Mainland banks resist CBRC edict on pooling of wealth products

Mainland lenders brush aside order barring the pooling of investment instruments, prompting industry regulator to issue new guidelines

PUBLISHED : Tuesday, 15 July, 2014, 1:31am
UPDATED : Tuesday, 15 July, 2014, 12:17pm

Mainland banks have continued to pool wealth management products despite attempts from the banking regulator to stop the risky practice, analysts said.

The underlying assets to which banks channel off-balance-sheet funds have a wide range of durations and many, such as investments in real estate, may not generate returns for years. However, with an average lifespan of six months and an annualised return of more than 5 per cent for many wealth management products, banks pool them and draw off from new funds to pay back investors.

Pooling products hides the true destination of their investments from customers and analysts have said that the mismatch in duration is risky, especially if the products default.

The China Banking Regulatory Commission sought to crack down on pooling in April last year, calling on banks to map out the products so that each was registered in a separate account, making them much easier to track.

Many banks had not yet complied, analysts said.

"They forbid this already but we still see arbitrage on banks financing old wealth management products by issuing new ones," said Vivian Xue, a Shanghai-based analyst at SWS Research.

On Friday, the CBRC issued a new set of rules that once again barred banks from pooling the products, echoing past regulations. It also required banks to establish departments to oversee the products they issue.

One analyst, who asked not to be named, said banks such as China Minsheng Bank left the management of such products to their branches, with little central oversight. Minsheng did not respond to a request for comment.

By the end of May, more than 400 financial institutions had issued 50,918 wealth management products with 13.97 trillion yuan (HK$17.44 trillion) in assets under management, the notice from the CBRC said. That indicated a rise of 27 per cent in the first five months of the year, according to some estimates.

The new rules were mainly directed at smaller banks that had not yet fallen in line with past regulations, said Chen Xingyu, an analyst at Phillip Securities.

"The key point is that asset management at banks is a mess and the authorities are still trying to figure out how to regulate it," Chen said. "One important sign to investors and banks is that shadow banking is being transformed into a more formal asset management business."

The CBRC's new rules did not spook investors yesterday. Shares of Industrial and Commercial Bank of China closed up 0.6 per cent, Bank of China rose 0.86 per cent and China Construction Bank added 0.36 per cent.

The Hang Seng Index ended 0.49 per cent firmer.

"These are rough guidelines and that makes it hard to monitor," Xue said, noting that previous regulations on wealth management products had hit share prices of China's biggest banks. "In the second half of the year, we don't think there will be too much more news on this."