International Financing Review Asia November 25 2017 15Please send job moves to
[email protected]China unifies
rules on
AM products
This is ‘turning point’ for regulators, says
analyst
China’s central bank issued sweeping
guidelines to tighten rules on the asset-
management business, Beijing’s latest step
to fend off systemic risks in the country’s
rampantly growing shadow banking sector.
The guidelines unify rules covering AM
products from banks, trust firms, insurance
AM companies, securities firms, funds and
futures companies, the PEOPLE’S BANK OF CHINA
said in a November 17 joint statement
with the banking, insurance, securities and
foreign-exchange regulators.
At the end of 2016, the collective
outstanding volume of their AM businesses
stood at Rmb102trn (US$15.38trn),
including Rmb29trn of bank wealth-
management products and Rmb17.5trn in
trust products, according to the PBoC.
The new rules aim to close loopholes that
allow regulatory arbitrage, reduce leverage
levels to curb asset-price bubbles and rein
in shadow-banking activity.
The new rules will set leverage limits
for AM products. They will cap the totalassets-to-net assets ratios at 140% for open
mutual funds and 200% for private funds.
Investors will be prohibited from pledging
their shares in AM products as collateral
to obtain financing, a practice that will
increase leverage.
The central bank also said financial
institutions must break the practice
of providing investors with implicit
guarantees against investment losses.
Financial institutions will also be
forbidden from creating “capital pools” to
manage funds raised through AM products.
The practice allows banks to roll over the
products constantly. The investment losses
will be implicitly covered with the issuance
of new products.
The draft guidelines are the latest and
most comprehensive set of rules that
financial regulators have proposed to fend
off shadow-banking risks, whch can spread
across different asset classes.
“Clearly, this is a critical turning
point of the financial regulations,” said
Zhou Hao, a Singapore-based analyst at
Commerzbank. “Over the past few years,
while the financial risks were rising, the
overall regulations were actually behind
the curve.”
PBoC Governor Zhou Xiaochuan has
warned that China’s financial system
is becoming increasingly vulnerable
due to high leverage and accumulating“hidden, complex, sudden, contagious and
hazardous” latent risks.
Financial institutions will not be allowed
to use AM products to invest in commercial
banks’ credit assets or provide “channel
service” for other institutions to bypass
regulations, according to the statement.
Also, financial institutions will be
required to provision 10% of their
management fee income from AM products
as risk reserves.
“The coordinated and unified regulatory
requirements on financial institutions’
AM products will reduce the scope for
regulatory arbitrage and the economic
incentives behind shadow-banking
practices,” said David Yin, a senior analyst
at Moody’s.
Earlier this year, China set up a top-
level committee under the State Council
to safeguard financial stability, with the
central bank playing a leading role.
The transition period for the new
regulations lasts until June 30 2019, the
statement said.
“The new requirements will push AM
business to go back to its essence and
prevent risks to transfer cross-sector and
cross-markets,” said Dong Ximiao, a senior
researcher at Chongyang Institute for
Financial Studies at Renmin University of
China.
SHU ZHANG, RYAN WOOKKR cuts CICC stake more than half
KKR has sold more than half of its stake in
CHINA INTERNATIONAL CAPITAL CORP for HK$1.52bn
(US$194.6m), according to a stock exchange
filing.
The US private-equity firm sold 74.
million shares, through subsidiary KKR
Institutions Investments, on November 14
and 16.2 million the next day at an average
price of HK$16.82 each.
As of September 30, KKR held 166.
million shares, or a stake of 10.97%, according
to a regulatory filing from CICC.
In 2010, KKR, PE peer TPG Capital,
Singapore sovereign wealth fund GIC and
Great Eastern, the insurance arm of Oversea-
Chinese Banking Corp, acquired a 34.3% stake
in CICC from Morgan Stanley for US$989m.
Great Eastern sold its entire stake earlier
this year, according to Thomson Reuters data.
Levin Zhu, the son of former Chinese
premier Zhu Rongji, ran the country’s oldest
investment bank for many years. CICC built
its reputation on bringing large state-owned
companies to list overseas.In recent years, rivals have eclipsed CICC as
the number of sizable state-owned IPOs has
dried up. Also, other banks have responded
with build-outs of their retail broking and
wealth-management offerings.
According to data from the Securities
Association of China, CICC was ranked 17th
in 2016 among 97 securities firms with
revenue of Rmb7.32bn (US$1bn), six places
higher than the previous year, but down
from first place in 2005.
In 2014, Zhu stepped down as CEO and his
successor, Bi Mingjian, has been vocal about
expanding the bank’s footprint in other
areas, including wealth management.
In 2015, CICC raised HK$6.28bn from its
Hong Kong IPO, meant to improve its capital
base and help the bank to compete with
rivals like Citic Securities and Guotai Junan.
The IPO represented a 41% increase in the
firm’s valuation since KKR and TPG acquired
minority stakes, according to Reuters’
calculations.
The return would be classified asdisappointing in the PE industry, where a
multiple of two times or more over five years
counts as success.
The stock, however, has risen 62% this
year, hitting a record in September when
CICC agreed to sell close to a 5% stake to
technology giant Tencent Holdings for
HK$2.86bn.
Tencent has 938 million active users on its
WeChat application and also offers wealth-
management services through its Licaitong
platform, which is expected to help CICC
expand its client base.
In March, CICC received regulatory
approval to take over unlisted China
Investment Securities. CICC said last
November it planned to acquire 100% of
Shenzhen-based CIS for Rmb16.7bn.
Analysts viewed the takeover as
complementary for the two firms, giving
investment banking-focused CICC the means
to boost its retail business.
CIS had around 200 retail branches across
China, versus CICC’s 20, according to the
two companies’ websites at the time the
acquisition was announced.
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