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BEIJING - Commercial lenders have received orders from banking regulators to halt sales of short-term individual wealth management products (WMP) with a maturity of less than a month, said a senior banking executive on Thursday.
The source from the private banking sector of China Citic Bank Corp told China Daily that the order is necessary to reduce volatility in market liquidity and contain risks.
"The new policy will certainly affect lenders because it is customary among banks to collect more deposits when these products mature before the end of each month, to meet regulatory requirements," said Cui Lizhu, general manager of the Retail Banking Wealth Management Center at China Minsheng Banking Corp Ltd.
In the long term, however, it will help establish more orderly competition among banks and promote healthier development of WMP, she said.
Shang Fulin, chairman of the China Banking Regulatory Commission, has told banks to temporarily stop selling short-term WMP, in order to fend off liquidity risks caused by volatility of savings, the 21st Century Business Herald reported on Thursday, citing anonymous sources.
These products issued by Chinese commercial lenders usually require a minimum investment of 50,000 yuan ($7,900), and the capital from buyers often goes into bonds, loans, and company projects.
"The rapid growth of banks' wealth management business may increase systemic financial risks and affect the implementation of monetary policies because common monetary tools cannot directly affect the flow of capital to these products," said Liu Xiaoxin, an economics professor at Nankai University in Tianjin.
WMP sales in China rose markedly in the first half of the year after the gap between deposit interest rates and the inflation rate reached the widest level in three years. In June, the gap reached 3.15 percentage points.
Data from Chengdu-based Fanhua Puyi Investment Management Co Ltd show that Chinese commercial lenders issued 8,497 WMPs in the first half, worth more than 8.5 trillion yuan, compared with 7.05 trillion yuan issued throughout 2010.
Hwa Erh-Cheng, chief economist at the Baoshang Bank Co Ltd, said the bank has seen WMP sales rise nearly 30 percent this year.
Because of the lower deposit rates compared with the inflation rate, many deposits have shifted to off-balance-sheet business, such as wealth products, for higher returns.
And companies' cash flow problems against a backdrop of tightened liquidity this year left more room for higher returns on these products, as companies have been eager to use equity as a pledge for finance, analysts said.
The International Monetary Fund warned on Tuesday that "China's financial sector is facing several near-term risks, structural challenges, and policy-induced distortions", citing growing off-balance-sheet exposures and disintermediation as a main source of risks.
It said interest rates need to be more influenced by market dynamics because relatively low rates have distorted investment and savings decisions.
To prevent lenders from taking a shortcut and skirting regulations, the China Banking Regulatory Commission released a series of rules on Oct 9 to overhaul the wealth management sector and reduce banks' dependence on WMP to collect deposits. Those rules will take effect on Jan 1.
"Although year-on-year growth of the consumer price index has been slowing, it will stay at a high level for a relatively long time. More and more consumers will choose to buy WMP to protect their assets," said Cheng Shaoyong, deputy general manager of the retail lending department at the Bank of Communications Ltd.
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