China sets up risk committee for wealth management products

BEIJING Tue Dec 11, 2012 10:44am GMT

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BEIJING Dec 11 (Reuters) - China has set up a committee of senior banking executives to oversee the burgeoning category of wealth management products, shortly after the failure of one of the products led to increased scrutiny of banks' liabilities.

The China Banking Association Specialist Committee on Wealth Management Products will tighten standards over the sale and risk management of the investment products, which are highly sought after by depositors seeking higher interest rates. The Banking Association reports to China's banking regulator and comprises most major national and local banks.

As of the end of September, the amount of outstanding wealth management products distributed by Chinese banks had reached 6.73 trillion yuan ($1.08 trillion), an increase of 47 percent over the end of 2011, Du Jinfu, the head of the discipline commission at the China Banking Regulatory Commission told reporters at a press conference to launch the new committee on Tuesday.

Banking regulators are worried about a crisis of confidence in the products, following investor protests at Hua Xia Bank after a product sold through its Jiading branch in a suburb of Shanghai failed to pay out upon maturity late last month. The bank says a branch employee sold the product without authorisation.

Senior Chinese banking officials had previously expressed concern over the proliferation of the products, many of which channel money into the opaque shadow banking system where it is lent to real estate developers and other businesses that cannot access normal bank loans.

Most notably, Xiao Gang, the chairman of the board of Bank of China , called the products a "Ponzi scheme" in an editorial in the official English-language China Daily in October.

Du warned that some banks do not follow regulations when selling wealth management products, highlighting inappropriate promotions, not handling customers' complaints properly or not disclosing information completely.

But he defended the practice of selling the products, which allow banks to compete for depositors with attractive interst rates.

"Some banks' board of directors and top executives do not fully realised the importance of developing wealth management products and they haven't come up with a strategy regarding this business, which could help them transform their operation models and improve competitiveness," Du told reporters.

Wealth management products distributed by banks made up 18 percent of total social financing in the first three quarters, Du said. That measure is considered to be a better yardstick of the credit available in the Chinese economy than data on traditional bank loans.

The new committee is headed by executives from Industrial and Commercial Bank of China , with vice directors drawn from the biggest state-owned banks while committee members include the major joint stock or regional banks.

Chinese banks sell to their customers a mix of proprietary and third-party wealth management products, only some of which have principal or interest guaranteed. Some are directly backed by specific loan projects while others are vague about the source of their returns. Because they are sold by banks, the broader public tends to view them as safe.

Critics worry that the products are difficult for banks to manage because of their fluctuating interest rate and tenure, and because the underlying assets are often opaque, potentially exposing banks and their customers to risky loans whose full extent is unclear.

Although Hua Xia is expected to assume some liability for lack of internal controls, it says it should not be responsible for the failure of the wealth management product, issued by a third party called the Zhongding Wealth Management Center linked to a number of businesses in the inland province of Henan.

In a sign of the sensitivity of the case, reporters attending the press conference were told not to ask about Hua Xia. Reports by some Chinese media on the Zhongding product failure have been removed from their websites. ($1 = 6.2451 Chinese yuan) (Reporting By Zhang Shengnan, Aileen Wang and Lucy Hornby, Editing by Jonathan Thatcher)

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