Move aims to make most of new rules; existing WMPs may be shifted to lenders' subsidiaries

A broader range of asset management activities are set to become integral to Chinese banks, following new rules.

The banking and insurance regulator announced the new rules on Dec 2 that allow qualified banks to set up their own wealth management subsidiaries.

As of Jan 19, nearly 30 banks had announced their plans to establish asset management or wealth management subsidiaries.

On Dec 2, the China Banking and Insurance Regulatory Commission issued administrative measures for wealth management subsidiaries of commercial banks, setting the threshold requirement for registered capital at 1 billion yuan ($147.35 million).

For the country's five largest State-owned commercial banks by assets, registered capital of their wealth management subsidiaries ranges from 8 billion yuan to 16 billion yuan.

The amount drops to 5 billion yuan for joint-stock commercial lenders and varies from 1 billion yuan to 3 billion yuan for city and rural commercial lenders.

A number of banks stated that they will consider introducing strategic investors to their wealth management subsidiaries later.

In the past, banks had limited options for asset management activities. For example, they were not allowed to invest directly in private equity funds or listed securities.

But, according to the new rules, banks can now step into mutual funds and private fund management after receiving necessary licenses for their subsidiaries concerned, said Melody Yang, a partner at international law firm Simmons& Simmons in Beijing.

"On the one hand, banks have already built up a wide distribution channel. On the other hand, because of the restrictions in the past, banks generally do not have a very large portfolio management team.

"So, it really takes time for them to recruit talent, integrate the asset management business into their whole business plans, and build up a strong portfolio management capability," she said.

By the end of 2017, the outstanding volume of China's asset management businesses exceeded 100 trillion yuan after rapid expansion in recent years.

At the same time, Chinese banking institutions recorded 29.54 trillion yuan balance of wealth management products or WMPs.

Standard assets such as bonds, bank deposits and interbank lending took a major part, or 68 percent, of the assets to which wealth management funds were allocated, said a report released by the China Banking Wealth Management Registration and Depository Center.

The majority of these WMPs will be transferred to banks' wealth management subsidiaries, whose establishment represents the general trend, said Yi Liping, analyst at the Shanghai-headquartered Hwabao Securities Co Ltd.

Private funds that meet regulatory requirements could cooperate with banks with regard to publicly and privately offered WMPs via investment consulting, or they could receive banks' privately offered wealth management funds through entrusted investment, according to the banking and insurance regulator.

"Under the pressure of removing implicit guarantees for wealth management products and shifting from an expected return model to a net value model for such products, banks will hopefully deepen their cooperation with private funds through their wealth management subsidiaries," said Yi in a report.

By allowing banks to set up wealth management subsidiaries, China is trying hard to open up the channel of financing via non-standard credit assets and the channel of equity allocation.

In this way, the country is looking to solve the problem of a mismatch between supply and demand of financing and to support the development of the real economy, the part of the economy that is concerned with actually producing goods and services, said Yang Rong, analyst at CSC Financial Co Ltd.

Banks will have significant advantages in wealth management after they launch subsidiaries focusing on this area of business, thanks to their large size of business, huge number of clients, wide distribution channels and strength in fixed income products.

However, banks are not familiar with equity markets and need to improve research and investment capabilities of their wealth management subsidiaries by building a strong team of talents, he said in a research note.

Meanwhile, competition between banks and mutual funds will intensify, as banks' fixed income products and wealth management products leaning toward cash management are likely to squeeze the market share of similar products offered by mutual funds, said analysts at Huatai Securities Co Ltd.