When China’s wealth management products become vulnerable to runs:From liquidity management to sponsor support

The new asset management regulation in China has removed the implicit guarantees provided by banks for their wealth management products (WMPs). As a result, investment risks are shifted back to investors, and WMPs become vulnerable to runs, which is a source of systemic risk. The regulation sets liquidity requirements for WMPs to improve their resilience against heavy redemptions. It also allows banks to adopt several liquidity management tools to discourage or restrict investors from redeeming. However, practical experience demonstrates that these measures are ineffective in mitigating runs during market stress and may generate counterproductive effects. <br/><br/>Alternatively, this article argues that banks should be allowed to provide sponsor support for their distressed products when there is a high likelihood of investor runs. Due to the prohibitive rules of implicit guarantees, many forms of sponsor support are illegal. As for lawful sponsor support, without regulatory constraints on its purpose and scope of use, it may be utilised by banks as a variant of implicit guarantees. Therefore, this article proposes two amendments to the current regulation: relaxing the restrictions on the forms of sponsor support and imposing restrictions on its purpose and scope of use.