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BEIJING (MNI) - Sweeping new regulations targeting asset management
products, including banks' wealth management products, announced on Friday by
the People's Bank of China and other regulators are expected to have a negative
near-term impact on the bond market, with the containment of banks' off-balance
sheet businesses leading to weaker demand for bonds.
Two core standards lie at the heart of the new regulations: The first is a
ban on banks or other financial institutions from implicitly guaranteeing their
AMPs and WMPs -- in other words, the holders of AMPs and WMPs must now be
prepared to shoulder the loss on such products, rather than the banks and other
financial institutions themselves. The other core regulatory standard is a
restriction on investment in non-standard assets.
The new regulations state that a net value calculation method should be
applied to AMPs, which should be based on its current fair market value and
reflect the profit and risks of underlying assets, compared with the previous
regulatory standard where the value of AMPs could be calculated based on the
past values of underlying assets.
Under the new rules, if the net value of an AMP/WMP is below the book
value, which means the AMP or WMP suffers from losses, financial institutions
cannot pay the entirety of the principle on the products to investors, making it
seem like no loss on the products was incurred, as has been standard practice by
banks until now.
"In the past, banks and trusts were the main types of financial
institutions that used to bail out their WMPs and AMPs," Zhongtai Securities
said in a report published over the weekend. "So the attraction of WMPs will
decline in the future, and the expansion of WMPs will be restricted and the
scale of WMPs might even decline."
Some analysts warned that the potential negative impact of the new rules on
the bond market could be much larger than expected.
"For now, almost half of the underlying assets of WMPs are bonds (worth
around CNY15 trillion). So if the WMPs mark their value to the market as the
regulation suggests, while banks cannot bail out WMPs, the current bond bear
market ... will likely lead investors to withdraw their money from those WMPs,
which in turn will force banks to sell off their bonds and cause further
downward pressure on bond prices," Deng Haiqing and Chen Xi, analysts at Jiuzhou
Securities, warned on Monday. "That will cause a lot of pain beyond the
imagination of regulators and investors, and the bond market and banking stocks
will suffer from huge fluctuations."
In addition, the new rules state that AMPs shall not invest in credit
assets in commercial banks directly or indirectly, and asset management products
that directly or indirectly invest in non-standard assets shall not mature
before non-standard assets expire, effectively restricting investment into
non-standard assets. This part of the rule could in itself be a net positive.
"The new rules try to make AMPs focus on investment into standard assets
like stocks and bonds, and restricts the invisible expansion of non-standard
assets and credit assets," Dong Dezhi, an analyst at Guosen Securities, wrote in
a report over the weekend. "That will support the bond market in the long term
by boosting demand for bonds."
Other analysts don't think that the lift in demand from the renewed focus
on standard assets will be significant, however.
"Large amounts of non-standard assets can be transformed into standard
assets or loans. Moreover, banks can issue longer-term WMPs or lower the terms
of non-standard assets to adapt to the new rule," Zhang Xu, an analyst at China
Everbright Securities, said on Monday. "In fact, non-standard assets only
amounted to 16% [of all assets] as of the first half this year, so the effect of
standard assets replacing non-standard assets should be very limited."
On the whole, though, the new regulations are not likely to be an overall
positive for the bond market in the short term, as previously anticipated by
some investors. However, the same investors expect market sentiment will take a
turn for the better eventually -- after the market adjusts to the new regulatory
"The new rules will regulate and restrict the expansion of banks'
off-balance business ... by restricting the expansion of WMPs," analysts at
China International Capital Corp. said during the weekend. "In the long term,
preventing bailouts will increase the attractiveness of deposits against WMPs,
which will help banks lower the costs of deposits."
"However, in the short-term, reining in the expansion of WMPs will increase
the difficulties for companies to get funding, which will cause lower growth for
banks' assets and thus lower growth for banks' liabilities, leading to
restricted growth of banking sector liquidities," the CICC continued. "That will
help bond yields stay in a relatively high position."
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