New rules set to transform asset management

New asset management regulations will transform banks' wealth management business and their valuation capability will be improved under fair value management, analysts said.

Michael Hu, PwC China financial services partner, said on Thursday, "The current business model of wealth management is not sustainable. Principal-preserved wealth management may not prevail in the future. As a result, better use of funds calls for dedicated management and risk provision requires more sophisticated skills for practitioners."

Preventing and resolving financial risks is the top priority for the Chinese government. A series of regulatory measures, including the draft new rules on asset management, were introduced, highlighting the elimination of shadow banking as the most important task in risk prevention, PwC said.

According to listed banks' 2017 annual reports, the measures combating shadow banking had a particularly pronounced impact on joint-stock commercial banks and city and rural commercial banks, resulting in a considerable slowdown in growth of their assets and liabilities.

"While addressing shadow banking risks may bring pressure on banks in the short run, these growing pains are necessary to safeguard long-term stability as the risks are better reflected," Hu said.

About 70 percent of the total size of assets under management by commercial banks in China will stay in the banking system, while the rest may flow to other investment channels including public and private equities, after the forthcoming launch of new rules on asset management, according to global management consulting firm Oliver Wyman.

Cliff Sheng, co-head of China at Oliver Wyman, said on Wednesday: "In the past, non-standardized debt assets used to form a major part of the underlying assets of banks' wealth management business in China ... Under the new regulatory policies, however, part of the debt assets will turn from shadow banking assets into consumer finance assets and supply chain finance assets. The rest of the debt assets will turn into open assets in the secondary market or private equity assets. The latter two segments of assets will flow out of banks."

The total size of assets under management by commercial banks in China is between $4 trillion and $4.5 trillion, said Ray Chou, a partner at Oliver Wyman.

"The forthcoming launch of new regulations on asset management will have a relatively big impact on the existing models of asset management business in the banking sector... How to acquire assets effectively will become a core competence for banks because they can no longer make earnings from the maturity mismatch," Chou said.

"Large banks had started making a transition toward net-worth wealth management products (which are similar to open-end funds) long before the regulators released the draft of the new rules," he said.