China issues rules to limit bond investment by shadow bank products

Thu Feb 13, 2014 4:35am EST
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By Lu Jianxin and Gabriel Wildau

SHANGHAI (Reuters) - China's central bank published rules on Thursday governing investment by wealth management products (WMPs) in the country's bond market, in a move aimed at containing risks posed by banks' off-balance-sheet business.

WMPs are short-term investment products that banks market to customers as higher-yielding alternatives to traditional deposits.

In principle, banks simply manage WMP assets on behalf of clients, with the client, not the bank, exposed to losses if the assets decline in value. But analysts warn that China's banks' are increasingly exposed to the loans, bonds and other off-balance-sheet assets underlying WMPs.

That is due in part to the maturity mismatch between short-dated WMPs and longer-dated bonds and the loans that underlie them. This mismatch often forces banks to use their own funds to make cash payouts on maturing WMPs when the underlying assets have not yet matured.

At the end of September, outstanding bank WMPs were 9.9 trillion yuan ($1.63 trillion), according to China's bank regulator, though interbank bonds comprise only a portion of that total.

The new rules are designed "to standardize investment by commercial banks' WMPs in the interbank (bond) market and protect the interests of various sides," the People's Bank of China (PBOC) said in the new rules published on the website of the central bank-backed National Interbank Funding Center.

Regulators are especially concerned about banks moving assets between their own balance sheets and off-balance-sheet WMP accounts based on which entity needs cash at a given moment.

"A common practice is that banks use proprietary funds to cover up a temporary shortfall in a WMP's account and vice versa," said a bond trader at a Chinese commercial bank.   Continued...

A woman walks out of the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing November 20, 2013. REUTERS/Jason Lee