China’s regulators have given the greenlight to Agricultural Bank of China (ABC) to set up a wealth management unit and start operations with a registered capital of RMB12 billion (US$1.7 billion). The approval comes amid a rise in the NAV wealth management products in the country.
ABC has become the latest of China’s big four state-owned lenders to get approval to launch a wealth management business from the China Banking and Insurance Regulatory Commission (CBIRC). Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of China have already launched their wealth management businesses.
ABC’s wholly-owned wealth management subsidiary, registered in Beijing, will cover both on-balance and off-balance sheet products as well as advisory and consultancy services.
The Chinese bank stated the launch is one of its “key reform tasks,”, adding that it will push through “prompt commencement of business.” The bank expects to launch its wealth management operations next month, according to local reports.
The RMB12 billion registered capital of ABC compares with RMB10 billion of Bank of China, RMB15 billion of China Construction Bank and RMB16 billion of ICBC.
CBIRC’s approval for setting up wealth management subsidiaries involves two steps: obtaining the right to establish the business and to start operations.
Even some municipal lenders, such as Bank of Ningbo and Bank of Hangzhou, have also received approval from the local regulator to set up their own wealth management units but did not obtain the approval to start operations.
Both Bank of Ningbo and Bank of Hangzhou have announced the launch of their respective wealth management subsidiaries with a registered capital of RMB1 billion. Currently, more than 10 municipal commercial banks have announced plans to launch their own wealth management subsidiaries.
Focus on NAV
Meanwhile, net asset value (NAV) wealth management products are gaining momentum in the country as the government introduced tighter rules last year to shake investor faith in implicit guarantee embedded in the products.
The number of NAV wealth management products stood at 9,494 as of the end of the second quarter, up over 16% from the previous three-month period, according to data from PY Standard.
NAV wealth management products are those based on fluctuations in their net asset value, providing a clearer picture of the kind of risk an investor is taking from purchasing a wealth management product, rather than promising an expected return that can be interpreted as an implicit guarantee.
“Having wealth management products on a NAV basis is in line with the government’s move towards a more market-based pricing in the financial market – i.e. products with zero risk and high return should not exist,” said Alicia Garcia Herrero (pictured), chief Asia Pacific economist at Natixis. “However, banks also react quickly to find regulatory leeway. For example, banks have switched to issuing structured deposits.”
Garcia Herrero added that banks setting up their own wealth management units make it easier for them to invest in non-standard assets, while the regulator has dialled down risk requirements for debt-for-equity swaps.
“Banks are also encouraged to set up asset management companies for debt-to-equity swaps with a risk weight on related equities at 150%, much lower than 400% for the first year and 1,250% thereafter, if held in the banks’ balance sheet,” she said. “These all point to more asset securitisation and the potential comeback of shadow banking in pursuit of short-term growth and stability in China.”