The People’s Bank of China headquarters in Beijing – the central bank has proposed radical measures to tighten the country’s wealth management market and curb debt © Bloomberg

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Chinese banks are engaged in a fierce lobbying campaign to soften new rules that would curtail shadow banking, in a test of the government’s determination to rein in runaway debt

The People’s Bank of China and four financial regulatory agencies jointly issued draft rules last month to eliminate implicit guarantees, regulatory arbitrage and maturity mismatch in the asset management sector.

Regulators have issued a steady stream of rules since 2010 to curb risky non-bank lending, but bankers said the latest rules went far beyond previous efforts. In focus is the Rmb29tn ($4.4tn) market for “wealth management products” that banks market to retail investors as a higher-yielding alternative to deposits. 

The regulations forbid banks from guaranteeing a rate of return on wealth management products. Instead, banks will have to mark the products to market based on their net asset value each day, essentially transforming them into traditional mutual funds. 

“These rules are radically disruptive, far more than anything we’ve seen before,” said a wealth management executive at a mid-sized Chinese bank. “The overall direction is correct. Developed countries don’t have these kinds of guaranteed products. But we need more time for the transition.”

Concern about the impact of the rules has contributed to a rise in bond yields and widening of the spread between yields on government and corporate bonds in recent weeks. 

Last week, a document circulated online containing detailed feedback from 10 mid-sized lenders during a November 30 meeting convened by the China Banking Association. The association responded that “there is no such thing as a joint submission to regulators” but did not deny a meeting had occurred. Two sources confirmed to the FT the document accurately summarised the meeting. 

Regulators are seeking industry comment on the draft rules. Among the suggestions in the document is that the deadline to implement the new rules be extended from the middle of 2019 until the end of 2020. 

While the change shifts risks from banks to investors, bankers fear that, without guarantees, investors will stop buying the products, harming banks’ ability to raise funds. Non-bank financial institutions such as mutual funds and hedge funds are expected to benefit, since they will be able to compete with banks for investor funds on a more equal footing.

“We see this as a game-changer for China’s shadow banking. China will move closer to the western style,” said Qiang Liao, banking analyst for rating agency Standard & Poor’s in Beijing. “It’s a kind of convergence.”

Instead of selling products that promise to combine the high returns of a mutual fund with the safety of a bank deposit, asset managers will manage transparent portfolios whose returns depend on the performance of their underlying assets.

The rules also restrict banks’ ability to shift loans off their balance-sheets or disguise on-balance-sheet loans as “investments” to evade capital-adequacy requirements.

In a direct appeal to policymakers’ desire to maintain strong growth, the document warned the rules would “reduce the strength of support for the real economy”. A significant share of wealth management funds flow to local governments to finance infrastructure projects, which have emerged as a crucial pillar of growth. 

Top Communist party leaders have recently signalled they intend to shift focus away from growth at all costs towards the pursuit of higher-quality growth. Still, few expect that policymakers will tolerate anything other than a gradual slowdown. 

The PBoC and the China Banking Regulatory Commission did not respond to requests for comment.

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