Winning the War to Rein in China's Wealth Management Products

China's banks got into the wealth management business in 2002, but the market really took off in 2009, experiencing explosive growth until 2015. As a result, it caught the government's attention because it much of it fell outside the oversight of financial regulators. Although WMPs were often issued by large banks, and perceived as secure by investors as a result, the underlying assets were often high risk investments such as property developments, and they were generally kept off balance sheet.

According to the South China Morning Post, in 2016 the market hit about $28 trillion, with about an average of 3,700 WMPs being issued each week in the first half of that year. At the time, only one product issued by a domestic bank had reported any form of loss according to Fitch. But soon after, default rates picked up. In one case in 2017, the underlying assets of WMPs sold at a branch of Minsheng Bank were found not to exist.

To combat the growing threat, Chinese regulators introduced measures to bring such products under greater oversight; introducing measures to make them less competitive compared to better-regulated alternatives; slowly opening the market to foreign competition and expertise; and opening up access to better regulated investment opportunities for such products to tap into. Such changes needed to be introduced gradually given the market's size, to allow banks time to absorb the shocks of deflating the market.

In early 2017, WMDs were required to be included on banks' balance sheets. In December last year, the CBIRC instituted the final version of long-awaited rules covering commercial banks' asset management subsidiaries, allowing these units to invest in public stock funds and invest up to 35% of their total assets under management in nonstandard credit assets. The CBIRC's new rules supplemented China central bank's overarching guidelines aimed at tightening supervision of the $15 trillion of asset management products that have been issued by banks, trust firms, insurance asset management companies, securities firms, funds and futures companies.

Most recently, the CBIRC has said that it is planning to tighten rules on cash management products (CMP), which accounted for about 60% of the outstanding WMP products in June 2018, according to a Bloomberg report. China's CMPs, which are sold by asset managers, involve an estimated $2 trillion of investments and the regulator wants to impose stricter rules on pricing; and to restrict where – and for how long – the inflows can be invested.

Currently, the looser regulation of CMPs enables banks to offer higher yields than those on better-regulated money market funds (MMFs) and the CBIRC's proposed changes could, if implemented, lessen their investment appeal, Bloomberg sources suggested. MMFs, overseen by the securities regulator, cap the duration of their investments at an average 120 days while no limit is presently applied to CMPs.

The move is unlikely to be the last by China's financial regulators as they try to rein in the risks of the country's mountain of debt held in WMDs. With a slowing and changing economy, it is likely to be a delicate balancing act with little room for error.