China's financial watchdogs are considering casting a huge new regulatory net over the country's vast shadow banking sector.
The central bank has spearheaded the drafting of new regulations to tame China's 60 trillion yuan (HK$67.7 trillion) "asset management" industry.
According to people who have seen the draft regulations, the rules would bring the various kinds of asset management products and investment schemes offered by all kinds of financial institutions under the one regulatory umbrella.
Oversight for the flourishing sector is now split between the securities, banking and insurance regulators.
China Minsheng Banking chief analyst Wen Bin said regulatory standards differed between watchdogs and a unified system would help regulators cut systemic risks and financial leverage.
"China's financial innovation has grown quickly in the past few years and the blending of financial operations through asset management products has challenged the fragmented regulatory system," Wen said.
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Mainland financial institutions, including banks, mutual fund firms, brokerages and insurance companies, have rushed to set up asset management schemes, raising funds from clients and then investing in a range of markets and projects. These schemes are usually beyond the watch of regulators and harbour growing risks for the country's financial stability – something the leadership is determined to eliminate ahead of a big power reshuffle due late this year.
If rolled out, the rules would ban financial institutions from promising clients a minimum or fixed return from their products.
Institutions would have to contribute 10 per cent of their management fees to a risk reserve fund, and funds in one "asset management product" could not be used in another, except in authorised cases.
Institutions would also not be able to create a "capital pool" of money to put into various products because pooling funds often led to debt default. In addition, the funds could not be ploughed directly into "non-standard" assets such as a stand-alone project with special terms and returns.
The draft rules also put ceilings on "leverage" for structured products. If a product is designed for fixed-income investment, the leverage rate should be no higher than three times the principal.
China Merchants Bank researcher Liu Dongliang said the proposed rules targeted all financial institutions.
"It shows China's determination to reduce regulatory arbitrage and further contain financial risk," Liu said.
DBS Vickers China banking analyst Chen Shujin said the draft document spelled out the central bank's leading role in the multiagency crackdown on shadow banking. "We expect the impact on banks to be neutral because the tone seems to clarify the business nature of the services that banks tend to offer through cooperation with trust companies and brokerage companies," she said.
Chen said the China Banking Regulatory Commission might add further detail to the rules down the track. It introduced new draft rules governing commercial banks' off-balance sheet businesses in November, and urged lenders to set aside impairment and provisions for risky business.
Beijing has long planned to regulate asset management businesses, particularly since the 2015 mainland stock market rout exposed systemic financial problems and as defaults on trusts and bonds have risen in recent years.
Prevention of financial risks and asset bubbles has also become a higher priority this year, according to the Central Economic Work Conference.
The central bank did not reply to a faxed request for comment.