China lets bank wealth products buy preferred shares

Thu Dec 26, 2013 4:04am EST

Related Topics

* Bank WMPs can open accounts at the stock exchanges

* WMPs can buy bonds, preferred shares, but not stocks

* Huge new pool of investment funds for preferred shares

* Step toward granting banks full access to stock exchanges

SHANGHAI, Dec 26 (Reuters) - China announced rules on Thursday allowing commercial banks to use wealth management funds to buy preferred shares on domestic bourses, enabling a large new class of investors to access the shares which Chinese companies will issue from next year.

Wealth management products (WMPs) operated by banks will be allowed to open securities trading accounts effective immediately, the China Securities Depository and Clearing Corp., the official clearing house for the Shanghai and Shenzhen stock exchanges, said.

It announced the rules on its website on Thursday, in a notice dated Dec. 13.

The move appears designed to ensure adequate demand for new preferred shares by granting access to a huge new pool of investor funds.

Banks are still banned from investing in common shares under the new rules, but market players say the move is an incremental steps toward granting banks unrestricted access to the stock exchanges.

"This notice opens a big door to connect bank funds with the capital markets," said a senior executive at a commercial bank.

"Even though the rules only allow investment in preferred shares, it's an opening at least, and it signifies a trend. In the long run, blended operations are inevitable," he said.

China's securities regulator announced in September that it was preparing a pilot scheme to allow listed companies to issue preferred shares for the first time.

The scheme is open to all listed companies, but banks will be especially encouraged to issue. China's commercial banks are under pressure to raise funds to meet tough new capital adequacy requirements in line with global rules known as Basel III.


Preferred shares are hybrid securities that enjoy seniority over common equity in case of bankruptcy and typically pay fixed dividends but offer less potential upside exposure than common stock. They carry no voting rights.

The change will make it easier for banks to use funds raised through the sale of WMPs to purchase preferred shares. WMPs are structured investment products typically backed by money market instruments, bonds, loans, and other assets.

Sales of WMPs, many of which banks hold off-balance-sheet, have exploded in recent years as Chinese investors hunt for alternatives to low-yielding bank deposits, the weak stock market, and the frothy property market.

China's banking regulator said that bank WMPs outstanding totaled 9.1 trillion yuan at end-June.

The new rules allow bank WMPs to open securities accounts at the exchanges. Previously, only banks themselves - not the special-purpose vehicles used to create off-balance-sheet WMPs - could open accounts, and those accounts were restricted to trading bonds and other fixed-income products.

Commercial banks have been largely banned from China's bourses since 1996, when regulators launched a campaign to clamp down on banks' speculation in the stock exchanges.

The China Securities Regulatory Commission this month issued draft rules for the preferred shares pilot for public comment. Market watchers expect the regulator to issue final rules in January. Companies could begin selling preferred shares shortly afterwards. (Reporting by Gabriel Wildau; Additional reporting by Zhang Xiaochong in BEIJING; Editing by Robert Birsel)

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