New rules to streamline asset management firms

China tightened regulations for cash management-oriented wealth management products to firmly implement new rules governing the asset management industry, which is undergoing a huge transformation.

The China Banking and Insurance Regulatory Commission recently announced that it will apply the same regulations to cash management-oriented wealth management products and money market funds because they are similar products.

In the past, the regulations on cash management-oriented WMPs were loose compared with those for money market funds. As a result, banks' cash management-oriented WMPs were more attractive to investors than money market funds due to higher liquidity and returns, said Liu Bingbing, managing director and partner of Boston Consulting Group.

"The recently issued regulations will create a level playing field for cash management-oriented wealth management products and money market funds. It shows the strong determination of top policymakers and regulators to firmly carry forward new regulations governing the asset management sector. A major principle of the new regulations is to implement unified regulations on asset management solutions in various financial sectors according to their functions," Liu said.

In the past year, cash management-oriented WMPs were widely welcomed by many investors who were concerned about financial risks due to their increasing occurrence.

Cash management-oriented WMPs accounted for about 60 to 70 percent of the total volume of new WMPs that adopted a net value model rather than an expected return model. They were issued by banks after China announced new regulations governing the asset management sector, Liu said.

"Restricting the growth of cash management-oriented WMPs will greatly affect the growth of assets under management in the banking sector and the growth of revenues generated by WMPs offered by commercial banks, especially if we take into account that cash management-oriented WMPs are not just asset management products. They also help banks attract, serve and maintain clients more effectively."

"Because of the launch of new regulations, this type of product will go through further transformation and upgrading in the short term. Besides, commercial banks also face greater pressure to develop other types of WMPs that may raise the requirement on banks' WMP management capability in the long run," he said.

Following a decrease in the volume of low-risk quasi fixed-income products, the difficulties for banks to provide asset management services will increase significantly. The current market environment is also forcing bank clients to make a choice of either highlighting asset security while enduring low returns or taking higher risks to earn greater returns, he said.

Despite this, banks still have other solutions which include structured deposits and large-denomination certificates of deposit to mitigate the effect of tighter regulations on cash management-oriented products.

Min Cheng, head of investment products and investment advisory at the wealth management division of Standard Chartered China, said: "In the past, the wealth management business of the Chinese banking sector actually deviated from the real nature of asset management and separated itself from the real economy due to a lack of professional management. The launch of new regulations on the asset management business and wealth management products will completely reform the domestic asset management sector and raise hopes for the development of the wealth management business in the future."

Min said it takes time for Chinese investors who are used to principal protected wealth management products which provide guaranteed rates of return to assume the risk that they may suffer investment losses or WMPs may fail to meet expectations.

While banks are improving the assessment of investors' risk tolerance and the identification of different levels of risks associated with wealth management products, they will also step up investor protection.

"The top priority for asset managers is to strengthen their investment capabilities and to build and optimize their investment research platforms," Min said.