China Wealth Management Dilemma


Chinese Money


Financial market regulators commented that there are loopholes in their guidelines to regulate the wealth management space and protect lay investors. CSRC and CBRC has tried making new laws. There are still gaps in the regulatory space due to rapid growth for wealth management. The combined assets managed by banks, insurance companies, trust funds and fund managers almost exceed 90trillion yuan. There are risks surfacing as the sector grows. Regulators are starting to doubt the regulations as inadequate. There are regulatory holes need to be plugged. For instance, CBRC decided on reducing risk by asking banks to split the lending and wealth management business. Regulation was in draft but never really executed due to disagreements. There were great arguments over the split.

Stock market bear downturn went against wealth manager's investing performance. Insurance companies who had vested interest in stock markets has seen their asset value fall. Banking officials pointed at the regulators for encouraging risk taking by wealth managers. There was no good coordination between different agencies. Asset management sector is getting messier due proliferation of complicated investment package. Chinese banks controlled biggest portion of funds in 2015 and are invested via wealth management space. Trusts, securities firms, insurance companies and fund corporations were handling 16trillion, 12 trillion, 11 trillion and 9 trillion yuan respectively. Smartphones and internetas well as interest rate drops all pushed retail investors and huge financial outfits to investment in these wealth management package.
Sales proceeds from these products were ploughed into the equity markets. Asset managers are risking the funds on stock markets in Shenzhen and Shanghai. Some invested in corporate bonds and private placement. A total of about 7trillion yuan is invested into stocks, bonds as well as futures securities. 1.7trillion was invested in structured products. Bank executives were warned that borrowing spiked to cover for share market investment. Despite the share market volatility, equities are not riskiest. Private placement presents the highest risk. Banks are also funding out of balance sheet mezzanine financing, which is investing in shares of private companies via loans.
About 20% of assets from wealth management are invested into these types of financing. Good companies are targeted for the financing arrangement as it increases leverage risk. Risks have increase since the stock market crash and bubble is forming. Many see this as the only way for making profits due to low interest rate environment. Asset managers are finding it tough to find great investments. There are about 200billion excess funds with nowhere to invest except considering for share market. Moody's reported that weak share market could adversely affect bank's asset quality and profits due to weak stock lending and share market related custody services. Moody's expects more defaults on company debt as borrowers struggle on repaying their leverage. Wealth management as a whole should be revamped and risks are real.
Regulators have not been interfering with the investments. They have paid close scrutiny on funds raised from short term products in wealth management. These money are invested in long term projects which presents a mismatch. Asset management executives support more disclosure in investment products. Same rule and standardization should apply to the products similar to public funds. Retail investors ought to be protected by regulators by enhancing these measures. All regulatory bodies from China have pursued different goals and agendas and neglected on coordination. Each focused on their own segments. It is not effective due to loophole with different frameworks, especially in wealth management space. There are some who praise the innovative form of segmentation. Top policymakers have the ultimate power to pass through legislations for unification of regulations. There were examples of cooperation in the past. For instance, in 2003, CBRC as well as CSRC jointly instructed banks and asset managers to be more transparent in their pool of capital. However it still lacks results as banks tried to transfer out the capital by channeling to other companies.
Capital pool enterprise is closely linked to wealth management package for stocks and corporate bonds investment. CSRC allowed fund manager and broker to push and market wealth management package. CBRC followed suit for banks and CIRC launched similar wealth management package rules for insurance enterprises. Each regulator are doing their best on its own area of expertise. However unification is still yet to be implemented to standardize regulations in wealth management space.


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