Market in a tizzy over proposed new guidance for wealth products
China's stock markets took a roller-coaster ride on Monday in response to last week's unified standards set by the central bank for asset and wealth management products across the financial sector.
Market mavens interpreted the draft regulation, which is still in the form of guidance awaiting stakeholder feedback, as the strictest rules to date aimed at reining in shadow bank financing and taming related risks.
High-risk multi-tranche products with complicated investment structures, which could be used as arbitrage tools to channel money into stock, bond and property markets, will be limited by the new guideline, said a statement on the website of the People's Bank of China.
The period from Friday to the end of June 2019 will be a cushion to prevent market panic, said the statement.
However, the benchmark Shanghai Composite Index retreated 1.4 percent to a two-month low intraday, before recovering to end slightly up at 3,392.40 points on Monday.
Similarly, the CSI 300 Index, which tracks blue chips, plummeted as much as 1.5 percent intraday, only to end 0.56 percent higher.
"The new rules, (if they are finalized in their current form), would reduce capital flowing into stock markets through over-structured products, but their influence would be limited," said Li Chao, an analyst with Huatai Securities.
"Mostly, they would have a psychological impact on the market as they show that the top financial regulators may continue to tighten regulations to prevent risks and further reduce the leverage level."
Any major fluctuations in stock and bond markets could lead to corresponding changes in the proposed regulations, he said.
The proposed regulation lays down that the total assets of private equity products with tranches cannot be higher than 140 percent of their net asset value.
Zeng Mengya, a researcher with China International Capital Corporation, said that the guidelines, if finalized in their current form, would remove financial institutions' guarantee on products' potential returns to investors. This, in turn, could help address investor concerns about off-balance sheet assets.
"They would help raise the value of assessment in the wealth management industry because of the improved information disclosure scheme," she said.
Despite stricter standards on pooling of capital and debt management, which are in line with market expectations, the proposed regulation of third-party custodial services and asset portfolio composition is not as tight as the previously issued rules. Hence, it is unlikely to be applauded by stock and bond markets, according to a research note from CICC.
It would also likely have a limited impact on commercial banks' income, the CICC note said. For, income from asset and wealth management products accounts for only 3 to 5 percent of the banks' total income.
According to PBOC data, by the end of 2016, bank-issued asset and wealth management products totaled 29 trillion yuan (.4 trillion), nearly 80 percent of which are off balance sheets.
The total value of such products was about 102 trillion yuan across the country's financial sector.
As of June 30, a total of 555 Chinese banking financial institutions' outstanding asset and wealth management products were valued at 28.38 trillion yuan, down by 670 million yuan from the beginning of this year, according to a report from China Central Depository and Clearing.
A State-owned financial infrastructure provider, CCDC offers registration, depository and settlement services for financial products.
During the first six months this year, commercial banks issued fund-raising asset management products that netted 83.44 trillion yuan, compared with the full-year (2016) figure of 168 trillion yuan, it said.
The largest part of such funds is invested in bonds. It accounted for 42.51 percent of all related investments by June-end, according to the report.