China economy

China’s own Dodd-Frank Act aims to tame wealth management sector as crackdown on risky financial activity gathers pace

New set of restrictions could have wide-ranging impact by curbing the products financial institutions can offer and the clients they can serve

PUBLISHED : Friday, 17 November, 2017, 11:44pm
UPDATED : Saturday, 18 November, 2017, 10:49pm

China’s financial watchdogs have unveiled a major new regulation – described as Beijing’s Dodd-Frank act – to rein in shadow-banking activities, responding to President Xi Jinping’s call to reduce financial risks.

The country’s off-balance sheet businesses – including banks’ wealth management products for retail investors, trust investment schemes and mutual funds – with a total value of 100 trillion yuan (US$15 trillion) will fall under the scope of the new draft jointly released by the People’s Bank of China and the country’s banking, securities and insurance regulators on Friday.

While the new regulations are a ministerial-level set of rules, they are set to have a far-reaching impact on China’s financial world similar to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into federal law by former US president Barack Obama in July 2010.

The US legislation was introduced in the wake of the financial crisis and was designed to improve consumer rights and improve accountability and transparency in the financial sector.

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The draft Chinese legislation, posted on the central bank website for public feedback, may put an end to China’s extraordinary financial exuberance over the last decade by restricting what clients financial institutions can serve and what products they can buy.

For instance, a “qualified” investor in certain financial products should have at least 5 million yuan (US$750,000) in family financial assets or have earned more than 400,000 yuan a year for three consecutive years.

When selling products, financial institutions should not make any promises on returns. And financial institutions will have to set aside 10 per cent of their management fees as “risk reserves”.

The regulators made it clear that the new rules would target firms offering wealth management products online – a stipulation that could push back the aggressive inroads made by internet firms into the financial services sector.

Nomura chief China economist Zhao Yang said the new regulations would squeeze financial liquidity and “exert downward pressure on the economy”.

Zhao added that the implementation of the regulations could lead to a rise in defaults.

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According to the central bank, there will be a buffer period until the end of June 2019 for existing asset management firms to introduce the new regulations.

China’s extraordinary monetary easing, the rigid state interest rate system and discord between regulations from different watchdogs have led to a boom in “asset management” products.

Many Chinese depositors have moved their funds from bank savings accounts, which offer an annual interest rate of 1.5 per cent, into wealth management plans that offer investment returns close to 10 per cent.

By the end of last year, 29 trillion yuan was held in wealth management funds, and another 17.5 trillion yuan was in various trust investment plans, the central bank said in a statement.

The new rules also aim to tackle “excessive leveraging” in China’s non-bank financial sector, with leverage limits to be set on asset management products. The rules will cap the total assets to net assets ratio at 140 per cent for mutual funds and 200 per cent for private funds.

Zhao said the draft regulation was the first major initiative by the Financial Stability and Development Committee, an agency Xi set up to improve financial coordination. The committee, chaired by Vice-Premier Ma Kai, had its first meeting earlier this week.

Ding Shuang, chief China economist for Standard Chartered Bank, said it was a game-changer for China’s asset management industry.

“It does not mean a marginal increase of financial tightening. It mainly serves as a countercyclical approach for regulators and a rule book for future implementation,” Ding said.

“A transitional period is given to prevent market panic.

“The measures taken in recent months have mainly been used to prevent expansion, while the new draft is focusing on preventing specific risks.”

The central bank introduced a macro prudential assessment framework in the first quarter of this year, which told banks to focus on seven sets of indicators.

Meanwhile, the China Banking Regulatory Commission under its new chairman of Guo Shuqing has taken on the high degree of leverage and heavy speculation.