Chinese Banks' Off-Book Wealth Products Exceed $3.8 Trillion

  • Value of wealth-management product exposure rises 30%: PBOC
  • PBOC includes off-book WMPs in macro prudential assessment

Chinese banks had more than 26 trillion yuan ($3.8 trillion) of wealth-management products held off their balance sheets at the end of December, a 30 percent increase from a year earlier, according to the central bank.

The expansion of this form of shadow banking, with money eventually being diverted to quasi-loans and bonds, outpaced the 10 percent growth for normal lending during the same period, raising risks for the broader economy and undermining the country’s “deleveraging” efforts, the People’s Bank of China said Friday in its quarterly monetary policy report.

The central bank is including off-balance sheet WMPs in its so-called macro prudential assessment framework starting this quarter to better gauge the expansion of credit and potential risks in the financial system. The move will probably lead to banks reporting higher credit growth and may require them to take steps to maintain sufficient capital reserves to limit risks posed by the investment products.

Since late 2014, the China Banking Regulatory Commission has been tightening rules on WMPs, most of which are non-principal guaranteed, meaning they can reside off banks’ balance sheets. The products are a key reason behind the growth of shadow banking in China, and have been used by some financial institutions as a way to extend funds to risky borrowers and evade capital requirements.

A QuickTake Q&A explainer on WMPs

The investment vehicles are asset-management products by nature and therefore investors should shoulder any risks by themselves, the central bank said in its report. More work is needed to solve problems such as the real amount of capital banks should hold to cover WMPs, risk segmentation, regulatory arbitrage, and the perception of an implicit guarantee of repayment, the PBOC said.

Before the WMP inclusion, the central bank had taken into account loans, bond and equity investments, repurchase agreements and money deposited at other financial institutions when calculating banks’ overall levels of credit.

— With assistance by Jun Luo

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