Box 3 Promoting Sound Development of the Asset Management Business



In recent years, due to policy facilitation and market development, the asset management business has grown rapidly. With banking, trust, securities, and insurance institutions participating in the business, cross-industry cooperation has become ever closer. At end-2016, the outstanding value of off-balance-sheet wealth management products of banking institutions posted RMB 23.1 trillion; the outstanding value of assets managed by trust companies totaledRMB 17.5 trillion; the combined value of asset management schemes of mutual funds, private equity funds, securities companies, asset management companies and their subsidiaries, and insurance companies reached RMB 9.2 trillion, RMB 10.2 trillion, RMB 17.6 trillion, RMB 16.9 trillion, and RMB 1.7 trillion respectively. After excluding cross holding among the various industries, the total value of managed assets is estimated to exceed RMB 60 trillion. In addition, Internet companies, investment advisory firms, and other non-financial institutions have been active in the asset management business. Money market funds and other wealth management products offered on Internet platforms have mushroomed due to their low threshold, high yield, and real-time redeemable features.

 

The asset management business has effectively linked investment and financing, contributed to the growth of a direct financing market, expansion of domestic investment options, and the service range of financial institutions, and it has helped meet the financing needs of the real sector. However, the asset management business has also given rise to asset pool operations, frequent reinvestments of the raised funds before the final investment, and unbreakable expectations of mandatory repayments, among other problems. Market order needs to be improved through better regulations. Several problems need to be addressed. First, operation of the asset pool may trigger potential liquidity risks. Asset management institutions have used revolving issuance, collective operations, and separate pricing to raise low-cost, short-term funds and to invest them in long-term debt or equity projects to seek maximum returns. Once they fail to raise subsequent funds, their schemes wouldincur liquidity shortages, which might spread to other institutions involved in the schemes. Second, the frequent reinvestments of raised funds may spread the potential risks. As funds are raised from multiple sources but invested mainly in debt claims, some banks, in theirwealth management business, have used products managed by trust, securities, asset management, and insurance firms as channels for equity investments. Such products have complex structures after multiple reinvestments, blurring the underlying assets and possibly exacerbatingthe risk contagion and market fluctuations. In cases of losses, it may be difficult to pinpoint who is liable. Third, regulation of the shadow banking business is inadequate. In the case of off-balance-sheet wealth management of banks, bank-trust cooperation, bank–securities firm cooperation, and bank–asset management firm cooperation, when their products are invested in non-standard credit assets, such businesses have shadow banking features. The same can be said when insurance companies invest in products that are equity in name but debt in nature. Such businesses areinherently opaque, can easily duck regulatory requirements, and constitute quasi-credit investments. Some are even invested in restricted fields. Fourth, the existence of unbreakable expectations of risk-free repayments has meant that the risks remain within the financial system. The expected returns of some asset management products are assured by proprietary funds or asset pools of the management institutions, and thus the risks are not fully insulated from their own asset and liability businesses. The existence of expectations of risk-free repayments runs counter to the nature of the asset management business. It leads to an accumulation of risks in the financial system, pushes up risk-free yields, and gives rise to moral hazards. Fifth, the asset management business of some financial institutions is in disarray. Some asset management products designed for private placements are repackaged and sold on the Internet to the public instead of to the originally targeted group. Some pitch their products to investors that have no capacity to identifyrisks. Some others pitch their products in a misleading manner without full disclosure of the risks. Some have not placed the raised funds in custody, or have even engaged in illegal fund-raising activities.

 

To address the salient risks and problems that have emerged in the rapid expansion of the assetmanagement business, it is necessary to note that the relationship between wealth managers and clients is not a relationship between creditor and debtor. The stakeholders should have a full grasp of the nature of asset management. We will adopt a problem-oriented approach to guide it back to the trajectory of the managers managing wealth on behalf of clients and the clients assuming the risks of investment. At the current stage, we need to adopt the same regulatory standards for the same kinds of products and to establish effective regulation for the asset management business. First, the standardsfor regulation should be established and unified on the basis of the product categories to gradually eliminate the space for arbitrage. A macro-prudential policy framework will be put in place and policy tools will be improved to step up monitoring, assessments, and adjustments from a macro, counter-cyclical, and cross-market perspective. Functional regulation and regulation focusing on the underlying assets and the ultimate investors will be enhanced by adopting the same standardsfor the same category of products, and to prevent arbitrage and to contain the spread of risks as a result of reinvestments. Second, the asset management business will be brought back to its original nature and end the practice of risk-free repayment. The investors will reap the returns and assume the losses of asset management, while the agent will only charge a commission for managing the assets. The asset management institutions must not undertake to ensure the safety of the principal or returns to avoid misleading the investors. Investor suitability management and investor education should be improved to build investor awareness of the seller acting in good faith and the buyer taking the risks. Risk insulation between asset management and proprietary businesses should be enhanced and the trustee’s responsibilities should be fulfilled. Gradually fewer products with guaranteed returns will be issued and products without guaranteed returns will prevail in the market. Third, liquidity risk management will be strengthened to control leverage. The requirements of separate management, separate booking, and separate accounting will be strengthened to align the maturity of products with the duration of the invested assets. Financial institutions will be encouraged to create independent subsidiaries to engage in the asset management business. An independent custodianl system will be established and improved to insulate the risks of different asset management products and the risks of client money and proprietary funds. The leverage of products of the same category will be unified to keep the leverage of the stock market and the bond market at proper levels and to contain asset bubbles. Fourth, the practice of multiple reinvestments will be eliminated and channel business will be restricted. Equal access to and fair treatment in the asset management business will be granted to all kinds of financial institutions. Investmentsin which the same fundsare trusted many times will be restricted, and the active management responsibility of trustee institutions will be strengthened to prevent them from providing channel services to the trustor institutions to help them circumvent the regulatory requirements in terms of the range of investable assets and leverage. Adequate space will be provided to support operations for the purpose of active management, asset allocations, and portfolio management. Fifth, regulation of non-standard credit asset products will be enhanced to forestall shadow banking risks. Wealth management products outside the balance sheet of banks will continue to be included in broad credit to guide financial institutions to step up risk management of their off-balance-sheet business. The business of transferring bank credit assets and their beneficiary rights shall be better regulated. The investment volume of non-standard credit assets will be controlled and scaled down. Pre-investment due diligence and risk reviews and post-investment risk management will be enhanced. Sixth, a comprehensive statistical system will be established to provide a basis for regulation to look through the products to identify the underlying assets and the ultimate investors. Measures will be taken to build a comprehensive statistical framework that covers the entire financial sector with unified standards, to enable information-sharing across the sector, to collect basic information, placement information, asset and liability information and termination information for each and every product, to enable regulators to look through and identify the underlying assets and the ultimate investors, and to accurately and promptly capture what is going on within the industry and to fully reflect its risk profile. 

 


[1] As of January 1, 2017, three government-managed funds—compensation for additional land designated for construction projects, the South-to-North Water Diversion Project funds, and special revenuesubmitted by tobacco companies—were transferred to the general public budgets. Based on documents issued in March, starting from April the baseline figures for 2016 were adjusted to account for the impact of transferring these three government-managed funds to the general public budgets, and year-on-year absolute and percentage changes were calculated on this basis.

[2] In the first half of 2017, real-estate development loans rose by RMB 747.28 billion, among which new loans for welfare housing development registered RMB 451.47 billion.


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