Article / 29 July 2016 at 11:00 GMT

Chinese shares drop as regulation tightens

Saxo Capital Markets China
  • 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 
Chinese bank
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
Shanghai Composite Index, Weekly

Source: EastMoney

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.

ChiNext Index, Weekly

Source: EastMoney

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.

Source: CCDC

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

Jay Luo is an editor and analyst at Saxo Capital Markets in China
Tepord Tepord
US E&P companies have sold more stock so far this year than in the whole of the record year of 2013, when oil averaged almost $100 a barrel.
Tepord Tepord
As drilling proceeded, oil-prices began to fall as market confidence in a price recovery faded. In July 2015, prices began to fall. As they fell to near $40 per barrel by late August, price volatility increased again. Investors saw another price floor and opened their wallets.

Prices rose 18 percent to more than $48 by early October but by then, confidence in a price recovery again faded with increased drilling and global economic concerns about Chinese growth and oil demand. Oil prices fell below $30 in late January 2016 and by mid-February, oil-price volatility reached its highest level since the Financial Collapse in November 2008.

Once again, investors saw a price floor and the floodgates of capital opened. Pioneer and Diamondback raised almost $1.5 billion in share offerings in January 2016, probably the darkest time for oil markets since 1998.


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