China unveils new sweeping rules for low income investors

China unveils new sweeping rules for low income investors

SHANGHAI – Retired Shanghai truck driver Shen Xipei shunned risky stocks and low-yielding deposits and instead put his life savings into a wealth management product (WMP) sold – and guaranteed – by a bank.

Soon, however, investors like Shen may start switching into other assets after Beijing published draft guidelines on Nov. 17 to ban financial institutions from guaranteeing investors against losses, tightening supervision of what the central bank says is a $9 trillion asset management industry.

A move away from bank WMPs by armies of Chinese investors – which some analysts expect – would likely trigger a seismic shift in China’s asset management industry, with the new rules apparently favoring transparent mutual fund products.

“I bought the WMP because I trust banks. They don’t run away with your money,” said 63-year-old Shen. The product he bought from Industrial Bank promised an annualized return of around 4.15 percent – far exceeding the 1.5 percent yield on one-year bank deposits, he said. “But if they no longer guarantee my principal, I’ll definitely put my money elsewhere.”

It remains to be seen where, exactly, the flood of cash will slosh, but some analysts expect relatively safe bond funds or more liquid money market funds to benefit. With limited options for onshore investments, people may also park their money in already inflated real estate markets.

“When implicit guarantee fades out … demand for off-balance-sheet WMPs may partially switch to similar products such as money market funds or bond funds,” said Sophie Jiang, banking analyst at Nomura. “We see stronger competition for deposits as loopholes around WMPs get fixed.”