China Banks Drop on Tighter Savings Product Rule: Shanghai Mover

By Bloomberg News

Chinese bank shares tumbled in Shanghai and Hong Kong after the banking regulator tightened rules on wealth-management products and the cabinet called for new measures to deregulate interest rates.

China Citic Bank Corp. (998) fell 6.8 percent to 4.91 yuan as of 1:21 p.m. in Shanghai after dropping by its 10 percent daily limit, and lost 4.7 percent in Hong Kong. China Minsheng Banking Corp. (600016) dropped 7.9 percent in Shanghai and Huaxia Bank Co., which faced customer protests in December, plunged by as much as 10 percent. The regulator told banks to limit investments of client funds in credit assets that aren’t publicly traded, and to isolate the risks from their operations. Wealth management products increased 56 percent to 7.1 trillion yuan ($1.1 trillion) last year, equivalent to 7.6 percent of total deposits, according to Standard & Poor’s, prompting warnings from regulators and ratings firms that credit risks are rising.

“This is so far the harshest and most concrete tightening measures regarding WMPs,” Yao Wei, Hong Kong-basedChina economist at Societe Generale SA, said in a note. “However, the immediate impact should be manageable to banks, as the banking regulator has been communicating with the major banks about (potential) rule changes for some time.”

Customer Retention

Chinese banks rely on wealth management products, which pay higher rates than regulated deposits, to retain clients who are diverting savings to other investments. The sales are transforming the stable and cheap deposit base that has supported lenders into one that is “more mobile, expensive and short-term,” creating repayment risk, Fitch Ratings warned earlier.

“The majority of wealth management products that banks offer are merely deposits in disguise,” S&P said in a report today. “Shadow banking could have significant and far-reaching implications for the sector’s financial soundness in the next three to five years.”

The average yield of wealth management products was 4.11 percent in 2012, according to the banking regulator. That compares with the benchmark one-year deposit rate of 3 percent.

About 1.5 trillion yuan of such products are on banks’ balance sheets, while the remaining 5.6 trillion yuan are off- balance sheet, S&P said, adding that almost 70 percent of all proceeds are invested in loans, corporate bonds and other credit-type assets.

Bypassing Restrictions

Investments in “non-standard” credit assets, used by some banks to bypass loan restrictions and credit risks, can’t exceed 35 percent of all funds raised from the sale of wealth management products, or 4 percent of the lender’s total assets at the end of the previous year, the China Banking Regulatory Commission said yesterday.

The latest rule may reduce total financing in China’s economy by 1 trillion yuan, Citic Securities Co. estimated in a note today. About 50 percent of the outstanding amount of wealth products are invested in non-standard credit assets, including trust loans, entrusted credits and acceptance bills, the brokerage said, exceeding the 35 percent limit.

“The regulator has basically set the boundary on how banks should operate this business,” said Huang Biao, a Shenzhen- based analyst at Great Wall Securities Co. “The wealth management business will still grow but we probably won’t see the kind of explosive growth seen last year.”

Smaller Lenders

Banks may sell such assets, bring the products onto their balance sheets or issue more wealth products based on liquid assets following the rule, Barclays Plc analysts led by May Yan wrote in a note today. Smaller banks will be more affected than their larger peers, they said.

Investors of a wealth product sold through an ex-employee of Beijing-based Huaxia protested in December after losing money when the issuer defaulted on repayment. These investors later had their principal repaid in full after a guarantee firm bought the asset, Securities Times reported in January.

China’s banking regulator has been warning lenders since 2011 about the risks of offering the high-yield savings vehicles and banned them from selling products with maturities of less than one month. The regulator also prohibited banks from paying investors the expected rate of return by using profits earned from other businesses.

Meanwhile, the State Council said yesterday it will take steps this year to loosen state control over interest rates and the yuan as new Premier Li Keqiang seeks to open up the economy to sustain growth.

The central bank in June allowed lenders to widen the discount on the official lending rate to 20 percent and broadened the limit to 30 percent a month later, picking up the pace of interest-rate deregulation. Banks are offering savers a premium of as much as 10 percent over the benchmark deposit rate as they seek to attract more funds.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net

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