China gears up to battle financial risk

Regulator warns banks not to issue certain asset management products

China's banking regulator has asked some commercial banks to suspend issuance of classified asset management products, in Beijing's latest effort to curb financial risk amid a rising number of debt defaults, people with knowledge of the matter said on Wednesday.

The China Banking Regulatory Commision (CBRC) transmitted the so-called window guidance, a sort of informal administrative edict, orally, the three people said.

The CBRC did not give an immediate comment when contacted by Reuters.

Classified asset management products each have two sub-products, one priority and one secondary. The former is promised repayment first in the event of losses, but returns are smaller. The latter carries higher returns but bears the brunt of losses.

Typically, classified asset management products are very risky products, particularly when the market is volatile.

"The guidance was conducted orally, without giving reasons," said a source.

"However, regulators are apparently worried about bond defaults or off-balance sheet risk, with urban commercial banks' businesses typically more radical than major banks." Chinese markets are pricing in increasing risks following an unprecedented number of defaults this year. A long list of high-yield bond issuers in the $8 trillion domestic debt market are due to make debt payments this month.

The CBRC, in a move to rein-in the rapidly growing 'shadow loans' industry, told commercial lenders earlier this month to properly account for lending products that may appear on their balance sheets as lower-risk investments.

"Classified asset management products are not the mainstream of urban commercial banks' businesses," said a bank senior executive. "Regulators are just sending a warning, which, however, will have a relatively bigger impact on those with stronger asset management capabilities."

Among around 150 city commercial banks, those already listed in the Shanghai and Shenzhen stock exchanges fall into the category referred to by the executive, such as Bank Of Beijing Co Ltd and Bank of Nanjing.