage and curb asset bubbles, the new rules set leverage limits for asset management products.

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

Financial institutions are also forbidden from creating a “capital pool” to manage funds raised through asset management products. The practice allows banks to roll over the products constantly and the investment losses will be implicitly covered by the new product issuance, leading to increasing liquidity risk.

China’s financial institutions have seen their asset management business surge in recent years with a total value around 15 trillion US dollars and some non-financial are also joining the business.

But non-financial institutions are prohibited from issuing or selling asset management products except some allowed by other regulations, such as private fund, according to the rules.

The transition period for the new regulations extends to the end of 2020, from previously announced June 30, 2019, in a bid to give financial institutions enough time to make adjustment, PBOC said.

(With input from Reuters)