20180718-兴业研究-Macro__China_Banking_Sector_Faces_Challenges_9页_505kb

China Banking Sector Summary

Core Content

The Chinese banking sector is undergoing significant regulatory reforms aimed at enhancing financial stability, reducing systemic risks, and improving transparency in asset management and liquidity management practices. These reforms are part of a broader effort to strengthen the financial system and align it with international standards.

Main Regulatory Reforms

1. Asset Management Product Regulations

• New Guidelines Issued: On April 27, 2018, the Chinese central bank, securities, insurance, banking, and foreign-exchange regulators jointly issued the final version of new guidelines for the asset management industry.
• Accounting Method Changes:
  • Asset management products must comply with the Accounting Standards for Business Enterprises (ASBE).
  • Close-ended products can use the amortized cost method, while open-ended products are likely to be measured by face value.
  • The switch from amortized cost to face value for money market funds (MMFs) could follow two paths: new MMFs are measured by face value, while existing ones continue to use amortized cost; or all new MMFs are measured by face value, and existing ones stop accepting new inflows.
• Standard Debt Assets: Trading of standard debt assets must occur in markets approved by the State Council, such as the interbank market and exchanges. However, the criteria for identifying standard debt assets are still unclear.
• Shadow Banking Products: Non-standard investments (shadow banking products) funded by banks' wealth management products (WMPs) must mature by the end of 2020 or be brought back onto banks' balance sheets.
• Exceptions: Five types of asset management products are exempt from the new regulations, including private investment funds, venture capital funds, government venture capital funds, asset-backed securities, and pension funds.

2. Large Exposures Regulation

• CBIRC Rules: The China Banking and Insurance Regulatory Commission (CBIRC) updated rules to cap commercial banks' exposure to single counterparties or groups of connected counterparties.
• Key Limits:
  • Exposure to a single interbank client or interbank group client cannot exceed 25% of tier-1 capital.
  • Exposure to a single non-interbank client is capped at 15% of tier-1 capital, with the balance of lending not exceeding 10% of net capital.
  • Exposure to a group of non-interbank connected counterparties is limited to 20% of tier-1 capital.
  • Exposure to non-interbank group clients with financial subsidiaries is capped at 25% of tier-1 capital.
  • Credit lines to major shareholders and related entities are limited to 10% of net capital, with combined credit lines capped at 15%.

3. Liquidity and Liability Risk Management

• Liquidity Risk Management: CBIRC revised liquidity risk management guidelines, requiring commercial banks to maintain a high liquidity asset adequacy ratio of 80% by end-2018 and 100% by end-2019.
• Liquidity Matching Ratio:
  • Funding from the PBOC is now included in the numerator.
  • The weight for deposits maturing within three months is reduced from 70% to 50%.
  • The weight for interbank lending maturing within 7 days is set at 0%.
• Deposit Ceiling: The regulatory ceiling for the ratio of deposits at the end of any given month to the average daily level of the month was lifted from 103% to 104%.
• CD Interest Rate Ceiling: The PBOC raised the CD interest rate ceiling for major banks, which may increase the attractiveness of bank deposits.
• Structured Deposits: These have grown rapidly since 2017, becoming a key funding source for banks due to slow corporate deposit growth and investor demand for principal protection and relatively high returns.

Key Information

• The new regulations aim to reduce risks in the financial system by tightening rules on asset management, large exposures, and liquidity.
• The transition period for shadow banking products ends by end-2020, requiring banks to either bring these products onto their balance sheets or allow them to mature.
• The regulatory framework is still evolving, with some aspects needing further clarification, such as the definition of standard debt assets and the specifics of WMPs' investments in PPP projects.
• The liquidity risk management changes are expected to improve the resilience of the banking sector against short-term funding shocks.
• The increase in CD interest rates and the regulatory changes on MMFs and structured deposits are likely to affect the funding structure and investment behavior of financial institutions and investors.

Conclusion

The Chinese banking sector is facing a series of regulatory challenges that aim to enhance transparency, reduce risks, and improve stability. These reforms, though complex and requiring further clarification, are expected to have a significant impact on the structure of financial products, the behavior of banks, and the investment choices of individuals and institutions.