China eases AM rules as trade war fears grow

Jul 23, 2018

To support growth as default risks rise and economic uncertainties intensify, China will now allow mutual funds to invest in non-standard debt, three months after it said they couldn't.

China eases AM rules as trade war fears grow

China has loosened its recently unified rules for asset management products as credit creation in the country slows, default risk rises and the wider economic uncertainties stemming from rising global trade tensions ratchet up dangerously.

While the asset management rules introduced in April seek to reduce the systemic risks within the Chinese financial system and to curb shadow banking, the Friday's rules update from the People’s Bank of China (PBOC) aims to provide a smoother transition period for the asset management industry by creating a friendlier monetary environment.

The original rules were too strict and corporates have found it difficult to obtain financing, Xia Le, Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria, told AsianInvestor.

Relaxing them can help supply liquidity to the market, he added.

Fifteen Chinese issuers have defaulted on 27 bonds in the onshore market so far this year, covering more than Rmb2.8 billion ($414 million) of debt, the Chinese newspaper 21st Century Business Herald reported last Friday.

It comes at a time when trade tensions between China and the US show no sign of abating and institutional investors across Asia are becoming increasingly concerned about the global economic uncertainty.

“The [economic] pressure from the trade war is large, so the internal pace [of deleveraging] has to be adjusted,” Xie said. "The strict regulation announced before has to be relaxed, but the overall direction has not changed."

In the updated set of PBOC rules, mutual funds can invest in non-standard credit assets (NSCAs) while meeting the duration matching and other relevant requirements. The original rules said mutual funds should mainly invest in standard credit assets and publicly listed equities, with private funds, commodities and derivatives allowed under certain circumstances.

Existing asset management products issued before the introduction of the rules can continue to raise new money. But the new funds should preferably invest in national projects and satisfy the financial needs of small and medium enterprises. These new investments should mature before the grace period ends in December 2020.

Standard debt securities in China are defined as those that trade in the interbank bond market or exchanges and have higher liquidity. NSCAs are typically packaged loans and debt for financing local government projects, infrastructure, property projects or other industries suffering from over-capacity. Such instruments form part of China’s shadow banking sector.

Source: PBOC

Total social financing (TSF), or aggregate financing to the real economy, includes official and shadow lending and hit its lowest level in May since July 2016, at Rmb763.6 billion.

That broad measure of credit creation picked up in June and stood at Rmb1.18 trillion, but was still much lower than the Rmb1.77 trillion seen in the same month last year.

ACCOUNTING RULES RELAXED

The April rules stipulated that asset management products will have to mark-to-market and disclose their net asset value (NAV) using a fair-value accounting method in most cases.

But the new rules also relax the accounting method for certain asset management products. During the transition period, the cost amortisation method is allowed for open-ended asset management products with a lock-in period of more than six months and invest in held-to-maturity bonds. Bank cash-management products can also use the cost amortisation method.

Asset management products that use amortised-cost based NAVs have a higher appeal to investors as their prices are less volatile, so they can better compete with money market funds that also use this accounting method, Chen Shujin, a Hong Kong-based banking analyst at Huatai Securities, told AsianInvestor.

By relaxing the rules around held-to-maturity bond funds, authorities want to divert some capital for corporate bond financing as TSF and the bond market are not doing well, Chen said.

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