Chinese Regulations On WMPs - Business Insider

The Chinese stock market took a hit Thursday after its banking regulator issued new regulations to tighten control over banks' wealth management products (WMPs).?

WMPs are essentially a pool of securities (trust products, bonds, stock funds) that have yield that is on average 2 percentage points higher than bank deposits. They are sold as low-risk investments but often are not so.?

With a dearth of investment alternatives, WMPs have grown incredibly popular in China in the past few years, reaching 13 trillion yuan ($2.1 trillion) at the end of 2012, a 50 percent year-over-year increase, according to Fitch.

WMPs have been creating risks in the banking sector and some have called it "ponzi finance":

To lower these risks, the China Banking Regulatory Commission (CBRC) announced three key regulations to monitor WMPs (via Societe Generale's Wei Yao):

1. "WMPs have to be managed product by product with matching assets, separate accounting and book-keeping." If banks fail to do this they will be prevented from issuing new WMPs.
2. "For outstanding WMPs that have not met the requirement above, they should be treated like regular commercial loans in terms of loss provisions and risk weights by end-2013."
3. "For each bank, the amount of WMPs invested in debt instruments that are not traded on exchanges cannot exceed 35% of the bank?s total outstanding of WMPs or 4% of its total asset, whichever is lower. Such debt instruments include, but are not limited to, trust loans, entrust liabilities, bankers? acceptances, account receivables, and equity investment with buy-back clauses."

Yao however thinks banks have been preparing for this, and writes that the new policy isn't intended to "devastate banks, but to cap future risks."

Source: http://www.businessinsider.com/chinese-regulations-on-wmps-2013-3

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