What has changed, and what does the future hold for the RMB100 trillion asset management industry in China now that new rules are firmly embedded? Frankie Wang reports
Does that old saying, “cash is king”, hold true in the current sluggish economy? Business tycoon Warren Buffett is the champion of cash; his Berkshire Hathaway had stockpiled US$137 billion at the end of the first quarter, with a net loss of US$49.75 billion for the same period. Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, who once famously said that “cash is trash”, has also witnessed a slump of 20% by the end of the first quarter for the company’s flagship fund Pure Alpha II, as reported by Bloomberg.
China’s asset management sector is struggling against the Sino-US tussle and the pandemic. The cashflow of financing parties is tighter, the expected rate of return of asset management products is falling, and heightened regulations also pose great challenges.
In April 2018, the Guidelines on Regulating the Asset Management Business of Financial Institutions was issued, and anticipated to set off a new era of “mega asset management”, when the whole sector would be under standardized regulation. The guidelines explicitly prevent banks from providing financing to clients through third-party trusts or asset managers (or the so-called channel service, where third-party trusts serve as channels to funnel the funds from the banks to companies), and also to prevent financing platforms from making guarantees of full repayment to the investors when borrowers default and require deleveraging.
Even with such heightened regulation, by the end of 2019’s second quarter, the size of assets under management in China was still as high as RMB115.83 trillion (US$16.55 trillion), according to the statistics of PY Standard, an asset management data company.
Since then, detailed regulations of the guidelines have been promulgated, and these asset managers have embarked on transitions at varying speeds. Tony Wang, a senior partner at Wintell & Co in Shanghai, believes the guidelines serve two purposes. “On the one hand, it unifies the regulation, reducing the opportunities of policy arbitrage, while on the other hand, it aims to curtail the size of non-standard financing to decrease the possibility of a systematic financial risk,” he says. “The whole sector is advancing towards these two goals steadily.”
Zhu Zhitong, a partner at Hylands Law Firm in Beijing, adds: “The regulators and judicial organizations now have more refined targets for supervision, and attach greater attention to whether the sector really services the real economy, asking the sector to re-commit themselves to basics.”