Wealth Management Product Issuance Slowed by Regulatory Crackdown

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The issuance of wealth management products, a key staple of the Chinese shadow banking sector, has slowed in the wake of a crackdown on lenders by financial regulators.

The outstanding  balance for WMP’s issued or distributed by Chinese banks saw year-on-year growth of 16.4% in April to hit 30 trillion yuan, according to a new report from Moody’s.

This marks a significant slowdown compared to the figure of 23.6% for the same period in 2016, and 56.5% in 2015.

Considered a key part of China’s shadow banking sector, wealth management products are used by Chinese banks to dodge regulatory constraints on standard deposits and as well as draw funds from clients by means of higher yields.

The funds are often channeled into riskier investments, such as domestic bonds, while banks are seen as providing an implicit guarantee on the products to investors.

As part of an ongoing crackdown on the financial sector China’s Banking Regulatory Commission has heightened regulation of WMP’s, requiring that banks keep investors clearly apprised of any risks involved, as well as prohibiting them from investing in their own WMP’s.

The People’s Bank of China has also decided to include off balance sheet WMP’s in macro prudential assessments of lender due to concerns over the risk they pose.

According to Moody’s, who recently downgraded China’s sovereign credit rating due to concern over its debt levels, the regulatory tightening is a move in the right direction.

“This is credit positive as it would gradually dampen banks’ incentive to engage in regulatory arbitrage, and reduce the risks in the shadow banking sector,” said the report.

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