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China regulator orders more disclosure on shadow bank products: sources

By Weihao Cao and Gabriel Wildau

BEIJING/SHANGHAI (Reuters) - The China Banking Regulatory Commission (CBRC) will require banks to report detailed information on their holdings of wealth management products beginning in 2014, four sources with direct knowledge of the new regulations told Reuters on Friday.

Wealth management products (WMPs) are short-term investment products that Chinese banks market to clients as a higher-yielding alternative to traditional bank deposits. They have become a crucial element of China's shadow banking system, which analysts warn has contributed to excessive debt growth that has led to a build-up of financial risk.

Many WMPs are recorded off-balance-sheet and are used to finance lending to risky sectors such as real estate developers and local governments, to which banks are otherwise discouraged from lending.

"After implementation, (WMP) holdings will be transparent to regulators. The initiative and authority are in their hands," said a director of wealth management business at a major state-owned bank, who spoke to Reuters on condition of anonymity as the rules are not yet published.

He said the greater transparency could change which assets get packaged into WMPs, reducing the share of "non-standard" assets such as loans, while raising the proportion of bonds and money market instruments.

"This will directly cut off the traditional methods for operating wealth management products," said a fixed-income trader involved in internal negotiations at China Central Depository and Clearing Co, the state-backed clearinghouse that will manage the new registration system.

CBRC could not be immediately reached for comment.

Regulators have rolled out a series of rules this year to reduce risks from off-balance-sheet lending. Reuters also reported on Friday that the CBRC has drafted new rules to curb complex transaction that banks use to evade lending restrictions by disguising corporate loans as loans to other banks.

A key focus of the registration system is to force banks to match each WMP with a specific set of underlying assets, with returns on the product linked solely to the performance of those assets.

CBRC wants to eliminate the practice in which banks sell new products to raise the cash necessary, or use on-balance-sheet funds, to make payouts on maturing products.

Such practices can enable banks to hide losses on the assets underlying WMPs. China's chief securities regulator has compared the practice to a Ponzi scheme.

The practice also creates liquidity risk for banks, which could find themselves unable to meet payouts on maturing products if WMP investors decline to roll over maturing products into newly issued ones.

Regulators also want to force banks to strictly separate their on- and off-balance sheet businesses, forbidding them from using on-balance-sheet funds to finance payoffs of off-balance-sheet products.

Analysts warn that investors widely perceive WMPs as carrying an implicit guarantee from state-owned banks, even when the fine print says otherwise. They say that banks will face enormous pressure to compensate investors in the event of default, leaving them heavily exposed to risks that do not show up on their balance sheets.

(Editing by Jacqueline Wong)