(Yicai Global) Nov. 20 -- To regulate financial institutions' asset management business, better prevent and control financial risks and better serve the real economy, departments led by the People's Bank of China (PBOC) including the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission CSRC), China Insurance Regulatory Commission (CIRC) and the State Administration of Foreign Exchange, have drafted the Guiding Opinions on Regulating Financial Institutions' Asset Management Businesses (Opinions) and are now soliciting public comment thereon, per a notice on PBOC's official website on Nov. 17.

The Opinions aim to limit leverage-stacking and channeling businesses. Financial regulators will define fair criteria for various financial institutions' access to asset management businesses, while financial institutions must thereby perform their obligations of spontaneous management, and may not aid the asset management products of other institutions in evading regulatory investment scopes and leverage constraints as defined in regulations by offering channeling services. At the same time, the Opinions strictly regulate stacked leverage products and channeling services, proscribing the investment of asset management products in another layer of such products, and barring the recipients of such channeled investment from further investing it in any other products (except for publicly-offered securities investment funds). The Opinions further mandate that financial institutions may not offer channeling services for other financial institutions' asset management products to help them circumvent regulations on defined investment scopes and leveraging constraints.

Leverage-stacking business refers to banks' acts of absorbing funds by issuing negotiable certificates of deposit (NCD), then investing these funds in inter-banking assets such as inter-banking wealth management products, and then further investing in underlying assets with these inter-banking assets. In this chain, funds become leveraged at each layer further stacked, with the interest rate thus rising at each stage and the potential for conflicting terms of maturation thereby also arising. As various institutions engage in this chain -- commercial banks, funds, trust companies and insurance companies -- if each link falls within the administrative purview of different regulatory agencies, more latent risks may also arise.

'Channeling business' refers to acts by securities traders of issuing asset management products to banks to absorb their funds, and then buying bank bills with these funds, while the traders thereafter help banks extend indirect credit loans, while transferring relevant assets to off-balance sheets. Securities traders thereby serve as conduits for banks, which they charge for these 'bridging' services. The major form of channeling business was cooperation between banks and trust institutions until the CBRC banned this practice, whereupon banks started cooperating with securities companies instead.

The Opinions also control the leveraging of asset management products, imposing an upper limit of 140 percent on the debt ratio (total assets/net assets) of public placement products and on private placement products of 200 percent.

To restrain bubbles in asset prices generated by leverage stacks, the Opinions bar the custodian of an asset management product from engaging in financing by pledging the shares thus held, and likewise prohibit individuals from investing in asset management products with funds they hold in trust -- including bank loans -- and forbid enterprises with a high asset-liability ratio from investing in asset management products.

The Opinions also prescribe relevant measures against forced repayment, which here means that, after asset management products fall due, financial institutions must repay both principal and income to the investor, and if they cannot do so as scheduled or confront difficulty in so doing, the Opinions direct that financial companies must have corresponding fail-safes to guard against this eventuality.