Wealth management products aren't part of shadow banking

The wealth management business in Chinese banking "should not" be categorized as shadow banking, a senior official of China's banking regulator said on Monday.

There's been heated debate about whether banks' wealth management business should be defined as shadow banking, and foreign media have raised concerns about Chinese bank shares, the economy and government debt based on the banks' growing wealth management business, said Yan Qingmin, vice-chairman of the China Banking Regulatory Commission.

According to a Xinhua News Agency report on Tuesday, Yan said banks' wealth management business should not be categorized as shadow banking because such activity is covered by a separate regulatory and supervisory framework, has clear legal status, presents controllable liquidity risks, provides sufficient disclosure and undertakes no involvement in high-leverage operations.

However, some wealth management business that eludes supervision is similar to shadow banking activity — and regulators must remain alert, he added.

"It sounds as if the authorities are emphasizing the compliance characteristics of banks' [wealth management products].

"Although some WMPs are designed to bypass supervision and realize purposes such as expanding off-balance-sheet lending, the general wealth management business is subject to strict compliance requirements and has controllable risks," said Vincent Chen, a senior client manager with a midsized bank based in Shanghai.

As of Sept 30, outstanding bank WMPs totaled 9.9 trillion yuan ($1.63 trillion), according to the CBRC.

That's larger than the entire Australian economy.

Analysts have expressed concern that the WMPs, mainly issued by banks and third-party financial organizations, are raising funds for high-interest loans and investors are usually unaware of this.

Overseas rating agencies have warned that some banks have been using new WMPs to cover losses from previous products in the pool, which isn't fundamentally different from a Ponzi scheme.

Meanwhile, the maturity mismatch between short-dated WMPs and the longer-dated loans on which they're based often forces banks to use their own funds or borrow on the interbank market to make cash payouts on maturing WMPs. That situation exacerbates banks' liquidity management pressures.

Many analysts believe the cash crunches that hit domestic money markets in June and December were largely caused by banks' efforts to deal with such mismatches.

Also, WMP accounts enable banks to move assets on and off their balance sheets, which allows them to increase their lending capacity by manipulating their credit-to-deposit ratio, which also increases risks, Chen said.

Yan said regulators must be alert because the Chinese capital management market is still in its infancy, and officials must clarify the definition of banks as agents of wealth management.

The CBRC is urging banks to curb their reliance on short-term borrowing and control risks from off-balance-sheet lending, the Shanghai Oriental Morning Post reported earlier.

The CBRC has set up a leadership group on banking industry reform, headed by its chairman, Shang Fulin. It's expected to release a reform plan during the first quarter.