China to tighten rules on banks' wealth management business - sources

BEIJING/SHANGHAI (Reuters) - China’s banking and insurance regulator will soon publish detailed rules on banks’ wealth management products (WMPs) as part of Beijing’s effort to curb risks in the financial sector, three sources familiar with the matter told Reuters.

The rules, which would tighten banks’ risk control of the country’s $4.63 trillion WMPs, follow the long-awaited publication by the central bank in April of broad new regulations on the $15 trillion asset management industry that are scheduled to kick-in after 2020.

China is in the third year of an ambitious campaign to reduce risks in its financial system stemming from a rapid build-up in debt, which the Bank for International Settlements has warned could lead to a banking crisis.

The country’s regulators are scrambling to keep up with fast-growing financial innovation as lenders and investors scrounge for higher returns while borrowers, unable to secure bank credit, turn to other means for funding, creating potential systemic risk.

In the forthcoming rules, the China Banking and Insurance Regulatory Commission (CBIRC) is likely to adjust the limit for exposure of bank wealth management products to so-called non-standard investments, known widely as “shadow banking” products, said one of the sources.

Currently, such investments by banks cannot exceed 35 percent of the outstanding amount of their wealth management products or 4 percent of their total assets.

By end-2017, 562 banks had 29.54 trillion yuan ($4.63 trillion) in outstanding WMPs, according to official data.

Banks are expected to come up with proposals to reduce the size of their outstanding shadow banking investments while not suddenly choking off credit to borrowers, the three sources said, and face quarterly reviews.

The April rules from the central bank were slated to kick in after 2020, but the banking regulator has informed banks that asset management products backed by newly-invested assets must comply with the rules immediately, the sources said.

All three sources declined to be named because the plan has not yet been made public.

The banking and insurance regulator did not immediately respond to requests for a comment.

Structured deposits, a relatively new way for banks to raise funds from retail investors, have gained popularity after banks were told to stop guaranteeing fixed returns for wealth management products.

The regulator had voiced concern that some banks, facing pressure on the liability side, were not prepared to handle the risks associated with structured deposits, the sources said.

Structured deposits are categorized as liabilities on banks’ balance sheets, and have effectively replaced guaranteed-return WMPs. The products offer some principal protection and a chance to book high returns.

($1 = 6.3737 Chinese yuan)

Reporting by Shu Zhang in Beijing, Li Zheng and John Ruwitch in Shanghai; Editing by Jacqueline Wong