The newly released asset management regulations are to rein in risk, serve the real economy, improve the regulatory fairness and unleash potential for financial innovation, a central bank official said.
Yi Gang, governor of the People's Bank of China (PBC), of the central bank, elaborated on the four main purposes at a media interview on Monday.
With the rapid expansion in recent years, the asset management sector has exposed issues such as cross-investment, increased leverage, arbitrage in the same industry and not serving the real economy.
The long-expected guidelines were first released in November 2017 in draft form by five departments jointly unifying regulatory standards for asset management products.
Formally launched, the new rules further clarify the suppression of multi-level nesting and channel businesses, breaking the rigid payment, controlling the leverage level of asset management products, and implementing asset-based management. Meanwhile, the new rules execute supervision of product types, and implementation of fair market access, Yi said.
The new rules will also facilitate sound long-term development of the financial industry, creating a market for financial innovation while reining in its risks, Yi added.
The asset management business of financial institutions has developed rapidly, which has played a positive role in enriching market investment channels, deepening financial market reform, and developing direct financing markets. At the same time, issues such as differences in rules and product embedding have emerged, forming a huge “shadow bank” and constituting a potential systemic risk. The status requires orderly resolution and regulation, Yi noted.
"Shadow banking" refers to a credit agency system that is free from banking supervision systems and may trigger systemic risks and regulatory arbitrage. The main characteristics of the "shadow banking" could be: long value chains, high leverage, structural complexity, regulatory arbitrage, and lack of regulation.
Zhao Xijun, deputy dean of the School of Finance at Renmin University in Beijing, said that shadow banking mainly refers to financial institutions that provide banking services, such as credit and financing, but are not managed in accordance with bank requirements.
Many small and medium-sized enterprises (SMEs) and poorly qualified companies or individuals have to be financed through shadow banking. Such loans will increase the leverage and exacerbate the risks.
More details to come
The bank’s financial management has been systematically reviewed both at home and abroad, and related regulatory measures have been drafted. As a supporting rule for the new regulations on asset management, more regulatory measures will be released next, explained Li Wenhong, former director of the CBRC's banking innovation supervision department.
As a financial business, the asset management business is required to be licensed, which helps strengthen and enhance the value of the financial institutions' licenses. However, the development of different institutions will be further fragmented. Some SMEs as financial institutions will face greater challenges while those with excellent investment and management will gain more competitive advantages. The process of adjustment and reform will lead financial institutions and financial consumers to grow together, said Dong Ximiao, a research fellow with the Chongyang Institute for Financial Studies at the Renmin University of China.
China unveiled new rules that regulate the asset management businesses of financial institutions on April 27, a key step toward standardizing the country's fast-growing asset management industry.
China's asset management businesses have been expanding rapidly in recent years, with collective outstanding volume reaching over 100 trillion yuan ($ 15.8 trillion) by the end of 2017.
The guidelines also specified rules covering investment advisory businesses that use artificial intelligence technology, requiring financial institutions to obtain qualifications before conducting such businesses.