29 July 2016 at 11:00 GMT
- Shanghai Composite Index drops for the second week in a row
- Concerns rise over tighter regulations on Wealth Management Products
- Sales of WMPs have been booming in China in last few years
- Bond market may attract more funds
Tighter regulations are coming for Chinese commercial banks and their popular Wealth Management Products. Photo: iStock
By Jay Luo
China's stock market dropped for the second consecutive week, as concerns about tighter banking regulations on Wealth Management Products (WMP) intensified.
The benchmark Shanghai Composite Index declined 1.11%, falling below the key 3000 level. The ChiNext Index of small-company shares slumped by 5.67% for the week.
Shanghai Composite Index falls below 3000
For the month of July, the Shanghai Composite Index rose 1.7%, while the NASDAQ-style ChiNext Index dropped 4.73%. It hasn't been easy for the SHCOMP to have achieved this gain, as the regulatory environment was tightening and expectations for further monetary easing faded in recent weeks.
According to the China Banking Regulatory Commission (CBRC), it was drafting new regulations on commercial banks' WMPs to curb risks, as sales of WMPs have been booming in the past few years. It’s reported that nearly 8% of the WMPs was invested in equities, and roughly 16% was invested in non-standard credit assets.
According to the newly-drafted rules, investments in "non-standard assets" and equities will be tightened. Only institutional investors and wealthier individuals with at least 1 million yuan of financial assets, or private banking clients with at least 6 million yuan, are not restricted.
The CBRC is also likely to impose a cap on WMPs' investment in equities. The issuance of "multi-tier WMPs" (which are somewhat similar to CDOs) will be forbidden.
The new rules are being studied internally and feedback is being gathered. Some analysts and investors think interest in WMPs will drop after the new rules are implemented, and the bond market will attract more funds.
At the same time, the China Security Regulatory Commission has tightened its regulations and intensified its fight against illegal activities in the securities market. The China Insurance Regulatory Commission has also asked for more information disclosure regarding changes in insurance company shareholder equity.
— Edited by D. Deacon
is an editor and analyst at Saxo Capital Markets in China