CHINA is planning to tighten regulations governing the asset management industry, which among other things, will put an end to the common practice of guaranteed minimum rates of return on certain investments.

The plans, in the form of draft rules, also cover standard leverage ratios, risk reserve funds, and investment restrictions on asset management products. The rules aim to create unified regulations, reduce arbitrage and aim to ensure the healthy development of the asset management sector, PBoC said in a statement last Friday.

China’s central bank, the People’s Bank of China (PBoC), and four regulators – China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission and State Administration of Foreign Exchange – came together last Friday to issue the draft rules governing China’s asset management industry.

The plans are open to public consultation until December 16 this year, with a planned implementation date of June 30 2019.

One of the most important changes is to put an end to the promising of a guaranteed rate of return, which has been a common practice in China’s wealth and asset management sector, particularly in relation to the management of trusts.

Most real estate trust products, government financing trust products, and products offered under the co-operation between banks and trust companies, guarantee a breakeven investment or a minimum return to investors, according to Chinese media.

When the products are not performing well, the financial institutions will pay the guaranteed principal and return to the investors out of their balance sheets. However, this practice distorts risk pricing, adding to instability in the financial system, according to the regulators.

The new rules will affect about half of the 100 trillion yuan (US$15.8 trillion) of assets under management (AUM) in China’s asset management industry, according to Chinese media.

There is a recognition of the need for new regulations within the industry. With China’s financial sector further opening up, and fintech coming into the picture, unified regulations governing the asset management business are necessary, says Zhang Weiwei, vice-president and chief marketing officer at CCB Principal Asset Management Company.

According to the new rules, non-depository institutions with minimum guaranteed rates of return will be charged with illegal business operations and faced with administrative penalties such as fines. Depository institutions will be subject to certain requirements, such as increasing their level of reserves.