Wealth management market: No guaranteed benefit promise to investors

The China Banking Regulatory Commission on July 11 issued a circular on improving the management system of banks' wealth management business, and banned them from including a guaranteed benefit promise in the description of their wealth management products.

Banks are required to include the following warning in a prominent position of the sales document of any wealth management product: "Wealth management products are not deposits. This product involves risks, and investors are advised to be cautious when making investment decisions."

The scale of Chinese banks' wealth management market has been expanding at an average annual rate of 100 percent since 2005. By the end of May 2014, there were 50,918 wealth management products offered by more than 400 financial institutions in the banking sector around the country, with the book balance of wealth management funds hitting 13.97 trillion yuan ($2.25 trillion).

The end of the guaranteed benefit promise to investors is good news for the market.

First, it will help reduce the real economy's financing costs and contribute to achieving China's stated goal of creating a relaxed monetary environment for the rural economy and small and micro-enterprises.

Second, it will make the bond market and the stock market more attractive, helping domestic investment and financing markets to restore their ability to tap their internal potential.

Third, it will help curb chaotic credit expansion and dampen the expansion speed of shadow banking.

And, last but not least, it will encourage investors to adjust their asset structure and make them aware of the risks of wealth management products.

In this circular, the Chinese central bank has set out the principles and systematic methods for preventing financial risks, which is the most pressing matter for China's current financial governance - and this move will have a far-reaching influence on the country's financial reforms in the long term.

We have reason to believe that - after the dissipation of the smog brought about by the guaranteed benefit promise - the Chinese financial market will be able to welcome clear skies and sunshine again.

The author is a certified financial planner and independent commentator. The views expressed here do not necessarily reflect those of China Daily.