Bank of China, China Construction Bank get wealth management units in shake up of US$4.3 trillion industry

Beijing has given two of China’s biggest banks the go-ahead to set up wealth management units, a move that could create a new growth engine for an industry struggling to sustain profitability.

The Bank of China and China Construction Bank have received their approvals from the China Banking and Insurance Regulatory Commission (CBIRC), the regulator said in a statement on Thursday. The go-ahead comes three weeks after the commission published the regulations governing these wealth management units.

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“It is a new business for banks, since they need to have high-skilled professionals manage assets, instead of relying on assets to chase profits via interest margins,” said John Qu, a senior partner at global consultancy McKinsey. “In fact, it is a light-asset business, totally different from banks’ traditional lending business.”

Wealth management products issued through banks were valued at 29.54 trillion yuan (US$4.3 trillion) at the end of 2017, according to official data.

More banks are expected to follow with the set up of their own wealth management units. According to local media reports in mainland China, more than 20 banks have plans to set up such units.

On the mainland, banks – except for their private banking units – were barred from directly managing assets for their clients before the rules took effect.

Wealth management products in mainland China typically mean non-standard debt assets, or shadow loans, which are issued through banks to other institutions such as trust firms or hedge funds. Banks act as middlemen and issue wealth management products to investors as a way of raising funds.

By allowing banks to have their own subsidiaries focused on the management of massive amounts of capital, the CBIRC was also aiming to strengthen risk management and regulation of fund flows, it said.

The wealth management subsidiaries will be required to set aside a risk reserve fund to cover potential losses, according to the rules. They will also be required to have registered capital of no less than 1 billion yuan.

Moreover, this units will be allowed to invest in stocks at a time when mainland China’s A-share market is mired in a crisis of confidence. The benchmark Shanghai Composite Index has slumped by 25 per cent year to date, closing at 2,483.09 on Thursday.

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“It is a policy that can benefit the stock market,” said Zhou Ling, a hedge fund manager with Shanghai Shiva Investment. “Some of the investors with high risk appetites would like to see banks’ units manage their assets to chase returns on the stock market.”

The banks in mainland China are facing an uphill task when it comes to maintaining their profit growth amid a narrower net interest margin. A strong wealth management segment could eventually help them shore up profits as interest income drops, said McKinsey’s Qu.