China Herald: Regulating wealth management products

China is about to start regulating its financial jungle of wealth management products, one of the causes of its giant shadow banking system. Time to protect the consumers against those risky products, writes financial analyst Sara Hsu in the Diplomat. An overview of the regulations.

Sara Hsu:

Very little has been written about the regulation of Chinese shadow banking products, so we start here with a discussion of the regulation of banks’ wealth management products, since they have been so wildly popular in recent years. Wealth management products are products sold by banks that may be securitized off of bonds, stocks, loans, and other types of debt products. These products are normally sold to regular consumers, and may be of different (mainly short-term) maturities, interest rates, and risks. It is the consumer who bears the risks and loses her investment, should the wealth management product default.

These products became very popular in 2008 and thereafter, as growth in other areas of China’s economy slowed. Regulation through 2008 was relatively light; it began in September 2005 when the personal wealth management business was discussed by the China Banking Regulatory Commission (CBRC) for the first time. Certain types of wealth management businesses, such as that connected to guaranteed returns, required CBRC approval while other types did not. Risk management problems were required to be reported to the authorities. Overseas wealth management services were regulated and initiated in June 2006, and resulted in the generation of Qualified Domestic Institutional Investor (QDII) products, which were, as it turns out, not overly popular due to investment restrictions.