After new regulations on asset management, another new rule is issued. On October 12, the PBC issued the Determining Rule for Standardized Creditor's Right Assets (Draft for Comments) (the Determining Rule for short below), which is also an important supporting rule of the new regulations on asset management. 

After the release of the Determining Rule, quite a few people believe that it is more strict than expected, mainly explained by the fact that it clearly stipulates that "financial direct financing instruments of the Banking Wealth Management Registration and Custody Center" and "creditor's right financing plans of Beijing Financial Assets Exchange" fall into the category of non-standardized creditor's right assets. A previous market analysis showed, the above two assets will be formally identified as standardized creditor's right assets as a way to realize the shift from non-standardized creditor's right assets to standardized. 

In terms of the Measures for the Supervision and Administration of the Wealth Management Business of Commercial Banks, a director of the relevant department of the China Banking and Insurance Regulatory Commission said in an interview last year, as with the current supervision regulations, it is required that a bank's balance of financial products invested in non-standardized creditor's right assets shall not exceed 35% of the net assets of the financial product or 4% of the bank's total assets; and that invested in the non-standardized creditor's right assets of a single debtor and its affiliated enterprises shall not be over 10% of the net capital of the bank. 

5 standards for standardized creditor's right products are rolled out 

In a statement on October 12, the PBC announced the formulation of a rule for determining standardized creditor's right assets (Determining Rule for Standardized Creditor's Right Assets (Draft for Comments)) pursuant to the Guiding Opinions of the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange on Regulating the Asset Management Business of Financial Institutions (Y Fa [2018] No.106, hereinafter referred to as the Guiding Opinions), for purposes of standardizing investment in asset management products of financial institutions, further safeguarding investors' interests, promoting the sound development of direct financing, and effectively preventing and controlling financial risks. 

It is stipulated in the Determining Rule that the following conditions shall be met at the same time if other creditor's right assets are to be recognized as standardized ones: 

1. Equal division and tradability. A non-public offering is carried out for the assets in the form of bookkeeping or bidding, which have 2 or more qualified investors during the issuance and existence, with par value or an integer multiple thereof as the minimum transaction unit and standardized transaction contract texts. 

2. Full disclosure of information. Investors and issuers agree on the specific schedules about the way, content and frequency of information disclosure in the issuance documents and the responsible party of information disclosure shall make the information disclosure true, accurate, complete and timely. 

Among others, it is clearly stated in the documents that the issuers have obligations to repay the investors by providing cash or financial instruments, or by using the cash flow generated by the bankruptcy isolated underlying assets, which at least include the issuance amount, par value, the way to determine the issuance price or interest rate, term, issuance way, underwriting method and other elements. 

3. Centralized registration for independent custody. The assets shall be registered centrally for independent custody in the bond market registration and trust institutions recognized by the PBC and the financial supervision and regulation departments. 

4. Fair pricing and sound liquidity mechanism. In such trading methods as inquiry, bilateral quotation and competitive matching, the assets are supported by market-making institutions and underwriters for actively providing market-making, valuation and other services. The buyer and the seller shall give priority to determining the transaction price based on the historical transaction price or the quotations of market-making institutions and underwriters. Please refer to the valuation of other third parties for the assets without historical transaction price or quotation. Other third-party valuation agencies providing valuation services shall have a sound corporate governance structure for effectively handling conflicts of interest, while ensuring the quality of valuation through reasonable quality control means, and disclosing valuation methods and processes to make the valuation transparent. 

5. Trading on the inter-bank market, stock exchange market and other transaction markets established with the consent of the State Council. The institutions, providing infrastructure services such as registration and custody, clearing and settlement, have been under the overall supervision of the infrastructure of the inter-bank and exchange bond markets, and have been docked with other infrastructures of the bond market on the basis of hierarchical order, organic complementarity and diversified services, with related businesses being subject to unified and standardized arrangements for bonds and asset-backed securities. 

