Stricter rules for Chinese fund subsidiaries

Added 18th May 2016

Chinese regulators are proposing stricter rules for asset management companies in regards to leveraging investments and opening subsidiaries.

Stricter rules for Chinese fund subsidiaries

The China Securities Regulatory Commission is consulting fund houses on the proposed rules for registering a new subsidiary, as well as controlling the net capital level, according to the state-run Securities Times

The Asset Management Association of China also rolled out new guidelines recently, according to Caixin. The leverage ratio of equity and mixed assets is fixed at a maximum of 1x, while that of fixed income and futures investments cannot exceed 3 times. The ratio was previously at 10 times.

Specifically for an asset management subsidiary, the amount of net capital, which is equal to net assets minus the risk assets, should be at least RMB 100m ($15.3m). There are also controls on other risk factors, such as the liability and risk assets level.

The proposals are harsher than expected and if implemented would have a huge impact on the asset management business, according to an unnamed fund subsidiary source quoted in the Caixin report.

It also means that firms with a smaller scale and money market fund-focus will not be allowed to set up subsidiaries that target wealthier clients.

To set up a new subsidiary in general, a fund house would need a two-year history, assets under management (mutual funds excluding money market funds) no less than RMB 20bn, and net assets of at least RMB 600m.

To date there have been no capital restrictions on fund subsidiaries because the authorities want to promote product innovation. Capital restrictions, however, are imposed on trusts and on the asset management units of brokers.

Fund subsidiaries have experienced vast growth because they have no limits on the type of investments they can make. Assets under management surged 1.3 times last year to RMB 8.57trn.

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