A bank clerk tells a customer how to seek helps with service machines at an outlet of the Industrial and Commercial Bank of China in Zhengzhou, capital of Henan province. [Photo provided to China Daily]

CBRC move designed to rein in risks to the financial sector

The banking regulator is set to tighten its control on wealth management products, in order to rein in risks to the banking sector.

The China Banking Regulatory Commission recently issued a new draft of regulations on the wealth management business of commercial banks to solicit opinions.

According to the new regulations, wealth management products will be forbidden from investing directly or indirectly in non-standard assets, which refer to debt-financing instruments that are not traded in stock exchanges or on the interbank market, except for trust plans issued by trust companies that are in accordance with relevant CBRC regulations.

At the end of 2015, the wealth management market of the banking institutions increased by 56 percent from a year earlier to 23.5 trillion yuan ($3.5 trillion). About 15.7 percent of the total, or 3.7 trillion yuan, was invested in non-standard assets, said a report issued by China Central Depository & Clearing Co Ltd.

"Due to the limited size of trust plans, the proportion of WMPs invested in non-standard assets will drop further, and tighter regulations will inevitably reduce the size of banks' wealth management business and profits," said Yang Rong, a banking analyst with China Securities Co Ltd.

The new regulations reiterate that wealth management products cannot invest directly or indirectly in equity funds, except for money market funds and bond funds.

Nor are they allowed to invest in domestically listed companies, non-publicly offered or non-publicly traded shares, or equities of non-listed companies, unless the products target qualified high-net-worth individual clients and institutional clients with higher risk tolerance.

"The restrictions on WMP investment targets are expected to reduce capital flows into the stock market," said analysts with Goldman Sachs Group Inc in a research note.

"In the long run, the new regulations will help maintain financial stability and mitigate credit risks of the banking system. But banks could face slower growth in WMP revenues and increasing costs of provisions for risks," the note added.

CBRC will require commercial banks to set aside half of their product management fees as potential impairment provisions for the WMPs against the expected rate of return. However, for the WMPs that base the returns on their net worth, and can be redeemed more flexibly, only 10 percent of the product management fees will be set aside as potential impairment provisions.

"That shows a clear intention of the regulator to guide commercial banks to develop the WMPs whose returns rely on their net worth," said Li Qilin, an analyst at Minsheng Securities Co Ltd. The tightening of regulations will have a stronger impact on small and medium-sized banks than large ones, said analysts at China International Capital Corporation Ltd.

They estimated that it will lower the profits of the banking sector by less than 10 percent on average in 2016, but the reduction could be close to double-digits for certain small and medium-sized banks that were aggressive in developing their wealth management businesses.