China tightens wealth management regulation

China's banking regulator has moved to tighten its regulation over banks' wealth management products to dissolve risks in the shadow banking system that may jeopardize the country's financial stability.

The China Banking Regulatory Commission (CBRC) said on Thursday that it would strictly control the direction of investment by wealth management products to ensure such investments are in line with the state's macro and industrial policies and support the physical economy.

The banking regulator vowed to closely monitor bank operations using money pooled from sales of wealth management products, short-term financial products yielding a much higher rate than bank deposits.

The benchmark interest rate of one-year deposits stands at 3.25 percent.

Such wealth management products are considered an important part of China's shadow banking system, a complex and unregulated sector that has emerged and grown significantly in China in the last few years.

The CBRC ordered banks to fully disclose information on wealth management products and vowed to tighten oversight over sales activities of such products through covert investigations.

Risk warning must be prioritized and unauthorized sales and misleading words are prohibited in sales of such products, according to the CBRC.

The tightening of regulation over wealth management products came after Chinese banks' rushing to sell such off-balance-sheet products in recent years to evade regulatory oversight, raising concerns that they may threaten financial stability in the world's second-largest economy.

Sales of wealth management products have helped channel funds to borrowers or activities explicitly banned by government regulation amid efforts by the State Council, or China's cabinet, to rein in the property sector by limiting bank loans to real estate developers.

Some estimate wealth management businesses have accumulated to a combined level equal to about 5 percent of the banking sector's assets, which stood at 133.6 trillion yuan (about 21.5 trillion US dollars) at the end of last year.

The banking regulator also sounded the alarm over loans extended to local government financing vehicles (LGFVs), or financial entities set up by local governments to invest in infrastructure and other projects, which are considered another major source of risk for China.

A CBRC spokesman warned that commercial lenders should calculate their loans to LGFVs that are due each month, make timely communications with local governments and take precautionary measures to prevent major default incidents.

Banks are now banned from extending credit to vehicles with debt-to-asset ratios over 80 percent or a cash-to-debt ratio lower than 100 percent.