BEIJING - A $1.7 trillion source of inflows into Chinese markets has suddenly switched into reverse, challenging the nation's money management industry and making a big impact on local bond and share prices.

The turbulence has centered on so-called entrusted investments - funds that Chinese banks farm out to external asset managers. After a long period of funneling money into such investments, banks are now pulling back in response to a series of regulatory guidelines over the past three weeks that put a spotlight on the risks.

Critics have blamed entrusted managers for adding leverage to China's financial system and reducing transparency.

The banks' withdrawals helped erase $315 billion of stock market value over six straight trading days and sent bond yields to the highest level in nearly two years, highlighting the challenge for Chinese authorities as they try to rein in shadow banking activity without destabilizing financial markets.

While the government has plenty of firepower to prop up asset prices if it wants to, forecasters at Australia& New Zealand Banking Group Ltd predict the selloff will deepen this year.

However, Industrial and Commercial Bank of China and China Construction Bank, which were reported to have made big withdrawals, played down the reports.

"Our entrusted investment operation is steady and we do not have large withdrawals," said a spokesman of ICBC.

The arrangements for entrusted investments have become an important part of China's shadow finance system.

When banks sell wealth management products - the ubiquitous savings vehicles that offer higher yields than deposits - they sometimes farm out client money to entrusted managers such as hedge funds and mutual funds. The managers invest the cash in bonds, stocks and other securities, hoping to generate enough income to cover the banks' promised returns to wealth management product clients - plus some extra for themselves.

Chinese banks allocated an estimated 3.46 trillion yuan of wealth management product cash to such managers as of Sept 30, according to PY Standard, a Chengdu-based research firm. When the banks' own money is included, the total size of entrusted investments swells to 11.8 trillion yuan, according to SWS Research in Shanghai.

Zhang Ming, chief economist at Ping'an Securities, said China should pay attention to financial system risk and prevent complicated trading structures and products.

Bloomberg - China Daily