Stocks dip amid WMP curb concerns

Regulators aim to reduce systemic risks in banking industry

Chinese mainland stocks slumped the most in six weeks as a report about possible curbs on wealth management products added to concern that regulatory efforts to reduce risks in the financial system will limit flows into equities.

The ChiNext Index of smallcompany shares sank 5.5 percent, the most since June 13, while the Shanghai Composite Index fell 1.9 percent. The Shenzhen Composite Index lost 4.5 percent.

China’s banking regulator is considering tightening curbs on the nation’s $3.6 trillion market for WMPs, the 21st Century Business Herald reported, citing people it didn’t identify. Authorities may set a limit on how much WMPs can invest in equities and “nonstandard assets” such as loans, the report said.

“There’s an obvious trend that the regulators want to strengthen market monitoring and lower the use of leverage in financial markets to control risks,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. “Under such circumstances, ChiNext is especially vulnerable, given its high valuationsandtherecentgains.”

The China Banking Regulatory Commission met some lenders this month on the rule revision and a final version hasn’t been drafted, the 21st Century Business Herald report said. The CBRC didn’t immediatelyreplytoafaxseeking comment.

China’s watchdogs have signaled they are paying closer attention to the fund managers and brokerages who funnel the nation’s household savings into investments from stocks to bonds and derivatives.

The China Securities Regulatory Commission this month issued guidelines curbing the use of leverage by structured asset management plans. Li Chao, vice-chairman of the regulator, told a gathering of firms in the northeastern city of Harbin last week to do better duediligence on prospective clients and issuers when arranging initial public offerings, secondary share sales and bond issues, people familiar with the matter said.

The outstanding value of WMPs rose to 23.5 trillion yuan ($3.5 trillion), or 35 percent of China’s gross domestic product, at the end of 2015 from 7.1 trillion yuan three years earlier, according to China Central Depository & Clearing Co.

“The government thinks tighter regulation is needed because investments from WMPs helped fuel the stocks bubble last year and then contributed to the crash,” said Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong.

“Some of them are just like black boxes, so neither the government nor the investors know for sure which products the banks invest the money in.”