Chinese Banks Warn Risks of the New Management Rules

Ten Chinese banks have raised solid objections to the central bank’s recent move to tighten rules on the asset management sector, which may cause a rush of redemption among other risks.

Some banks in China raised their objections to the central bank’s recent move to tighten rules on the asset management sector.

According to some sources, who declined to be identified, the senior executives from the joint-stocks banks stated during a closed-door meeting in Shanghai last week that the rules would have a big impact on financial markets and could even trigger systematic financial risks.

The executives also added that the new rules on removing implicit guarantees for wealth management products could spark liquidity risks and increase market volatility.

The move was a rare protest by Chinese bankers as pressure mounts amid a government campaign to de-leverage and de-risk the country’s huge and increasingly complex financial system.

The new rules, which economists defined as “a critical turning point of financial regulations,” were aimed at closing gaps that allow regulatory arbitrage, reducing leverage levels and reining in shadow banking activity.

The sources said that if the recent draft of the new rules takes effect, banks would be force to discharge assets beforehand, including selling stocks, bonds, and other liquid assets at a discount and asking clients to repay loans before time.

“No matter which solution we choose, it will hit financial markets,” the sources added.

A data from central bank shows that the combined outstanding volume of asset management products managed by financial institutions amounted to 102 trillion yuan or $15.41 trillion as of end-2016.

According to the report, the data was equivalent to 29 percent of total assets of the country’s financial system.

The banks agreed to submit their joint feedback to the central bank in the hopes of amending the rules, which were made public in mid-November.

However, the People’s Bank of China (PBOC) did not immediately respond to a faxed request comment.

Some bankers said that the new rules will pose a direct challenge to a business model that small and mid-tier banks have been relying on to drive asset expansion and profit growth.

“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,” a source said.

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