China: A new era for the asset management business – Standard Chartered

Analysts at Standard Chartered explain that the new guidelines on the asset management business feature equal access and unified regulations as the guidelines aim to discourage regulatory arbitrage and contain shadow banking.

Key Quotes

“China’s financial regulators released the final version of the new guidelines for the asset management industry in late April. The guidelines aim to reduce room for regulatory arbitrage by offering equal market access and applying unified regulations in an industry with assets under management (AUM) exceeding CNY 100tn (over 120% of GDP). They tackle implicit guarantees, capital-asset pooling, investment in non-standard credit assets (NSCAs), over-leverage and channel businesses. Strict implementation will bring China’s asset management business in line with international standards, focusing on managing wealth on behalf of clients.”

“Several adjustments were made to the final version, based on feedback on the draft: extension of the transition period by 18 months to end-2020; allowing the amortised cost method to be used in valuing certain financial assets; and adoption of stricter criteria in identifying standard credit assets and qualified investors.”

“We expect the guidelines to affect the broader financial industry. With some shadow-banking business moving back onto banks’ balance sheets, the industry’s AUM may now grow at a slower pace, while pressure may build for banks to beef up their capital base. The restrictions on channel businesses and capital-asset pooling will likely constrain growth of non-bank financial institutions. With investment in NSCAs subject to tighter regulation, demand for standard credit assets may increase.”

“As financial regulation turns tighter, monetary policy is likely to remain neutral and flexible to facilitate orderly de-risking in the financial system and gradual deleveraging of the economy. The People’s Bank of China (PBoC) may cut the required reserve ratio (RRR) further to keep liquidity stable.”