Proposed stricter regulations to address key wealth management risks in China

Risks include banks' losses from their own investments.

On 27 July, Bloomberg reported that the China Banking Regulatory Commission (CBRC) had proposed tighter rules for regulating wealth-management products and related services provided by commercial banks as part of its effort to strengthen regulations for shadow banking products.

These measures, if implemented, would be credit positive for Chinese banks because they would address key risks stemming from the fast growth of this financial product, says Moody's.

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On a product level, these risks include indiscriminant sales of wealth-management products that invest in high-risk asset classes such as equities, non-standard debt instruments and derivatives.

Banks also face the risk of losses from their own investments in wealth management products packaged by other banks, and from the contingent liabilities they could incur from their sales of these products to avoid reputational risk or to compensate for losses related with indiscriminant or misleading sales practices.

More broadly, wealthmanagement products carry the risk that these instruments will become a burden on bank liquidity and a front for under-supervised financing activities.

Wealth-management products in the past have been predominately sold to retail investors through bank retail channels and have higher yields than bank deposits. Backed by creditinstruments including bonds, interbank placements, bank loans and trust loans, they carry the same credit risks as the underlying assets in which they invest.

Banks’ off-balance-sheet wealth-management products are not guaranteed. Additionally, securities companies issue such products, mainly through asset management or directional plans for institutional investors, and they mainly consist of assets originated by banks.

In 2015, the outstanding balance of wealth- anagement products issued or distributed by banks grew to 19.1% of renminbi-denominated deposits, or RMB23.5 trillion, from 13.2% in 2014, led by midsize (joint-stock) and small (city commercial) banks.