Chinese banks urged to rectify their self-issued wealth management products

They have until end-April to comply with CBRC's requirements.

According to Barclays, China Securities reported on 12 March 2013 that the CBRC has asked banks to conduct self checks and rectify their self-issued wealth management products (WMPs) that are managed by asset pools.

Here's more from Barclays:

Banks that are unable to meet the regulators' requirements by end-April will be punished, and may be stopped from conducting wealth management business.

It was also reported (Xinhua Net, 19 Dec 2013) earlier that the CBRC required banks to scrutinize and do internal risk checks on the sales of third-party financial products within 15 days.

A move to help lower liquidity risks exposed by banks' pooling practice

WMPs issued by banks are mainly managed in the following ways:
1) Single asset basis where issued WMPs are separately managed and directly linked to an underlying asset;

2) Asset pools for fixed-term WMPs, where different WMPs with fixed maturity terms are not linked to any specific asset, but to a pool of assets. In this case, it should not be too hard for banks to re-match the assets to the liability side; and

3) Asset pools for open-ended WMPs, where WMPs are linked to a pool of assets, that cash flows do not always match the timing of repayments. In this case a certain cash line is normally provided by the issuing bank to bridge the gaps between redemptions and new fund subscription, ranging from 1-5% of total WMP outstanding balance.

On the investment side, we understand that 70-80% of the WMP balance are allocated in liquid bond and money markets, 20-30% in other illiquid assets (e.g. project financing).

From our channel check, ICBC has consistently managed their self-issued WMPs on a single asset basis, with better matched asset/liability duration. Although banks that used to manage their WMP fund by asset pools are now trying to match each product with separated underlying assets, they are having difficulty clearing the asset pools for open-ended products.

Any difficulty in new WMP issuance might put pressure on the potential returns of the whole underlying pool and hence lead to a potential liquidity problem for banks, in our view.

The move by CBRC is in line with our expectation, as the regulator tries to mitigate the potential asset/liquidity mismatch risk of asset pooled products.

Particularly from late last year, when more attention was drawn to banks' asset pooled products after BOC Chairman, Xiao Gang, warned of the shadow banking risk and called WMPs a Ponzi scheme, in his article published in China Daily in October 2012.