New AM rules to halt rapid slowdown in Chinese bank credit

Authorities are softening the impact of deleveraging through looser guidelines.

China’s newly unveiled asset management rules are an attempt to strike the balance between controlling credit growth and making sure there’s enough liquidity to go around to prevent a credit crunch, according to credit rating agency Fitch.

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Although the guidelines are largely in line with intensifying oversight on shadow banking activity, certain aspects of the notice point to looser approach with Fitch noting that publicly raised funds are allowed to invest in non-standard credit assets but within limitations.

“The guidance also allow financial institutions to issue products that are non-compliant with new asset management rules by allowing them to invest in assets that support national policy, major construction projects or SME and micro-enterprises under certain conditions,” the credit rating agency added.

Whilst these rule changes do not necessarily flag less commitment by regulators to the deleveraging campaign, Fitch notes that this more likely represents an attempt to achieve a balance between the crackdown on financial sector risk and improving financial stability at the same time, without draining credit from the system.

New credit as a percentage of GDP has plunged to a near-three year low in June, according to Bloomberg data, as Beijing’s campaign to clamp down on risk has significantly weighed on economic activity.

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The central bank has already slashed the reserve requirement ratio for the third time this year to unleash around $180b and boost lending for struggling SMEs. There are also reports that the the People’s Bank of China is considering relaxing a number of capital requirements including structural and pro-cyclical contribution parameters in its Macro-Prudential Assessments (MPAs) for commercial banks.