Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 101 2. The wealth management business of the commercial bank (Commercial banks generally are those banks offering traditional retail banking services such as deposit taking, loans, etc. to consumers.) By the end of 2017, the existing balance of the wealth management business of the commercial banks was RMB29.54 trillion (USD 4.3 trillion). 5 As the difference between the original rules on wealth management business of the commercial banks and the New Asset Management Rules is the largest, the impacts of the New Asset Management Rules on the wealth management business of the commercial banks is also the largest among all asset management businesses. The major impacts are as follows: • Breaking the capital pool. Many wealth management products of the commercial banks operate in the form of cash pooling, in which the commercial banks will pay the principal and fixed income to clients through the rolling issuance of wealth management products. The New Asset Management Rules requires the commercial banks to break the capital pool and establish a management model so that the client’s fund corresponds to the assets invested by the product with matched duration. We believe that such a requirement will have a tremendous impact on stock wealth management businesses. This is also why the New Asset Management Rules have a transition period for more than 24 months. • Establishing an independent subsidiary for asset management. The New Asset Management Rules requires the commercial banks to establish a subsidiary with an independent legal status to conduct asset management business after the transition period, which will last till the end of 2020. Currently, some commercial banks such as China Merchants Bank and Hua Xia Bank have already announced that they will establish subsidiaries for asset management. Such asset management subsidiaries are solely owned by the commercial bank. Although they have an independent legal status, great support is to be gained from the parent bank in various aspects such as sales of the products and as a source of capital-raising in the future. • Strict monitoring of the sales of publicly raised wealth management products. The corresponding detailed rules of the CBIRC lower the investment threshold of publicly raised wealth management products from RMB50,000 to RMB10,000 (USD 7,278 to USD 1,455). By drawing on the rich experience of retail funds, the corresponding detailed rules also impose stricter requirements on the practice of sales for the wealth management product of the commercial banks. 3. Trust business of the trust company By the end of 2017, the existing balance of various types of trusts was RMB26.25 trillion (USD 3.82 trillion). 6 The New Asset Management Rules also have a significant impact on the trust business, which includes mainly the following two aspects: • Breaking the “implicit guarantee”. The implicit guarantee means the manager of the asset management product or its affiliated party uses self-owned funds to pay investors the principal and/or the income when the product is at a loss. Implicit guarantee of all kinds of institutions is seen as a violation of the New Asset Management Rules. Since the arrangement of implicit guarantee is most common in trust business (especially in debt-financing trust), the trust company shall gradually get rid of the culture of implicit guarantee in the transition period. • Shrinking channel business. Channel business refers to business in which the manager is only responsible for administrative work and never makes decisions actively but rather obeys and executes the opinions of the investors. According to media statistics, at the end of 2017, the scale of channel business was as high as RMB18.44 trillion (USD 2.68 trillion) in the stock of trusts, which amounts to more than 70% of the total stock. 7 The New Asset Management Rules encourages active management and prohibits channel business that helps other asset management products to circumvent regulatory requirements, such as the investment scope and the leverage constraint. It is therefore imperative for the trust company to strengthen the ability of active management and gradually reduce channel business for non-discretionary trusts.