China’s new move to strengthen rules on the asset management sector has raised strong concerns and objections from Chinese banks due to the possible rush of redemptions as well as other risks involved. Financial markets would have a huge impact and could even experience systemic financial risks while wealth management products (WMPs) could initiate liquidity risks and increase market volatility.
The new rules were aimed to reduce leverage levels, restrict shadow banking activity, as well as closing loopholes that allow regulatory arbitrage. If these rules take in effect, banks will be forced to offload assets beforehand. Assets include stocks, selling bonds, and other liquid assets at a discount. Clients will also be asked to repay loans ahead of time.
Financial companies’ combined outstanding volume of asset management products total to about $15.41 trillion last year. This is equivalent to 29% of total assets of the country’s financial system.
“Every time when the regulators announce tighter regulations it would almost always benefit the large state banks and hurt the smaller ones, because they (the latter) are taking much bigger risks,” said a senior executive at one of the country’s big four state-controlled lenders.