AMCs see rules creating transparency

or AMCs to the whole financial system.

Another key target is to minimize regulatory arbitrage, thus cutting rent-seeking, according to the country’s top financial regulators.

The new rules shall retain provisions related to restricting the so-called non-standard assets, such as trustee loans, that are less transparent and more risky, by financial players and investors, and eliminating complicated structured instruments, to guard against risks and make the financial sector better serve the real economy.

One of the key changes, as seen in the final version of the guidelines, is to assess the value of financial assets as per market prices. This will help measure their net value instead of setting rates of expected return, to better reflect the market risk.

Companies that offer WMPs and other investment products are required not to guarantee returns of principal and profit. Any violation of this rule will make them liable for punishment, the guideline said.

Such rules come in the wake of proliferation of credit by type and volume, including the so-called shadow banking sector, a space where certain financial entities carry out potentially risky credit and related activities outside the regulated banking system.

Tighter rules are seen as regulators’ efforts to rein in rapid growth of shadow banking, or the less-supervised asset management products, which have contributed a large part to such growth, becoming a potential risk in the form of banks’ unprotected loan exposures.

A report from Standard & Poor’s, a global credit ratings agency, said the new rules will speed up the changes in the shadow banking structure.

There are signs that additional regulatory scrutiny of shadow banking activities will continually increase in China, which could be a net positive for financial stability and liquidity risk prevention, said experts.

Through shadow banking activities, banks are believed to have hid loans using alternative accounting practices, thus circumventing regulatory restrictions such as credit allocation constraints. And those activities are mainly channeled through third-party financial institutions, including other banks and non-bank financial institutions.

Given that the global markets are interconnected these days, shadow banking could lead to unpredictable asset price volatility, and pose challenges to monetary policy regulation and financial risk management. In recent years, it has been seen as a major threat to financial stability not only in China but the world over.

sizesizeofofthetheshadowshadowbankingbanking assets assets worldwide worldwide by the by end ofthe2016end of 2016

As per data from the Financial Stability Board or FSB, by the end of 2016, the worldwide shadow banking assets reached $45 trillion, accounting for 13.2 percent of total global financial assets. It was a 7.6 percent increase from a year earlier.

In China, shadow banking products increased to $7 trillion in 2016, rising from 1.4 percent of total global shadow banking assets in 2010 to 15.5 percent in 2016, marking a 40.1 percent compound annual growth rate on an exchange rate-adjusted basis, according to the FSB.

It showed that shadow banking assets have exceeded 14 percent of China’s total financial assets, and it is nearly 65 percent of the total GDP in 2017. The segment is now the second-largest globally, just behind the United States where the segment accounts for 31 percent of the GDP.

As China’s banking industry still dominates the overall financial sector, banks’ WMPs accounted for the largest part of the asset management segment.

As a result of increased regulation, smaller Chinese banks, that rely on the interbank market and shadow banking for liquidity, may see rising funding costs, while larger banks with stronger deposit franchises may be relatively better insulated than smaller, less capitalized peers, experts said.

Fitch Ratings’ Grace Wu, who covers China banks, wrote in a research note, “The FSB’s narrow measure of shadow banking may not fully capture the range of activities in China due to their complexity”, although it is still manageable percentage

The Fitch analyst saw China’s shadow banking “as more systemic and complex” relative to more developed markets, with significant interconnectivity and risk for the banks.

“If the authorities’ measures do not slow growth in credit trends, the system will become more difficult to control,” said Wu.

In addition, the newly combined supervisory agency for the banking and insurance industries can support efforts to move toward a more comprehensive regulatory framework that can address risks across the financial system, said Fitch Ratings.

“A more unified approach could enhance regulatory oversight and help to limit contagion risks, which would be positive for the long-term stability of the financial system,” it said.