Ten-year government note yields last week hit the psychologically important 4% level as investors braced for sweeping rules to curb risks in the country’s $15 trillion asset-management industry.
Caving into social pressure, banks in China have been bailing out wealth-management products that have gone bad. That’s not going to be allowed come June 2019. If an offering defaults, issuers or manager can’t use their own funds to prop it up or roll the product over into a new one. Those found violating the new conditions will be fined.
There will also be big changes to the types of debt offerings wealth management products themselves can invest in.
Beijing has deemed that interest rates paid by wealth management products are too high. Many are short term — only 7% have a maturity longer than one year, according to CICC Research — and most yield around 4% to 5%.
To ensure those juicy returns on the front end, asset managers have had to move ever further up the yield curve on the back end, buying higher-risk, longer-term securities. As a result, more than 15% of banks’ wmp funds are in so-called “non-standard debt products,” which have tenors of up to three years.
Under the new rules, any wealth management products that invest in non-standard debt, like debt-for-equity swaps that are less liquid than stocks or bonds, must have at least the same maturity as the underlying obligation. In addition, only funds raised via private placements can invest in non-standard debt; funds sold to the general public are restricted to buying liquid instruments, such as shares or debentures.