Financial regulation

Chinese banks push back on regulators’ plan to bring wealth management products in line

Ten mid-sized banks have asked regulators to extend a June 2019 deadline by another 18 months until the end of December 2020, for ending promised guarantees on wealth management products.

PUBLISHED : Sunday, 10 December, 2017, 9:33am
UPDATED : Sunday, 10 December, 2017, 11:34pm

Ten of China’s mid-sized banks have pushed back on a plan by regulators to bring their wealth management products in line with international best practices, seeking to extend a grace period before terminating wealth management products with guaranteed returns.

The banks are asking to extend a June 2019 deadline by an additional 18 months until December 2020, before they stop making promises on any returns in their wealth management products, according to a document from a November 30 closed-door meeting in Shanghai, a copy of which was seen by the South China Morning Post.

Chinese banks had been bolstering their deposits with trillions of yuan of household savings through the sale of wealth management products with guaranteed returns substantially more generous than the 1.5 per cent interest on one-year deposit accounts. The wealth management sector, including trust investment schemes and mutual funds, is valued at 100 trillion yuan (US$15 trillion), three times larger than the licensed banking industry’s 30 trillion yuan.

But the outsize financial industry has a less attractive underbelly, as higher interests on these promises have forced banks to seek out high-risk investments and bankroll speculative projects. The government earlier this year cracked down on insurers that were selling wealth management products with guaranteed returns, on concern that their funds were channelled into war chests that ended up in aggressive acquisitions and speculation. Several of the most egregious insurers already had their licenses revoked, or closed.

Now the axe is falling on banks. Financial institutions were ordered to stop promising returns on their products, based in a set of preliminary regulations drafted on November 17 by five Chinese regulators overseeing securities, banking, insurance, foreign exchange and the centra bank. Instead, they are required to offer investment yields based on the net asset value of the products that reflect the performance of the underlying assets.

Even though no effective date was finalised, the Chinese authorities set a grace period until the end of June, 2019, for their new instruction to take effect.

Still, the banks asked for a longer grace period to “gradually and orderly” handle the break of implicit guarantee to transition their customers to the new regime.

Most retail investors have a low risk appetite and low acceptance of “net asset value” model, thus any quick and abrupt break of implicit guarantee could trigger sweeping redemption by them, pushing the industry into turmoil, the banks said.

Financial analysts don’t share that view. The current grace period is already reasonable enough to wean investors off promised returns, they said.

“Even without such guarantees, banks could still be the preferred choice for retail customers for the industry’s relatively conservative risk appetite,” said Xu Wenbing, chief banking analyst at Bank of Communications in Shanghai, noting that he sees little likeliness to see huge redemption from retail investors.

The 10 banks that are pushing back, mostly second-tier financial institutions, also asked for regulators to loosen a strict restriction on investing in non-listed private companies, noting that a strict restriction could undermine the banking support to the real economy and leave companies turn to other financing channels and shore up leverage instead of cutting it.