March 27, 2013 / 10:28 AM / 7 years ago

China tightens rules on bank finance product sales

BEIJING (Reuters) - China’s banking watchdog has ordered banks to strengthen checks on the underlying assets of a range of wealth management products to ward off potential risks to the financial system.

A Chinese national flag is seen at the headquarters of the central bank of China in Beijing February 20, 2013. REUTERS/Kim Kyung-Hoon

It is China’s latest move to tighten its grip on the booming sales of finance products through banks, which have fanned concerns about default risks due to poor information disclosure and opaque investment structures.

The China Banking Regulatory Commission said in a statement on its website that commercial banks must set up an accounting book for each finance product to guarantee its investment channel can be clearly tracked and monitored.

Banks are ordered to fully disclose all information related to wealth management products, including the borrower, return ratio, maturity and transaction structure.

They must inform investors of any change in underlying assets within 5 days, the CBRC said in a statement published on Monday on its website.

It requires banks to keep investments in such assets at no higher than 35 percent of total outstanding wealth management products, or no more than 4 percent of their total assets - whichever is the lower amount.

The CBRC particularly singled out risks of investment in “informal debt assets”, such as trust loans, letters of credit, accounts receivable and bank acceptance bills, among others, in a clutch of instruments that are broadly categorised in China as “wealth management” products.

They are so defined by issuing banks to keep capital raised off-balance sheet, differentiating them from regular deposits so as to allow their proceeds to be loaned out to corporate customers even if the central bank is clamping down on credit.

China’s major state-owned banks lend at Beijing’s behest.

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.

Market concerns and regulators’ warnings over risks in China’s fast-growing wealth management sector came to a head late last year after one instrument sold through Hua Xia Bank (600015.SS) failed to pay its annualised return and China’s CITIC Trust announced payment delay on its product.

Banks are not technically liable for the performance of the third-party wealth management or trust products they sell, but many investors believe the instruments are backed by the banks.

The banking regulator had earlier warned banks against pooling proceeds from the sale of newly-issued wealth management products to pay off earlier instruments, leaving the underlying assets particularly hard to discern.

Reporting by Aileen Wang and Nick Edwards; Editing by Sanjeev Miglani

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