Wealth management products should be put under better regulation to make them a regular item in banks' mixed portfolios as the industry moves forward with its market-oriented reform, the country's banking regulator said on Monday.

Shang Fulin, chairman of the China Banking Regulatory Commission, encouraged banks to explore new services in wealth management services, while guarding against risks.

Chinese banks' unregulated new financial products have generated risks as the industry has seen an explosive growth of off-balance sheet loans, which are often packaged into wealth management products, analysts said.

Shang asked banks to segregate on- and off-balance services to sort out intertwined services, a lesson learned from the 2008 global financial crisis.

"Too much overlapping among different financial services may cover up potential risks and increase contagion," said Shang. "Some off-balance services bear a high degree of similarity with on-balance ones. Therefore, it's imperative to set up 'fences' to separate the two areas in credit loans, wealth management, agent services and securities."

In spite of the warning on risks, analysts see good prospects for wealth management products.

"It's the first time that the CBRC explicitly recognizes the importance of wealth management services, which often draw skepticism because of their chaotic growth," said Lu Zhengwei, an analyst with Industrial Bank Co Ltd.

The financial industry saw a severe credit crunch in June, which was partly caused by the banks' shortage of funds to pay off maturing wealth management products. The People's Bank of China, the country's central bank, did not pump cash into the industry at that time as it used to do, forcing banks to borrow money to bring off-balance sheet assets back on their books temporarily.

"The essence of creating 'fences' among on- and off-balance services is to rate risks in a reasonable way," said Lu. "Right now, some high-risk services are being placed off the balance sheets, for which the banks do not have to set aside provisions. If those investments fail, they will create bad loans that will drag down the banks' asset quality."

Shang also outlined new policies for the fees of wealth management services, banning banks from charging extra fees from high-yielding investments. "Banks can only collect management fees in fundraising, investment and risk control activities. Any actions to cut into the profits of the investments is forbidden," said Shang.

"The speech is highly forward-looking because it prioritizes risk segregation and product streamlining," said Guo Tianyong, a finance professor at the Central University of Finance and Economics. "It fends off risks that may derail China's financial sector as banks' portfolios are becoming more complicated."