A widespread crackdown on China’s shadow-banking industry could lead to foreign asset managers with wholly foreign owned enterprises (WFOEs) in the country to lose investments from wealth management products (WMPs).
Last month, China clarified the definition of financial institutions (FIs). It said private fund manager (PFM) WFOEs are no longer considered FIs and non-FIs are prohibited from issuing or selling asset management products.
What’s more, FIs are also not allowed to use asset management products to invest in commercial banks’ credit assets or provide channel service in an attempt to bypass the new regulations.
China also forbids FIs from conducting asset pools to manage funds raised through asset management products.
It said FIs must make provisions and set aside 10% of their management fee income from asset management products as risk reserves and that FIs providing implicit guarantees on products will be punished.
A lot of these directives are targeted at the shadow-banking sector and WMPs. As such, banks will be prohibited from investing in non-FIs, and any portion of these monies will not be directed towards PFMs.
Non-FIs are excluded from selling AMPs except where otherwise provided for by the law. Such an allowance is seen as allowing for PFMs to operate, as otherwise the products they issue, in their RMB 11.1 trillion market as of end-December 2017, would be banned.
It is generally thought that the recent legislation is aimed at FIs and their subsidiaries which contribute to the shadow-banking sector in China, like the subsidiary companies of FMCs, rather than at PFMs directly.
Armin Choksey, partner for asset management at PwC Singapore, said the full extent of the changes will remain uncertain until a practical interpretation is provided.
He said currently a more immediate cause of concern is the additional guidance stating that Chinese insurers and banks are only able to invest money and give mandates to FIs.
Being removed from the FI definition, but given legal rights to undertake AMB, means that PFMs will no longer be able to raise money from insurers and banks as institutional investors, he added.
Foreign asset managers who have established a PFM WFOE may find their fundraising activities severely hampered by this development and those who have been considering establishing one may have to completely redevelop their strategy.
Choksey said there are about 20 PFMs in China.