China's leaders approve rules to rein in $15 trillion asset management sector

BEIJING (Reuters) - Chinese President Xi Jinping and other top officials have approved new regulations for the country’s $15 trillion asset management sector, the establishment of a financial court in Shanghai and plans to deepen reform.

FILE PHOTO - Chinese President Xi Jinping walks to deliver his speech at the closing session of the National People's Congress (NPC) at the Great Hall of the People in Beijing, China March 20, 2018. REUTERS/Damir Sagolj

In November, China’s central bank issued draft rules on the country’s asset management sector to close loopholes that have allowed regulatory arbitrage and increased leverage.

Their approval comes amid a widening crackdown on risk in China’s financial system as authorities seek to rein in a sector that has rapidly grown in complexity, driven by shadow banking products and off-balance-sheet lending.

Sources previously told Reuters that Chinese banks have raised objections to the rules, saying they may cause a rush of redemptions, among other risks.

The move to remove implicit guarantees for wealth management products could spark liquidity risks and increase market volatility, the sources said.

China has also launched a campaign to root out officials engaged in corrupt practices in the financial sector.

A new financial court in Shanghai, which is yet to open, underlines Beijing’s push to rid the sector of misconduct and police those asset managers who have fallen foul of regulations.

The state news agency Xinhua reported the decisions from the first meeting on Wednesday of the Central Committee for Deepening Overall Reform, a body over which Xi presides and which is charged with driving China’s economic and political reforms.

“The launch of deeper reform of the Party and state institutions marks a new stage for deepening reform in all areas,” it quoted Xi as saying.

“The reform will further touch upon profound adjustment of interest patterns and changes of the system of institutions.”

Market reforms begun 40 years ago have underpinned China’s rise to become the world’s second biggest economy, but critics say difficult changes in areas ranging from finance to governance are necessary to keep development on track.

Xi called for stronger and improved Party coordination and leadership over reform, which will become “more complex, sensitive and onerous”, Xinhua said.

In addition to approving new regulations for the country’s asset management sector, details of which were not made public, and a proposal to set up a financial court in Shanghai, the meeting approved plans for deepening reform and opening-up in pilot free trade zones in Guangdong, Tianjin and Fujian, it said.

Moreover, it passed guidelines on strengthening regulation over the investment of non-financial entities in financial institutions.

The meeting also considered a report on deepening reform of party and state bodies that oversee anti-corruption work and a report on the first round of inspection over environmental protection led by central authorities. Xinhua did not give details.

Reporting by Se Young Lee and Lusha Zhang in BEIJING, and John Ruwitch and Engen Tham in SHANGHAI; Additional writing by Ryan Woo; Editing by Shri Navaratnam & Sam Holmes