China’s biggest commercial banks are launching independent wealth management subsidiaries as they prepare to compete in the new landscape created by landmark rules curbing shadow banking.
This month the country’s banking regulator published regulations requiring lenders to split off their wealth management units from parent banks.
In recent weeks, at least 22 commercial banks, including the state-owned “Big 4”, have announced plans to do so. Industrial and Commercial Bank of China, the country’s largest lender by assets, said it would inject capital of up to Rmb16bn ($2.3bn).
The latest regulations followed a broad new regulatory framework for shadow banking announced last year that aims to eliminate implicit guarantees on “wealth management products”. The popularity of such products exploded from 2010 as banks marketed them as a high-yield alternative to traditional savings deposits. Some Rmb30tn in WMPs were outstanding by the end of 2017, according to official data.
In a statement this month, the China Banking and Insurance Regulatory Commission said commercial lenders can no longer run wealth management businesses through their parent entities.
“The subsidiary shall operate independently, be responsible for its own profits and losses, and effectively prevent business risks from infecting the parent bank,” the CBIRC said.
Banks had lobbied aggressively to soften the rules after the regulator released a draft for public comment in November 2017. The new regime is expected to reduce the attractiveness of WMPs by forbidding the soft guarantees were their main selling point.
Once fully implemented by the end of 2020, the framework will require bank WMPs to be marked to market each day such as a traditional mutual fund, thus dispensing with the perception that returns are guaranteed. This will reduce their competitiveness relative to comparable, already-compliant products from fund companies.
But this month’s follow-on rules provide some relief to lenders by expanding the universe of assets in which banks’ WMP subsidiaries are permitted to invest to include stocks. They also eliminate the Rmb50,000 ($7,250) minimum investment threshold for bank WMPs.
“Bank-owned WMP units have advantages over non-bank peers in terms of sales channels. But previously they entrusted mutual fund companies to do active management, especially for equity investment, because they didn’t have expertise,” said Lang Daqun, non-bank financials analyst at Southwest Securities in Beijing.
“Now they’re going to redeem a lot of those investments to bring the management in-house. The short-term blow to fund companies will be intense.”
In addition to stocks, the rules allow the new bank subsidiaries to invest up to 35 per cent of a product’s net assets in so-called non-standard credit assets — the official term for off-balance-sheet loans.
Such assets drove the overall surge in Chinese shadow banking since 2010, as banks sought to evade lending restrictions by shifting loans into off-balance-sheet WMPs. The original shadow bank regulatory framework, finalised in April, contained a blanket ban on bank WMPs investing in shadow loans.
On Liepin, a popular Chinese job search website, an advert from a top 10 commercial bank seeking investment directors for its wealth management subsidiary offers annual salaries up to $290,000 — far higher than the typical pay for senior Chinese bank executives.
“This is a very good beginning for China’s asset management industry and will greatly help marketise the industry,” said a bond portfolio manager at a large Chinese mutual fund company in Beijing. “The heart of asset management players is not assets but talent.”
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