[ET Net News Agency, 7 December 2018] China's rules on wealth-management subsidiaries
will expand banks' ability to compete with traditional fund managers. This could introduce
some powerful new players and heighten competition in asset-management. Other significant
effects include reduced moral hazard for banks and a further opening of the country's
financial markets to foreigners, S&P Global Ratings said today.
"Chinese bank's wealth-management units can now invest in a wider range of permitted
assets, including publicly traded shares. That means these units will increasingly compete
with traditional asset managers," said S&P Global Ratings credit analyst Fern Wang.
The China Banking and Insurance Regulatory Commission (CBIRC) announced the regulations,
effective immediately, on 2 December 2018, about a year after the start of major reforms
to stem potential risks from wealth-management products (WMPs).
WMPs are funding instruments similar to deposits and are packaged as investment products
and sold by banks to retail or institutional investors, typically to fund investments
where bank credit is restricted.
China clamped down on the WMP industry amid fast growth, loose regulations, and inherent
and hidden risks--given that banks implicitly guaranteed the WMPs they sold, raising
potential loss exposure, and creating moral hazard.
The new rules will require banks to make their wealth-management units independent. This
includes separate personnel, systems, risk assets, and management for wealth-management
subsidiaries.
S&P thinks this will allow the subsidiaries to pool assets for risk management and
gradually move away from implicit guarantees on WMPs. The rules also provide for
strengthening governance, avoiding related-party transactions leading to conflicts of
interest, and preventing insider trading.
However, the agency said not all banks will be able to meet the high capital
requirements to create wealth-management subsidiaries. Setting up such a unit will require
minimum registered capital of RMB1 billion (US$145 million).
Small and midsized banks will find this funding bar difficult to clear, due to tight
resources and limited capital headroom. These banks are likely to rely on other
wealth-management companies, including those owned by large banks, to serve their
customers. It is also possible that such banks will set up consortiums or joint ventures
with other players to compete, but the execution could be more challenging.
The rules specify the eligibility requirements for foreign shareholders, leaving the
door open for foreign ownership in wealth-management subsidiaries. While foreign investors
would require CBIRC approval to become a shareholder in one of these units, the same holds
true for domestic shareholders.
"The opening in the wealth-management sector follows on China's relaxation of ownership
restrictions on the financial sector, including but not limited to commercial banks,
insurers, asset managers and securities companies. This shows China is continuously
opening up its financial market," said S&P Global Ratings credit analyst Ryan Tsang. (KL)