China weighs tighter rules to rein in shadow-financing risks

Banks with less than 5b yuan of net capital or fewer than 3 years of experience face curbs

China’s banking regulator is proposing tighter rules for the nation’s $3.5 trillion (Dh12.8 trillion) market for wealth-management products (WMP) as the government moves to rein in shadowfinancing risks.

The China Banking Regulatory Commission has drafted regulations designed to protect mass-market investors, limit the involvement of smaller banks and ensure that lenders have adequate capital to cushion against potential losses, a source said.

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 in less-risky assets, such as government bonds and bank deposits, the person added.

Larger, better-capitalised banks would be allowed to conduct “comprehensive” wealth business, and allowed to put the money into equities and other riskier “non-standard assets” such as loans, the person said.

The rules are pending banks’ feedback and may change.

China has been tightening rules on WMPs since late 2014, when it imposed limits on investments in non-standard credit assets. The products are a key reason behind the growth in China’s shadow-banking industry, which Moody’s Investors Service estimates is worth more than 50 trillion yuan, and have been used by some financial institutions as a way to extend funds to risky borrowers.

Under the new draft rules, banks will be required to set aside reserves from net income until they have built up a capital buffer equivalent to 1 per cent of the value of their outstanding WMPs, the person said.