Define "standardized creditor's right assets" 

According to the Determining Rule, the standardized creditor's right assets thereof refer to bonds and asset-backed securities issued according to law and other fixed income securities, mainly including: 

1. Treasury bonds, central bank bills, local government bonds, government-backed agency bonds and financial bonds; 

2. Debt financing instruments of non-financial enterprises, debentures and corporate bonds; 

3. International agency bonds, negotiable certificate of deposit, credit asset-backed securities, asset-backed notes, asset-backed securities listed on stock exchanges, publicly offering securities investment funds of the fixed income type, etc. 

Institutions in line with the relevant requirements in "Article 5" of the determining standards above may apply to the PBC for the determination of standardized creditor's right assets, notes the Determining Rule. The PBC will, in conjunction with the financial supervision and regulation departments, conduct the determination in accordance with the requirements listed in "Article 2" determining standards and relevant provisions. 

In addition, the Rule also reveals that the creditor's right assets, falling short of the conditions in "Article 1", "Article 2" and "Article 3", are non-standardized ones, except for those derived from deposits (including large-value certificates of deposit), bond reverse repurchase, inter-bank borrowing and so on. 

Identify 6 non-standardized creditor's right assets 

At the end of the Rule, it also indicates the related non-standardized creditor's right assets, including: 

1. Financial direct financing instruments of the Banking Wealth Management Registration and Custody Center Co., Ltd.; 

2. Products related to credit asset exchange and usufruct transfer of the China Credit Assets Registry & Exchange Co., Ltd.; 

3. Creditor's right financing plans of Beijing Financial Assets Exchange Co., Ltd.; 

4. Income credentials of CSRC Inter-agency Quotation System Co., Ltd.; 

5. Creditor's right investment plan and asset support plan of Shanghai Insurance Exchange Co., Ltd.; 

6. Other types of financial products that provide creditor's right financing for a single enterprise that fails to meet the terms set out in "Article 2" at the same time. 

The latest comments from all walks of life 

It is widely believed that the stricter part of the Rule is that the assets of the Banking Wealth Management Registration and Custody Center, the Beijing Financial Assets Exchange and the Insurance ABS are determined as non-standardized ones. As a result, it will be harder to convert the non-standardized creditor' right assets to standardized ones. "Some corporate entities used to find it difficult to directly obtain on-balance sheet credits due to credit limits or industry constraints, and can only resort to non-standardized creditor's right assets. Once the conversion to standardized creditor's right assets becomes harder, broad-based funds such as banks and wealth management agencies may further impose restrictions on the financing of these enterprises", said Li Qilin, chief economist at Lianxun Securities. 

As of the end of June 2019, the balance of non-guaranteed financial products reached RMB22.18 trillion, with a leverage ratio of money management and investment at 113.3%. In 2018 and the first half of 2019, returns on wealth management assets dropped rapidly, and yields on credit bonds fell to a record low. In order to improve product returns and avoid customer loss, banks and wealth management institutions kept a certain proportion of leverage on investment. 

Of course, in view of the restrictions of the new regulations on asset management and wealth management, there are constraints on the investment duration and proportion of non-standardized creditor's right assets of net worth financial products, and the banks' possession of non-standardized assets is indeed on the decline. By the end of June 2019, banks and wealth management agencies' share of non-standardized creditor's right had fallen slightly to 17.02%. 

A team led by Li Chao from Huatai Securities thinks, the stable growth has been encumbered after the PBC tightened regulation on non-standardized creditor's right assets in the Determining Rule for Standardized Creditor's Right Assets (Draft for Comments), and thus it is possible that the subsequent official draft would be looser in this respect; the introduction of the determining standard means that the most important follow-up matters concerning the new regulations on asset management have been set down, which will go a long way towards financial institutions' prompt actions to restructure the assets and standardize the market landscape. 

Source | Wind, www.yicai.com