China's campaign to tighten regulations on asset management products and services will reshape the inflated financial sector by stifling the growth of leverage and constraining the conduit for shadow credit, experts said.
After a transition period through the end of 2020, a guideline jointly issued by top financial regulators will take effect and completely halt the issuance of high-leverage and risky investment products with guaranteed principal and fixed-yield returns. The guideline was issued on Friday.
The new regulation will reform the entire asset management sector, covering different types of financial institutions including banks, trusts, fund management, securities and insurance companies.
It will ensure financial stability and high-quality sustainable growth in the long run, said Gao Chong, deputy general manager of the asset management department of Industrial and Commercial Bank of China.
"Market vulnerability can be avoided, although the financing vehicles may shrink during a short phase of adjustment, and the final version of the new rules is within expectation," said Gao.
Financial institutions, especially in the 250 trillion yuan ($39.4 trillion) banking sector, usually use asset management products as investment vehicles that guarantee to meet certain returns when holders' short-term liabilities mature. This attracts assets to finance illiquid, long-term and highly leveraged investment projects.
Breaking the implicit guarantees is expected to shift risk-averse investments into safer instruments and reduce the demand for illiquid corporate bonds, which may slow down the overall growth of credit, said Li Qilin, chief macroeconomic researcher at Lianxun Securities.
By the end of 2017, outstanding off-balance-sheet wealth management products held by all types of Chinese financial institutions reached nearly 100 trillion yuan, about 120 percent of the country's GDP, according to the central bank, the People's Bank of China.
It includes 22.2 trillion from the banking sector, 21.9 trillion from the trust companies and 11.6 trillion in public funds, and has become a large contributor to the "shadow banking" system that is difficult for regulators and investors to monitor.
Other businesses, especially in portfolio investments relying on pooling off-balance-sheet assets and cross-holding of products among different financial institutions, will be gradually constrained by 2020, pushing financial services to change the model toward more transparent and cost-efficient management methods, according to Wei Xing, director of the asset management department at CITIC Securities.
"The influence on the stock market is expected to be limited, as most of the investments in equity assets follow the rules for mutual funds, which are less impacted by the new regulation," Wei said.
An 18-month expansion of the transaction period, compared with the previously released proposal, is a result based on solid statistics, and after collecting advice from financial institutions to ensure sufficient preparation and avoid market fluctuations, he said.
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