Many China WMP Issuers May Face Curbs as Regulator Tightens Rule

  • About 250 banks may be qualified to invest in riskier assets
  • CBRC seeks to limit WMP business of less-capitalized banks

Almost half of the Chinese banks that issued wealth-management products in 2015 may face restrictions on their operations as the nation’s banking regulator steps up regulation of complex financial products to limit risks, according to China Merchants Securities Co.

A total of 465 banks raised 158 trillion yuan ($24 trillion) from selling wealth-management products in 2015, official data show. Of that number, only about 250 may be qualified to conduct so-called “comprehensive” wealth business, which allows lenders to put the money into equities and other riskier “non-standard credit assets,” China Merchants Securities estimated in a note on Wednesday.

The China Banking Regulatory Commission is proposing tighter rules for the nation’s $3.5 trillion market for wealth-management products, a person with knowledge of the matter said this week, as the government moves to rein in shadow-financing risks.

Restrictions would be placed on banks with less than 5 billion yuan of net capital or fewer than three years of experience with wealth-management products, the person said. They would be required to invest the proceeds of any WMPs they issue only in less-risky assets, such as government bonds and bank deposits.

Most Aggressive

China’s smaller banks have been the most aggressive in expanding their WMP business and plowing money into non-standard credit assets. Such assets allow them to disguise lending by buying “investments” from intermediaries such as securities firms or trust companies without making adequate provisions and capital charges.

Under the proposed rules, on which the regulator is seeking feedback from the banks, lenders will also have to set aside risk reserves from net income.

While the new regulation should bode well for financial stability, it could affect banks in the short term by slowing growth in fee income from WMPs, adding costs for risk reserves and increasing asset-quality pressure from potential credit tightening, Goldman Sachs Group Inc. analysts led by Nan Li wrote in a note on Thursday.

In the longer term, the gradual removal of implicit guarantees for WMPs and a decline in non-standard credit assets “may be key to relieving credit and liquidity risks for the banking system,” they wrote.

— With assistance by Jun Luo

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