China demands wall around wealth management sector to cut risk

SHANGHAI (Reuters) - Chinese banks must create a firewall around increasingly popular wealth management services, the country's banking regulator urged, in order to avoid any contagion from higher risk products spreading to normal bank loans.

Banks must establish a separate department to carry out wealth management business by the end of September, the China Banking Regulatory Commission (CBRC) said on its website on Friday.

Thirsting for higher returns, China's wealth management sector has exploded in recent years, hitting around 12.8 trillion yuan ($2.06 trillion) by the end of May. But the opaque nature of the sector has fed concerns about its health. [ID:nL4N0P3028]

New rules require banks to set up separate departments for risk management, accounting and statistical analysis for wealth management services, and give details for each wealth management product individually.

China has been pushing to strengthen regulation of its wealth management sector as it looks to diversify funding channels in an economy historically over-dependent on bank lending for finance.

But with its growth expected to slow to a 24-year low of 7.3 percent this year, there are growing concerns about the risk associated with the financial sector, especially the so-called "shadow banking" sector of off-balance sheet lending.

China needs to reorganize its wealth management industry as it is unduly boosting funding costs and encouraging savers to behave like gamblers by chasing lucrative short-term returns, a senior central bank official said in May. [ID:nL3N0NW077] ($1=6.2034 Chinese Yuan)

(Reporting by Adam Jourdan; Editing by Clarence Fernandez)