New regulations to overhaul China's outdated wealth management model

The principal-preserved model may not survive under new rules.

The current business model of Chinese banks’ wealth management business is not sustainable in the long run, according to accounting firm PwC.

“Banks’ wealth management business is set to transform under the New AM (asset management) regulations,” PwC noted as the “principal-preserved” type of wealth management may not prevail in the future. 

This comes as Beijing spearheads a widespread crackdown on the country’s $15t asset management sector by closing loopholes that previously allowed banks to escape regulatory scrutiny particularly on shadow banking products and off-balance sheet activities.

“The launch of deeper reform of the Party and state institutions marks a new stage for deepening reform in all areas,” a report from state news agency Xinhua quoted President Xi as saying.

Under the improved regulatory framework, valuation capability is set to be enhanced under fair value management although risk provision would require more sophisticated skills for practitioners.

“Funds prohibited from products with embedded structures in the future, leaving wealth management funds with fewer investment alternatives,” it added.

Banks have been feeling the pain of tighter oversight as the assets and liabilities of Joint-stock commercial banks and rural and commercial banks grew significantly more slowly in 2017, PwC noted.

Also read: China's shadow banking crackdown slows home market

“Whilst addressing shadowing banking risks may bring pressure on banks over the short run, (e.g. capital adequacy pressure), these growing pains are necessary to safeguard their long term stability as the risks are better reflected.”