MNI: New China Asset Mgmt Rules Put Crimp In Bond Market

     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

regime.

     "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."

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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