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July 29, 2016

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CBRC plans harsh curbs on banks

CHINA’S banking regulator plans to curb harshly banks’ investment in wealth-management products that are a potential channel for shadow-bank lending.

The China Banking Regulatory Commission may restrict smaller lenders from riskier part of the wealth-management products and ban them from issuing “multi-tier” products that consist of various trenches with different risks and expected yields, financial media Yicai said on Wednesday based on draft rules that are open for review. The CBRC also asked banks to set aside reserve funds to cushion against potential losses.

Larger, better-capitalized banks would be allowed to conduct “comprehensive” wealth business, and could invest in equities and other riskier “non-standard assets” such as loans, according to the draft rules.

Wang Jian, banking analyst at Guotai Jun’an Securities Co, said that although such wealth-management products may help to encourage liberalization of interest rates, “it will add uncertainty to financial systematic risks and give investors distorted hopes of higher yearly return of free-risk investment.”

Since late 2014, China has been tightening rules on wealth-management products with limits imposed on investments in non-standard credit assets.

Australia and New Zealand Banking Group calculated that wealth-management products worth around 23.5 trillion yuan (US$3.5 trillion) were being managed at the end of 2015, up from 1.7 trillion yuan in 2009.

“Wealth-management products of banks need proper outside inspection and guidance,” said Guo Tianyong, professor at the China Banking Research Center of Central University of Finance and Economics.

He said banks need to be supervised closely to protect investors’ interest to ensure that funds do not flow into the stock market or invested into high-risk sectors without warning.

The CBRC has also asked banks to sacrifice profitability to restore loan buffers which they want to be reduced, according to Bloomberg News. This is likely to add liquidity pressure amid the coolest profit growth in a decade for Chinese lenders.


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