China's banking regulator has ordered banks to set up a firewall between their popular wealth management products (WMPs) and their cornerstone lending to prevent risk.
Banks are required to establish a special department to carry out wealth management business separately from loans and other transactions by the end of September, according to a document released by the China Banking Regulatory Commission (CBRC) Friday.
The CBRC's new regulation of this fast-growing but shadowy part of China's financial system came after the commission demanded in May that investment by WMPs be in line with the State's macro and industrial policies and support the real economy.
Such WMPs are considered an important part of China's shadow banking system, a complex and unregulated sector that has emerged and grown significantly in China in the last few years.
Under the new regulation, an independent risk control mechanism for WMPs must be put in place for all banks.
Commercial lenders are also required to install firewalls between the WMPs they design and those sold through their agency or between different products.
Banks that fail to set up separate wealth management business departments will be subject to "corresponding prudent regulation measures," the CBRC warned.
The low rates of bank deposits have led many savers to invest their money in speculative real estate projects or dubious investments known as WMPs offered by banks and finance companies, promising higher rates of return.
Problems such as misleading sales, inadequate information disclosure and banks' failure to separate wealth management funds from their own capital have emerged during the rapid growth of the business, the CBRC noted.
Zhang Xuyang, general manager of China Everbright Bank's asset management department, said the CBRC's regulation is good for nurturing a balanced and effective risk culture among banks and investors.
The CBRC also revealed that by the end of May this year, Chinese banks had sold 50,918 WMPs with an outstanding book value of 13.97 trillion yuan (about $2.3 trillion).
Such products brought Chinese residents more than 450 billion yuan in extra financial income at an average weighted return of 4.13 percent last year, well above the benchmark interest rate of 3 percent for one-year deposits, the CBRC said.
Guo Tianyong, a bank researcher at the Central University of Finance and Economics, said the new regulation could end the "barbarian growth" of WMPs.
"By setting up an independent department, banks can prevent risks from spreading and serve their clients more professionally and efficiently," Guo said.
