Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Services Regulation 102 4. Retail fund business of the mutual fund company A publicly raised fund managed by the mutual fund company in China can only invest in securities. By the end of 2017, the existing balance of retail fund was RMB11.63 trillion (USD 1.69 trillion). The New Asset Management Rules have relatively small impacts on the retail fund business. This is because historically there were regulatory requirements imposed on such businesses which insisted on diversified investment, independent custodian, net value management and repulsion of implicit guarantee. The impacts are mainly as follows. • Competing with the publicly raised wealth management products of the commercial banks . The New Asset Management Rules affirms the legal status of publicly raised wealth management products of the commercial banks in public placement. The corresponding detailed rules of the CBIRC allows “appropriate” investment in non-standardised (i.e. non-securitised) assets such as debt, by the publicly raised wealth management products. The corresponding detailed rules also stipulate that no approval is needed for the issuance of the publicly raised wealth management products of the commercial banks (while the issuance of the retail fund requires the approval of the CSRC). Therefore, policies that are unique to such products and differentiate them from retail funds, may put retail funds in a disadvantageous position when competing with those products in the future. • Suspending the approval of the registration of money market funds. In 2017, among all the retail funds, the scale of investment by money market funds reached RMB7.14 trillion (USD 1.04 trillion). 8 And up to now, all money market funds in China have been measured based on amortised costs. Due to a series of restrictions imposed by the New Asset Management Rules on the use of amortised costs as the method for valuation, we believe that in future it will be difficult for a mutual fund company to issue a money market fund with value measured in such a way in the short term. Nonetheless, there are no detailed rules on money market funds, with value measured based on market price (market valuation method) yet. Thus, the supply of new money market fund products is temporarily suspended, though the stock money market fund can be continually operated. 5. The privately raised asset management business of the securities company, the mutual fund company and the futures company These companies and their specialized subsidiaries may also issue asset management schemes similar to trusts, and conduct privately raised asset management business. By the end of 2017, the existing balance of such asset management schemes was RMB29.03 trillion (USD 4.23 trillion) in total. 9 The New Asset Management Rules will have impacts on privately raised asset management business in the following aspects. • Shrinking channel business. As the investment scope of the asset management schemes of these three types of institutions is the broadest, it is widely used as a channel to broaden the investment scope by other financial institutions. Therefore, there are considerable stocks of the channel business in the asset management schemes of the securities company, the mutual fund company and the futures company. It is estimated that, along with the prohibition of nesting multiple layers in asset management products and the broadening of the investment scope of other asset management products by the New Asset Management Rules, these three types of institutions will have to face the situation of “shrinking” channel business similar to what the trust company does and the challenge of “de-channel”. • Challenging quota management for non-standardised debt investment. The New Asset Management Rules restricts shadow banking and requires financial institutions to conduct “quota management” on non- standardised debt business. The CSRC, by reference to the standard of quota imposed on wealth management business of the commercial banks by the CBIRC since 2013, proposed for the first time in its corresponding detailed rules that the scale of management of non-standardised debt shall not exceed 35% of the total scale of a manager’s asset management scheme. Many institutions have exceeded the new standard and will need to reduce the scale of non-standardized debt asset management schemes.