Big China fund business banned as shadow-banking clampdown gains pace
Two moves announced on Friday by the Chinese authorities – one involving the mainland's second biggest segregated-account (SA) fund subsidiary – have seen Beijing continue its recent clampdown on shadow-banking activities.
Minsheng Royal Asset Management, with Rmb822 billion ($129 billion) under management, has been banned from conducting new business for six months and told to make changes to its business approach.
The China Securities Regulatory Authority (CSRC) has also begun consulting on stricter capital requirements for such subsidiaries, which function as a channel for shadow banking, the private financing sector that has seen rapid growth in recent years.
Beijing-based Minsheng Royal AM had published misleading yield figures for three SA products, in that their return expectations were not based on their underlying assets, according to the Asset Management Association of China (Amac). Amac, a self-regulatory body under the CSRC, is responsible for the supervision and product registration of fund firms’ SA subsidiaries.
In addition, Amac said Minsheng Royal AM had not properly separated the three products’ capital when it came to matching their underlying capital to their investments, resulting in “unclear management”.
The firm, part of Minsheng Royal Fund Management, was also criticised for not disclosing sufficient information on areas such as portfolio investments, performance, financial data and risk factors.
Minsheng Royal AM – a joint venture between Minsheng Bank (which holds 63.33%), Royal Bank of Canada (30%) and Three Gorges Finance (6.67%) – accepted the punishment without objection on July 25, said Amac.
This is the second ban this year for Minsheng Royal AM, the first of which came in April and was for three months. The reasons for that action were not made clear.
On May 5, Amac had also banned Citic-CP Asset Management, a SA subsidiary of the joint-venture fund house between Citic Trust and UK insurer Prudential, from conducting new business for six months.
As for the consultation on two sets of new proposals, the CSRC said problems and risks among fund houses’ SA subsidiaries – a sector worth Rmb11 trillion ($1.66 trillion) – were growing too fast. Since getting the green light from the CSRC in 2012, the sector has grown larger than the mainland mutual fund industry, which stood at Rmb7.9 trillion on June 30.
The proposals – for stricter requirements around risk management and net capital levels – were first sent to mainland fund houses in May.
Prior to that, Amac had set out risk-control requirements and guidance for Chinese fund houses and their subsidiaries in December.
Foreign asset managers with China fund joint ventures must now decide whether to continue funding any SA subsidiaries in light of the regulator’s increasingly close scrutiny, as reported.
Another recent move to restrict shadow-banking activity was that by China Banking Regulatory Commission to curb the growth of the industry’s $3.8 trillion wealth management product business. Banks will reportedly have more constraints on the products they can issue and partners they work with.