Chinese banks:Implications of Comprehensive Regulation on Asset Management

China’s financial regulators, led by PBOC, are jointly drafting new rules forasset management businesses, 21cbh reported. This new regulation may coverwealth management products (WMPs) issued by banks and assetmanagement products (AMPs) issued by NBFIs. These WMPs/AMPs are theprominent form of China’s shadow banking credit. Key measures here aremainly summarization of previous regulations, which include 1) prohibitingimplicit guarantee, cross-ownership and investing in non-standard creditassets; 2) requiring proper level of capital and provision charge and 3) puttingcaps on leverage ratios. The new regulation would be phased in after thematurity of existing products and only apply for new issued WMPs/AMPs.

    This is the first time that China’s financial regulators mulled a centralized,comprehensive regulation to curb the shadow banking. In the past theproliferation of shadow banking is mainly due to the fragmented regulatoryoversight. While since May 2016 there have been many tightening policies,shadow credit growth actually stayed strong due to lack of coordinationand slow implementation. We estimate shadow banking credit grew by16% yoy in 2016 to reach Rmb45tr, or 22% of system credit. This is clearlynot the situation that the PBOC desires. This new guideline suggestsgovernment’s determination to strengthen the regulatory controls (see ourreport No more hiding from shadow and Tightening regulatory noose).

    It is the continuation of financial deleveraging engineered by the PBOC,mainly targeting shadow banking and bond markets. In these two markets,speculators (mainly NBFIs and smaller banks) have been borrowing shorttermfunds to leverage up, buy long-term assets and chase yield, many ofwhich were packaged through WMPs/AMPs (see 2017 outlook).

    Implication #1: It is likely to drive down system credit growth modestly,from 16.4% yoy in 2016 (2015: 15.4%) to c.14-15% yoy in 2017.

    Implication #2: Joint-stock and city/rural banks could suffer capital andearnings risks, as they are the key players in shadow banking market.

    Among listed banks, the Big Four banks have very little exposure toshadow banking credit at 3% of total assets as of 1H16, while smallerbanks’ shadow credit had reached 21% of total assets. Individual namesamong H-share, Huishang (33% of total assets), CITIC Bank (25%) andEverbright Bank (25%) are the heaviest exposed to shadow banking.

    We continue to prefer CMB/ICBC/BOC/CCB (6-13% upside), while remaincautious on the rest. But we do not see recent rally as a structural re-rating,as China’s structure issue remains unsolved, i.e. still credit-driven.