Authorities in China have paved the way for wealth management products in order to buy stocks. The policy makers in mainland China are trying to reduce the potential risks that are linked with wealth management products buying third-party offerings.
Wealth management product assets can now be invested by commercial banks by opening new accounts. The Securities Depository and Cleaning Corporation in China said that the funds could only be invested directly into income products in the past. Of course, there is still an aspect of approval from regulators that has to be done before commercial banks open accounts to invest their wealth management product assets into the previously sanctioned financial products.
China has introduced this change in rules to reduce financial risk. This is part of their bid to reducing the country’s shadow-banking system. The wealth management products that are offered by banks show potentially higher yields than deposits. They have been the main driver behind the off balance sheet lending, which China is cracking down on.
China wants to reduce the dependency that banks have developed on intermediaries in order to invest in stock markets. This process is more often than not an opaque operation, which carries a significant overall risk.
China’s regulators took a softer than expected stance on the rules surrounding the wealth management industry that is valued at over $15 trillion. The announcement they made late on the 22nd of June, 2018 outlined the guidelines that were aimed at the wealth management products. This was done soon after the announcement by securities and banking regulators published rules of their own regarding particular wealth management products.
China’s stance towards the sprawling shadow banking system operating in the country turned out to be softer than anticipated with the announcement of the new rules. They will be maintaining the overall vision of the policy proposals initially made, while the new changes offer a more flexible manner in which the wealth management products can be managed. This is why the policy stance can be looked at as a softer one than expected.
The main uncertainty which remains is how the regulators will guide the financial institutions with these documents. The shadow banking sector in China saw the largest net monthly drop recorded in June based on calculations made using the central bank’s data. The key guidelines by the People’s Bank of China are:
- Financial institutions can issue products of the current styles in order to invest in new assets which fall in line with government policy during the grace period.
- There can be some wealth management products valued using an amortized cost method.
- Products sold publicly can be invested into non standard credit assets like loans to high risk borrowers as long as they meet the regulatory requirements.
Primary Keyword: wealth management
Secondary Keyword: China