Wealth management products, new regulation on asset management and banking stability in China

China’s Wealth Management Products (WMPs) as alternative financial innovation of deposits have experienced dramatical evolution and expansion during past decades, which are the largest and most important provider of shadow banking funding. Even though regulatory authorities constantly tighten regulations for both banking system and WMPs issuance, commercial banks tend to persevere in creating increasingly complicated operation mechanisms of WMPs business to participate in less regulated shadow banking activities. Until 2018, New Regulation on Asset Management (AMR) has been introduced officially to control the excessive and risky development of WMPs and shadow banking activities. The amount of WMPs issuance has declined for the first time in China. This study empirically investigates determinant factors that influenced the issuance of WMPs, especially the important regulatory indicator AMR. In the post-crisis era, government intervention has ensured economic growth but directly resulted in credit expansion and imbalance of resource allocation in China. Consequently, with accelerated financial reform and bank transformation, China’s commercial banks tend to window dressing their balance sheet to meet the regulatory requirements and provide shadow loans to satisfy social financing demands through issuing WMPs. Moreover, this study develops Banking Stability Index by Principal Component Analysis based on new supervisory indicators related to Basel III and China’s new regulatory standards. Then, it further inspects the impacts of WMPs on banking stability and moderate effects of AMR on such relationship in China. Commercial banks design and issue a great deal of WMPs to involved in shadow banking activities through cooperation with both banks and Non-Bank Financial Institutions for improving liquidity and profitability, as well as lessening their regulatory burden. However, disclosed potential threats of WMPs, such as excessive maturity mismatch and over- leverage, could undermine banking stability. Importantly, AMR aims to standardise the development of WMPs, curtail shadow banking activities, which plays an important role for the transformation WMPs and the stability of China’s banking system.A quarterly unbalanced panel data of 46 China’s commercial banks from 2015 to 2021 and two-step system GMM model are adopted in this study. The result shows that stronger pressure of bank-related requirements leads to greater incentive of commercial banks to issue WMPs. The increase of financing demand and household savings contribute to the growth of WMPs issuance while the influence of Interest Rate Liberalisation (IRL) is opposite. Appropriate WMPs issuance has significantly positive association with banking stability. Importantly, AMR has restricted the growth of WMPs and can mitigate the negative impacts of WMPs on banking stability. Besides, BSI declines over the period of 2015-2017 and increases constantly from 2018, which implies the effectiveness of AMR. This study contributes to the literature on WMPs and shadow banking in China through in-depth empirical analyses. It takes important financial reform IRL and comprehensive regulation AMR in China into consideration to investigate the determinants of WMPs and the impacts of WMPs on banking stability. Besides, this study provides comparison between different types of commercial banks to help regulators formulate appropriate regulatory policies for different types of commercial banks.

Text 125232 - Full Text.pdf Download (6MB) Text SPE 2023 19 - Declaration Form.pdf Restricted to Repository staff only Download (1MB) Text SPE 2023 19 - Full Text.pdf Restricted to Repository staff only Download (6MB) Official URL or Download Paper: http://ethesis.upm.edu.my/id/eprint/18831

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