Following the introduction of the new asset management regulation in the first quarter of 2018 in China, commercial banks' off-balance-sheet financial products were restricted and on-balance-sheet products, having fixed interest rates, were limited. As a result, commercial banks had to enhance their on-balance-sheet products by offering more structured products, while wealth management off-balance-sheet income funds led to a competitively large increase of domestic structured products. Yang Lu (pictured), vice president of structured products at Citic Securities (Citics) stated his perspective on the market in China, about the impact of the new regulation, and how the new framework could benefit the domestic structured products market.
The Chinese market will keep expanding and with the new asset management regulation this growth is expected to gradually increase in the next six to twelve months, according to Lu.
''In 2017, the growth of the domestic floating linked structured products was still very low compared to the one of the fixed-rate products,'' said Lu, adding that domestic investors are seeking income through investment linked structured products, although usage is not as widespread as with foreign investors. "On the other hand, compared to the overseas markets, there was a relatively high demand for domestic fixed-rate products."
Capital protected products had a significant share in China's structured products market in 2017 and this trend is expected to continue in the upcoming months as well. "The driving force was divided in three aspects: capital protection, ability of the products to obtain revenue and customer's level of knowledge in regards to the structured products market in China," said Lu. ''From the perspective of the ability of the products to obtain revenue, commercial banks will also tend to choose offshore absolute income funds with outstanding historical performance as the linked standard of guaranteed-structured products.''
In the first quarter of 2018, domestic investors' main tendency was to choose principal-guaranteed structured products linked to domestic stock indices, according to Lu. ''On the other hand, index-linked structures were generally a simple European bullish call or spread option," said Lu.
China is facing challenging changes which will continue to transform the structured products market in its' own way.
According to Lu, securities companies and commercial banks are in more of a cooperative relationship on the structured products battle field, because banks usually choose to use the method of buying over-the-counter options from securities companies and to use floating-linked earnings.
''At the moment, the biggest sellers of domestic structured products are still the commercial banks,'' said Lu. "Securities companies compared to commercial banks are much smaller when we talk about direct sales of structured products."
The new regulation will also help the market to expand as securities companies and commercials banks will be side by side and working on a more collaboratively basis. ''Domestic securities companies are equivalent to suppliers and commercial banks are equivalent to sellers of structured products, which together will promote the development of the business,'' said Lu.
China's long-awaited 'super guidance' for the wealth management industry was released in early March. The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions is aimed at 'preventing financial systemic risks' and 'serving the real economy', and seeks to introduce a unified standard applicable across China's asset management industry.
Under the previous regulatory regime, financial institutions and financial products were regulated by three distinct regulatory bodies - the China Banking Regulatory Commission, China Securities Regulatory Commission and the China Insurance Regulatory Commission.The segregation of supervision across these different regulatory bodies has sometimes led to ambiguity and regulatory arbitrage.
Citics is one of the top security brokers in China.The securities firm won three awards on SRP's 5th Asia-Pacific Wealth Management and Fintech Conference 2018 in Singapore - Best Distributor, Best Performance and Best Yield Enhancement Distributor.